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

Fannie and Freddie: A Chart and a Friend

There's no mechanism in place allowing either Fannie or Freddie to repurchase any of the senior preferred shares held by the government. Despite all the talk in Washington since 2008 of doing away with Fannie and Freddie, nothing has happened. A major reason for no action in Congress or by President Obama is fear of disrupting the U.S. economic recovery. Another reason for the Obama administration to leave the GSEs' status unchanged for as long as possible is the significant lowering of the federal budget deficit from the dividends being paid the government.

There was no mention in the statement from Sen. Johnson and Sen. Crapo of any consideration for private investors, but the senators did say that their bill would "start with" the provisions laid out in last year's GSE reform bill from Senate Banking Committee members Bob Corker (R., Tenn.) and Mark Warner (D., Va.) which would replace Fannie and Freddie with a new Federal Mortgage Insurance Corp., funded by private investors and the mortgage industry. The Corker-Warner bill provided nothing to common and junior preferred shareholders of Fannie and Freddie.

A Letter to the Treasury Secretary

But Fannie and Freddie's private investors have at least one friend on the Senate Banking Committee, Pat Toomey (R., Penn.).

Must Read: Discover, Fifth Third Are Well-Positioned for Higher Payouts After Stress Tests

Here's the entire text of a Question for the Record (QFR) letter sent to Treasury Secretary Jack Lew by Sen. Toomey on Friday:

To: The Honorable Jacob Lew

Community banks, retirement funds and other investors have all reached out to me to express their concern - and even outrage - about the unprecedented "sweep" that takes all of the GSEs' profits and gives them to the government.

Mr. Secretary, you have emphasized repeatedly the importance of returning private sector capital to the housing finance market. However, the government's actions with respect to the GSEs' profits raise serious concerns, including whether these actions lawfully respect the rights and interests of all Americans. As we can both agree, our nation is the most attractive place in the world to invest partly because of our commitment to the rule of law.

While I strongly support GSE reform that protects taxpayers, such efforts should also be mindful of investors in addition to other considerations. Taxpayers should be fully compensated, but once they are, investors, such as the York County pension fund in Pennsylvania, should not be denied their fair share of any remaining value.

What comfort can you give to private sector investors considering investing in the future of the housing finance system when they believe that the government arbitrarily changed the rules of the game mid-stream with the Third Amendment?

Based on the terms of the conservatorship, Treasury's stake in Fannie and Freddie is 79.9 percent. Has Treasury done any analysis of the value of its 80 percent equity stake in the absence of a Third Amendment? Did it value its stake prior to adopting the Third Amendment?

Do you believe that Treasury owns a 100 percent economic interest in the GSEs? If that is Treasury's view, why have Fannie and Freddie not been consolidated on the Federal balance sheet?

Secretary Lew may respond with similar arguments to those made by the government when it sought to have a lawsuit by institutional shareholders of the GSEs, including Bruce Berkowitz's Fairholme Funds, thrown out.

That argument failed to impress Judge Margaret Sweeney in the U.S. Court of Federal Claims, and the lawsuit is moving to the discovery phase. This means key witnesses for the government will be required to answer questions from the plaintiffs' lawyers.

2 of 3

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 $1.58 -3.66%
FNMA $1.75 0.57%
AAPL $95.36 1.80%
FB $117.65 -0.78%
GOOG $695.81 -0.34%


Chart of I:DJI
DOW 17,782.48 -108.68 -0.61%
S&P 500 2,063.17 -18.26 -0.88%
NASDAQ 4,771.4650 -46.1290 -0.96%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs