NEW YORK (TheStreet) -- Shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) traded in wild fashion on Tuesday, reversing early gains to show large double-digit declines in the last few minutes of trading.
Fannie Mae's common shares were down 30.8% to close at $4.03, while Freddie's common shares were down 26.8% to close at $4.04, after Senate Banking Committee Chairman Tim Johnson (D., S.D.) Senator and Mike Crapo (R., Idaho), the ranking member of the committee, announced they had come to an agreement on a bi-partisan proposal to wind-down the mortgage giants.
Fannie and Freddie -- together known as the government-sponsored mortgage enterprises, or GSEs -- were taken under government conservatorship at the height of the U.S. housing market meltdown in September 2008. The GSEs' common and preferred stocks remained publicly traded, but values plunged because dividends to non-government shareholders were suspended, and because it appeared highly unlikely at the time at the GSEs would eventually return to being highly profitable.
Over the past year, many institutional investors have jumped on what they consider to be a unique investment opportunity to scoop up common and junior preferred shares of Fannie and Freddie and wait out a long legal battle over government's treatment of private investors.When the GSEs were bailed out by the government, the original agreement required Fannie and Freddie to pay the U.S. Treasury 10% annual dividends on the government-held senior preferred shares, however, in August 2012, after the GSEs had returned to profitability and after they had stopped increasing their borrowings form the government, the bailout agreement was changed so that all GSE profits were paid to the government, in excess of minimal capital cushions. Following their March dividend payments, Fannie and Freddie will have paid total dividends of $199 billion on $189.4 billion in senior preferred shares held by the Treasury. Factoring in warrants that were handed to the government to acquire up to 79.9% of the GSEs common shares, Rafferty Capital Markets analyst Richard Bove on last week estimated the government's return on its investment in Fannie and Freddie was $238 billion.
FNMA data by YCharts Banks' Excess Capital Is 'Absolutely a Reality'
Stop Buying U.S. Bancorp Stock, Says KBW Follow @PhilipvanDoorn
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV