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Senator Stumbles in Fannie and Freddie Shareholder Defense

Updated from 3:16 pm Wednesday with changes to final four paragraphs.

NEW YORK (TheStreet) --Fannie Mae (FNMA) and Freddie Mac (FMCC) shareholders found a friend in the Senate last week, though the efforts of Pat Toomey (R., Pa.) to pass himself off as a defender of regular folks as opposed to wealthy hedge funds could use a bit of work.

In a question submitted Friday to Treasury Secretary Jack Lew, Toomey defended the rights of investors in Fannie and Freddie. But the only investor he identified by name, the York County pension fund in Pennsylvania, doesn't have any exposure to the government-backed mortgage giants.

York County Commissioner Chris Reilly told me this week he made a mistake in a Feb. 11 letter he wrote to Senator Toomey.

Urging the Senator to reject proposed housing reform legislation from Senators Bob Corker (R., Tenn.) and Mark Warner (D., Va.), Reilly wrote:

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The biggest issue at play is my county's pension investments in Fannie and Freddie. We have millions invested in the two GSEs [Government Sponsored Entities] that would be wiped out completely if the Corker-Warner bill passes. I don't have to explain to you the harsh economic impacts this would have on the county and our pension.

When I called him this week to discuss the matter, however, Reilly said something quite different.

"While we are invested in GSEs to some extent, it's not Fannie Mae and Freddie Mac, so my original letter to Senator Toomey was erroneous in some respects," Reilly told me.

It turns out the York County fund has about $10 million invested in another GSE, the Private Export Funding Corporation (PEFCO), which has little if anything to do with the proposed bill or U.S. housing in general.

Reilly told me initially that he told Toomey staffer Steve Kelly about the mistake two weeks ago -- well before Toomey cited York County in his question to Lew. A Toomey spokeswoman disputed that, and in a subsequent conversation Reilly said he had made yet another mistake. He had not told Kelly about the mistake in the Feb. 11 letter. He had told his friend Dan Hayward, who works at a Harrisburg, Pa. firm called Novak Strategic Advisors.

It was Hayward who got him fired up about Fannie and Freddie shareholder rights in the first place.

"We have 67 counties in Pennsylvania and my understanding was a large number of them could potentially be impacted," Reilly said.

The commissioner isn't sure which counties, if any, have Fannie and Freddie exposure, though. His understanding that "a large number" did came from Hayward, who Reilly assumes works for other pension funds.

Hayward told me hasn't yet identified any Pennsylvania pension funds with exposure to Fannie or Freddie, but is still researching the issue. He wouldn't disclose his clients, though he said none are big hedge funds with stakes in Fannie and Freddie. On the other hand, he said he is working with a conservative group called the Center for Individual Freedom, a conservative nonprofit group whose president, Jeff Mazzella, wouldn't disclose his funding sources. Mazzella says his group doesn't pay Hayward.

Regardless, there appear to be no shortage of parties eager to dig up shareholders such as pension funds who they believe will earn more sympathy from the public than big hedge funds like Perry Capital or Pershing Square Capital in their fight against the Obama Administration over Fannie and Freddie's profits. Such sympathetic shareholders can also help provide cover for elected officials such as Toomey, a former investment banker who has raised more money from the securities industry than any other industry over the course of his career. 

Toomey's spokeswoman disputed the notion that the Senator is doing the bidding of hedge funds.

"This is an issue that matters to many folks across the country and in Pennsylvania such as community banks and individual investors," she wrote me via email. The spokeswoman added that Toomey's office "will resubmit the question to Secretary Lew, striking the reference to York County." 

--Written by Dan Freed in New York

Follow @dan_freed

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

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