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Fannie and Freddie Shares Seesaw Wildly As Bill to Kill Them is Unveiled

Updated to reflect reversal in shares late Monday morning and to add a new paragraph at the end to discuss last week's sharp selloff.

NEW YORK (TheStreet) --Fannie Mae  (FNMA) and Freddie Mac  (FMCC) shares remained volatile Monday as a bipartisan Senate Banking Committee bill to wind down the mortgage giants was unveiled over the weekend.

Fannie Mae common shares opened higher but moved into negative territory in late morning trading and were down 7.02% to $3.84 shortly after noon Monday. Common shares of Freddie Mac were down 6.08% to $3.86. 

The proposed Housing Finance Reform and Taxpayer Protection Act of 2014, co-sponsored by Senate Banking Committee Chairman Tim Johnson (D., S.D.) and ranking Republican Mike Crapo runs 442 pages long and promises to eliminate Fannie Mae and Freddie Mac, which maximizing the return to senior preferred shareholders, i.e. the U.S. Treasury Department. It does not discuss the fate of common or junior preferred shareholders, many of whom have brought lawsuits against the government to claim a share of the profits of the mortgage giants.

The Johnson Crapo legislation builds on an earlier effort by Senators Bob Corker (R., Tenn.) and Mark Warner (D., Va.) and in consistent with the stated goals of President Obama, who said during a speech in Phoenix in August that he wants to wind down Fannie and Freddie. Nonetheless the proposal is expected to face considerable skepticism, including from key Senate Democrats Elizabeth Warren (D., Mass.) and Senate majority leader Harry Reid (D., Nv) as well as at least one Republican on the Banking Committee, Pat Toomey. Nonpartisan think tank the Urban Institute , on the other hand, appears to like the bill, according to a report Monday from Housing Wire.

Even if the legislation passes and winds down Fannie and Freddie, it isn't clear what that would mean for common and junior preferred shares, many of which have been bought up by hedge funds that are sitting on massive gains. Among the most prominent Fannie and Freddie shareholders are Fairholme Funds, led by Bruce Berkowitz, Perry Capital and Bill Ackman's Pershing Square Capital Management.

Fannie and Freddie common shares soared to multi-year highs of $6 for Freddie and $6.35 for Fannie on Tuesday, March 11, but reversed sharply mid-day and have yet to recover. That was the date an initial agreement between leading to the Johnson Crapo bill was announced, though many observers were surprised by the strong reaction in the stock market since the legislation was widely expected and is seen as having a fairly small chance of passing.

--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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