This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Strange Bedfellows Say Let Fannie and Freddie Live

NEW YORK ( TheStreet) -- "I don't know whether it's Ralph moving or me moving but we're finding ourselves more and more aligned these days."

The speaker was Ted Olson, partner at Gibson, Dunn & Crutcher, former solicitor general during the George W. Bush administration, and he was referring to Ralph Nader, the occasional Presidential candidate and storied consumer advocate.

What brought them together for a panel discussion on Wednesday was a shared belief that the U.S. Treasury Department needs to recognize the rights of shareholders in government sponsored enterprises (GSEs) Fannie Mae (FNMA) and Freddie Mac (FMCC).

Olson is representing Perry Capital, a large hedge fund, in a lawsuit against the government, while Nader is a shareholder himself, representing what he says are just regular folks, "not day traders" who relied on government assurances that Fannie and Freddie were safe investments, before the GSEs were taken under government conservatorship at the height of the financial crisis in September 2008.

Must Read: Two 'Top Picks' Among Mid-cap Bank Stocks

The status of Fannie and Freddie shareholders "is intimately related with affordable housing goals," Nader said. "These are very delicate institutions and if you don't have a capital market you're not going to have affordable housing."

But consumer and housing advocates who also sat on the panel seemed to have little interest in what happens to common and preferred shareholders in the GSEs.

"It's high cotton for me," said John Taylor, President and CEO of the nonprofit National Community Reinvestment Coalition, which seeks to "increase the flow of private capital into traditionally underserved communities," according to its website. "I'm not a hedge fund guy. They have their fight and they have their lawyers."

Taylor claims his only interest is enabling middle and working class people to afford homes, but "it looks like preserving Fannie and Freddie is the most likely scenario in which that outcome will come to [pass]," he said in a follow-up interview after the panel discussion.

Many hedge fund investors will presumably like the sound of this. Michael Kao of Akanthos Capital, for example, has been advocating for a return of Fannie and Freddie to the private markets for more than three years

But there is a point where the interests of shareholders and housing advocates diverge. For example, another nonprofit called the National Low Income Housing Coalition (NLHC) filed a lawsuit against the Federal Housing Finance Authority, which oversees the GSEs, arguing the FHFA failed to live up to obligations to pay into a National Housing Trust Fund and a Capital Magnet Fund

"The obligation to fund the Housing Trust Fund and the Capital Magnet Fund precedes other claims," said Sheila Crowley, President and CEO of the NLHC. Speaking on Wednesday's panel, Crowley said her group is looking for $500 million to $1 billion for the funds, which would be "the first new money to go into housing for poor people in a very very very long time."

If the GSEs pay into those funds, it means less money for shareholders, whether Fannie and Freddie live or die. Similarly, winding down Fannie and Freddie could be immensely profitable for shareholders, depending on how the wind-down is structured. Indeed, one large GSE shareholder, Fairholme Capital's Bruce Berkowitz, has proposed a wind-down --something he presumably wouldn't do if he didn't stand to make a killing.

Whether the GSEs live or die, in other words, may ultimately have little to do with determining what the recoveries would be for preferred and common stockholders.

Still, it is worth noting that several speakers on the panel, including Taylor and Crowley, as well as another consumer advocate, Ed Mierzwinski of U.S. PIRG, and Tim Pagliara, a professional money manager, appeared to like the idea of keeping Fannie and Freddie alive. Even James Glassman, a conservative pundit and visiting scholar at the American Enterprise Institute, didn't sound wholly opposed to the idea. That would be contrary to the stated goals of President Obama as well as legislation proposed by Senators Bob Corker (R., Tenn.) and Mark Warner (D., Va.), which so far has attracted more support than any other GSE reform proposal. A couple of years ago it seemed everyone wanted to kill Fannie and Freddie, but no one had the guts to do it for fear of crashing the economy. Now, in an increasing number of quarters, Fannie and Freddie aren't such dirty words. What that means for shareholders remains to be seen.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
FMCC $1.55 0.00%
FNMA $1.70 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs