Updated from 1:44 p.m. with market close information, Bruce Berkowitz's big bet on Fannie and Freddie and bank stock commentary.NEW YORK ( TheStreet) -- Fannie Mae ( FNMA) and Freddie Mac ( FMCC) retreated Wednesday following a surging seven-session ride in which both stocks more than doubled in value. Shares of Fannie Mae were down 29% to close at $2.90. The shares had risen 140% over the preceding week to close at $4.08 on Tuesday. Freddie Mac's shares were down 30% to close at $2.61, after seeing a one-week return of 150% through Tuesday's close at $3.75. "The furor that took the common stock to a $40 billion combined market cap seemed overdone when the preferreds have continued to languish at an $8 billion capitalization," wrote Michael Kao, head of Los Angeles-based hedge fund Akanthos Capital Management, in an email. The two mortgage lenders, known as the government-sponsored enterprises, or GSEs, and were taken under government conservatorship in September 2008 following the implosion of the industry.
Fannie and Freddie benefited from better-than-expected housing data from the S&P/Case-Shiller 20-city home price index which showed a month-over-month increase of 1.4% and a 10.9% gain from the same period a year ago. The national 20-city and 10-city indices all posted the largest year-over-year gains since 2006, according to S&P Dow Jones Indices. Economists polled by Thomson Reuters on average expected the 20-city index to show a year-over-year increase of 10.2%. The gains by both GSEs was sidetracked Friday after Ralph Nader, the longtime consumer activist, wrote in a column for the Wall Street Journal that the two companies' common shareholders should fight against the federal government's "great Fannie and Freddie rip-off." As part of its bailout agreements with Fannie and Freddie, the GSEs granted the government warrants to purchase just under 80% of the common shares of the two GSEs at a strike price of $0.00001 per share. "The zombie common shareholders have no rights or remedies against Fannie and Freddie, both operationally active companies, or their regulator -- the Federal Housing Finance Agency," Nader wrote on Friday. "FHFA ordered the Fannie and Freddie boards and executives to suspend communications with shareholders and abolish the annual stockholders meeting."
Government-Held Senior Preferred SharesThe U.S. Treasury holds $117.1 billion in Fannie Mae senior preferred shares and $72.3 billion in Freddie Mac senior preferred shares, in lieu of bailout funds provided to both companies. Fannie Mae announced on May 9 it would pay the Treasury a second-quarter dividend of $59.5 billion, after the GSE determined it could recapture most of its valuation allowance for deferred tax assets (DTA) at the end of the first quarter,. Freddie Mac announced on May 8 it would pay a dividend of $7 billion to the Treasury in June. Following the announced June dividend payments from Fannie Mae and Freddie Mac, the government will have received dividends totaling $131.6 billion on its combined GSE preferred investment of $189.4 billion.
The government appears to be making the best of its investment in Fannie and Freddie, and there is no agreement in place allowing either GSE to repurchase any government-held preferred stock. And that -- along with the potential government feast on the common-share warrants -- could be a ticking time bomb, assuming the GSEs' common and junior preferred shareholders decide to sue the government for their share of the gravy.