Fannie Mae and Freddie Mac are anything but standard, however, even when compared to other big bailed out companies like AIG ( AIG) that have offered big payouts to investors who bought shares after the subprime collapse. The key difference is the GSEs' quasi-governmental status and the controversy that has long surrounded it -- even preceding the housing crisis. That means changing the status quo isn't going to happen without a big political fight -- or possibly a court fight. And the status quo is that private stakeholders in Fannie and Freddie have no rights whatsoever. All the GSE profits are swept into the Treasury. Should that ever change, the following math may come into play. The U.S. government has $117.1 billion in Fannie Mae preferred shares and $72.3 billion in Freddie Mac preferred shares as of March 31. Fannie has paid the Treasury $95 billion and Freddie has paid $29.6 billion. The profit outlook for Fannie and Freddie is better than ever, according to Kao. Housing is rebounding, and Fannie and Freddie guarantee about 90% of mortgages, vs. 50% before the crisis. They also charge double their pre-crisis fee to provide that insurance, but they still haven't been able to attract private market competition.
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