After the GSEs were placed under conservatorship their common shares plunged, as investors had no confidence the common shareholders could ever see a decent return, because of the size of the government bailout and the GSEs' uncertain future. Common shares of both companies traded for just 26 cents at the end of 2012. GSE shares were strong all last week, and Ralph Nader on Friday wrote in an explosive op-ed piece in the Wall Street Journal that , saying 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."
President Obama and Congress are expected soon to negotiate over the future of the U.S. mortgage finance market, which will include a way forward for Fannie and Freddie, or possibly the long-term dissolution of the GSEs
A Massive, Profitable BailoutThe U.S. Treasury holds $117.1 billion in Fannie Mae senior preferred shares and $72.3 billion in Freddie Mac senior preferred shares, for the multiyear bailout. Fannie Mae announced on May 9 that 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 that it would pay a dividend of $7 billion to the Treasury in June. Following the June dividend payments from Fannie and Freddie, the government will have received dividends totaling $131.6 billion on its combined GSE preferred investment of $189.4 billion. A major factor holding GSE common and junior preferred shares back through the end of last year was, was the lack of a mechanism allowing either GSE to repurchase any government-held preferred stock. That hasn't changed, despite the much brighter earnings outlook for Fannie and Freddie.
Junior Preferred SharesDividend payments on junior preferred shares of Fannie and Freddie were suspended in September 2008 when the two companies were taken under conservatorship. With junior preferred shareholders having preference ahead of common shareholders for any possible reward from Fannie and Freddie, the market action for the junior preferred was strong for several sessions through Tuesday's close. But they were down on Wednesday and continued to decline on Thursday. Fannie's preferred Series E shares, with a face value of $50, plunged 32% to close at $10.26, following a 24.5% decline on Wednesday. The shares trade under the symbol FNMFM. Freddie Mac's preferred Series Z shares, with a face value of $25, ppulled back 3% to close at $6.45, after declining slightly on Wednesday to close at $6.66. A high-profile institutional investor has disclosed major investment in GSE preferred shares, possibly signaling a large commitment by other big investors, which could provide a solid "floor" for the junior preferred shares.
Other Financial Services NewsThe broad indices were all up 1% in afternoon trading, and the KBW Bank Index ( I:BKX) 1% to 62.90, after two slightly disappointing economic reports gave pause to investor fears that the Federal Reserve might soon curtail its monetary stimulus. The Bureau of Economic Analysis reported that its second estimate on U.S. first-quarter GDP showed an annual growth rate of 2.4%, which was down from the first estimate of 2.5%. U.S. GDP grew at an annual rate of just 0.4% during the fourth quarter, in part because of the effect of Superstorm Sandy on the Northeast. The consensus estimate among economists polled by Thomson Reuters was for the first-quarter GDP growth rate estimate to remain at 2.5%. The Department of Labor said that initial unemployment claims for the week ended May 25 increased by 10,000 to 354,000, which was above the consensus estimate of 340,000. The four-week moving average for initial jobless claims was 347,250, an increase of 6,750 from the previous week's average of 340,500. Shares of CIT Group ( CIT) were up 6.5% to $47.37 in afternoon trading, after the lender announced that the Federal Reserve Bank of New York had lifted a consent order placed in August 2009. The order required CIT to submit all plans for capital deployment to the New York Fed for approval. BTIG analyst Mark Palmer in a note to clients on Thursday wrote that as investors grew tired of waiting for the order to be removed, they chose "to focus on investment opportunities in which the timeframe for potential catalysts was more easily defined."
-- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn