According to standard securities laws, preferred holders would have to be paid in full before common shareholders would be able to claim any of the profits from the GSEs.
The only question is how much of those profits the government will eventually allow to go to private investors. Currently, the profits are being used to pay off the deficit, and are potentially available for any other number of pet government projects. The political risk, in other words, far outweighs the financial risk--something Kao freely admits. "We've always acknowledged that there's uncertainty about whether the preferreds will be worth anything," Kao says. "If there's uncertainty on the preferred, there should be a lot more uncertainty on the common, and here you've got the exact opposite going on." Kao says he has heard it rumored that a large fund focusing on distressed assets which also owns preferred shares has been buying common shares, though he doesn't know which one.
Paulson & Co., Claren Road Asset Management and Perry Capital, all multibillion dollar funds, own preferred shares of Fannie and Freddie, according to Bloomberg News reports last month, though the funds haven't confirmed it. Senator Bob Corker (R., Tenn.) has said big hedge funds have been lobbying the government to allow the GSEs to return to the private market. Corker, along with Senators Elizabeth Warren (D., Mass.), David Vitter (R., La.) and Mark Warner (D., Va.) have proposed legislation called the "Jumpstart GSE Reform Act" to keep that from happening without Congressional approval. Spokesmen for Paulson and for The Carlyle Group ( CG), which owns Claren Road, declined to comment. A call to Perry Capital wasn't returned. -- Written by Dan Freed in New York. Follow @dan_freed