However, there appears to be a group of GSE shareholders that may attract more sympathy from the public. Community banks -- at least the abstract "It's a Wonderful Life" idea of them -- are the type of institution politicians of all types like to say they support. And community banks lost an awful lot of money on their investments when the U.S. Treasury put Fannie and Freddie into conservatorship and suspended dividend payments on preferred shares in September 2008. The decision caused GSE preferred stock to become essentially worthless overnight. An estimated 600 depository institutions suffered "at least $8 billion in investment losses" on GSE preferred shares, according to a Federal Reserve paper published in March 2012. "In addition, fifteen failures and two distressed mergers either directly or indirectly resulted from the takeover," the Federal Reserve said in the report.
Regulators, including the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., in many ways encouraged banks to own GSE preferred shares "even when the investments were large relative to their other investments," according to the report. Community banks were given favorable tax treatment on their GSE losses, and Paul Merski, chief economist at the Independent Community Bankers of America, estimates about half of the trade organization's members that owned GSE preferred shares in 2008 have since sold them.
"There's bigger things that they need to deal with today rather than fighting the fight over whether or not they should seek to recover losses that occurred three or four years ago." Maybe so, though there is an awful lot of money at stake, and all the investors buying up Fannie and Freddie shares on the cheap could certainly use a front man. -- Written by Dan Freed in New York. Follow @dan_freed