Plenty of GSE Profit to Go Around

The government holds $117.1 billion in Fannie Mae senior preferred shares and $72.3 billion in Freddie Mac senior preferred shares, for the bailout that began in September 2008. Fannie Mae announced on May 9 that it would pay the Treasury a second-quarter dividend of $59.5 billion, after determining it could recapture most of its valuation allowance for deferred tax assets 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.

While Fannie and Freddie are now solidly profitable, there's no sign of an end to the bailout or the conservatorship, since there is no mechanism allowing either GSE to repurchase any government-held preferred stock. Per their amended bailout agreements, both Fannie and Freddie are required to pay dividends to the government equal to all of their earnings, less $3 billion apiece in retained earnings, to provide a minimal equity buffer.

Junior Preferred Shares

Junior preferred shares of Fannie and Freddie have also been quite volatile.

Fannie's preferred Series E shares, with a face value of $50, rose 22% to close at $12.55, after falling by a combined 49% over the previous two sessions. The shares trade under the symbol FNMFM and have risen 684% this year from a closing price of $1.60 on Dec 31.

Dividend payments on junior preferred shares of Fannie and Freddie were suspended in September 2008 when the two companies were taken under conservatorship.

CNBC on Wednesday reported that Bruce Berkowitz's Fairholme Capital Management had taken a roughly $500 million position in GSE preferred shares.

Berkowitz in a note to CNBC wrote "taxpayer dollars expended by the government during a time of national crisis will be fully repaid," adding that "equitable treatment of taxpaying shareholders, including community banks and insurance companies, must be restored.

"The government's ability to fully recoup its investment and restoring value to shareholders are not mutually exclusive," Berkowitz wrote.

Other Financial Services News

The broad indices all saw significant declines and the KBW Bank Index ( I:BKX) was down 2% to close at 61.60, as investors continued to worry over the eventual curtailment of monetary stimulus by the Federal Reserve.

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