For example, Fannie's preferred series E (FNMFM) shares, with a par value of $50.00 and a coupon of 5.10%, rose 23% on Tuesday to close at $8.00. The shares were flat in late morning trading on Wednesday.

Freddie Mac's preferred series Z (FMCKJ) shares, with a coupon of 5.375% and a par value of $25, rose 15% on Tuesday to close at $3.88. The shares were up 4% in late morning trading on Wednesday, to $4.02.

The Treasury holds a warrant to purchase up to 79.9% of Fannie's common shares, at an exercise price of just $0.00001 per share. That makes a long-term investment in the common shares a rather dubious proposition.

But for the junior preferred shares, the story is different. For one thing, the government is looking at a potential political time bomb, as it feasts on Fannie Mae's dividends. Numerous voices will be asking why the Treasury doesn't want its preferred investment -- the taxpayer bailout -- to be repaid. Fannie is now a profitable company with $3.2 trillion in total assets as of Dec. 31. It's not simply going to disappear, despite what we hear from various politicians.

There is also a possibility of the junior preferred shareholders filing a lawsuit against the government.

Australian hedge fund manager John Hempton, said in an interview with TheStreet on March 21 that the government's windfall on Fannie and Freddie could cause an "enterprising lawyer to take the case all the way to the Supreme Court and win."

Hampton said the August deal for Fannie Mae and Freddie Mac to effectively pay unlimited dividends to the government violated the Fifth Amendment of the U.S. Constitution, which requires "just compensation" to be given if the government seizes private property for public use.

Over the long haul, the government's potential for an outrageous yield on its preferred stake in Fannie and Freddie may constitute just the sort of "public use" that will end up with a big payout to junior preferred shareholders.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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