Freddie's preferred series Z shares, with a coupon of 5.375% and a par value of $25.00, closed at $4.70 on Wednesday, rising 169% from $1.75 at the end of last year.

Day-traders will obviously be looking for very quick gains on the volatile junior preferred shares, for investors who can go in for a period of years, the common shares could eventually provide very large returns, if the GSEs manage to restore the dividends. For investors going in at these discounted prices, the dividend yields will be very high.

Fannie's preferred series E shares are supposed to pay annual dividends of $2.25 a share. If the dividend were restored, an investor who went in at Wednesday's close would see a dividend yield of 32.90%.

President Obama and the Congress have shied away from radically transforming Fannie and Freddie Mae, mainly because of the fear that private investors wouldn't be able to step in quickly enough to keep the U.S. mortgage market liquid. With the GSEs turning into cash machines, investors can expect a renewed cry for comprehensive GSE reform.

And no matter what happens, those junior preferred shareholders will have legitimate claims on these two huge companies. Fannie Mae had $3.3 trillion in total assets as of March 31, while Freddie Mac had $2.1 trillion in total assets.

Fannie Mae's common shares were down over 4% in late afternoon trading to 86 cents, while the company's preferred series E shares were up 16% to $9.00.

Freddie Mac's common shares were up down 5% to 84 cents, while its preferred series Z shares were up 7.5% to $5.05.

-- 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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