NEW YORK (TheStreet) --Elected officials are finally speaking publicly about the fight between Fannie Mae
(FNMA) and Freddie Mac
(FMCC) shareholders and the Obama Administration, though what they are saying for the most part is this: leave it to the courts.
That is more or less the stance taken by Senators Bob Corker (R., Tenn.), Mark Warner (D., Va.), Mike Crapo (R., Idaho) in television interviews with this week.
The senators showed varying degrees of sympathy to shareholders in the mortgage giants, which include large investors like Fairholme Funds, Perry Capital and Pershing Square Capital as well as community banks and individual investors like consumer advocate and occasional presidential candidate Ralph Nader.
Nearly 20 lawsuits have been filed against the government, and they are expected to take years to resolve. Judge Margaret Sweeney in the U.S. Court of Federal Claims last month rejected the Treasury's motion to dismiss a high profile lawsuit by an investor group that includes Bruce Berkowitz's Fairholme Funds. This means the court case will move to the discovery phase, enabling the plaintiffs' lawyers to question government witnesses. That lawsuit takes issue above all with a 2012 amendment to the 2008 government conservatorship of Fannie and Freddie which changed the terms of the Treasury's investment. Instead of owing a 10% dividend to the government, the amendment changed the debt to all of the profits of those entities, minis a modest capital cushion.
Crapo who is working with Sen. Tim Johnson (D., S.D.) on a bill that would wind down Fannie and Freddie in keeping with the stated goals of President Obama told Bloomberg television Thursday, "there's a strong argument to be made that the private sector investors if they rely on a private sector system should be able to count on that. The response to that is the system was clearly moving into conservatorship & the taxpayers did put [$188 billion] into this and I honestly don't know how the courts are going to rule on this but the answer we get from the courts will then guide Congress as to how we move forward."
Warner, who along with Corker crafted a reform proposal that is in many ways the model for the Corker Warner legislation also acknowledged the interests of private shareholders in an interview with CNBC Thursday.
"These guys from Mr. Nader to the hedge fund guys they ought to have their day in court. There's a real question about the Treasury's sweeping of all the profits," he said. However, like Crapo, he also took the other side of the argument.
"For those who say Fannie and Freddie's made their money back. I was in the [venture capital] business a lot longer than i've been an elected official. If I put $188 billion to work in the bottom of the crisis I gotta tell you as an investor I'd want more than a one to one return," he said, referring to the $188 billion in Fannie and Freddie senior preferred stock purchased by the Treasury.
What these statements don't address, however, is what would happen to Fannie and Freddie's profits as they are wound down.
One hint may come from Rep. John Delaney (D., Md.). Delaney is working on legislation with fellow House Democrats John Carney of Alabama and Jim Himes of Connecticut that would make Ginnie Mae the main government guarantor of mortgages, with private capital ahead of it taking any initial losses. Fannie and Freddie could potentially be sold into private hands, but only if there is sufficient interest. If they are sold, some of the proceeds could go to shareholders, Delaney said. If not, they would be wound down, with profits going exclusively to the government.
The only unambiguous Fannie and Freddie shareholder advocate so far is be Sen. Pat Toomey (R., Pa), who submitted a strongly-worded Question For the Record to Treasury Secretary Jack Lew on Friday, though his office later conceded to me it misidentified the York County pension fund as a shareholder in Fannie and Freddie and will be revised.