Moving on, Fairholme made its demand: "Taxpayer dollars expended by the government during a time of national crisis will be fully repaid. And equitable treatment of taxpaying shareholders, including community banks, insurance companies, and mutual funds holding Preferred Stock, must be restored with dividends reinstated. Repaying taxpayer investments, restructuring government guarantees, and restoring shareholder property are not mutually exclusive. This is the American way." Then after calling for the immediate restructuring of Fannie and Freddie, Fairholme made its most interesting comment: "On behalf of the hundreds of thousands of Fairholme Funds shareholders who helped to rebuild American International Group ( AIG), Bank of America, CIT Group ( CIT), General Growth Properties ( GGP), MBIA Inc. ( MBI), and others after the Great Recession -- we stand ready to do our part."
Fairholme made it pretty clear that hundreds of thousands of investors -- voters -- would be displeased if the president and Congress were to force the GSEs to continue paying outsized dividends to the Treasury while not allowing Fannie or Freddie to repurchase any of the government's senior preferred shares. Fairholme also neatly tied its offer of assistance to the government's conversion of senior preferred shares in American International Group to common shares, which enabled AIG to move past its bailout, with the Treasury and the Federal Reserveboth claiming tidy profits . Such a move could raise the junior preferred shares to par value and would also enable Fannie and Freddie to begin rebuilding their capital levels, since they would no longer be paying all of their earnings to the government. Then, like AIG, the GSEs could repurchase government-held common shares, thus lowering the share count, increasing earnings-per-share, and possibly setting up huge gains for the common stockholders. Anticipating the expected negotiations between President Obama and Congress over the GSEs future, Nader wrote that "the common shareholders of Fannie and Freddie need to organize and make their voices heard in Washington. Clearly, they should have a say in how Fannie and Freddie are managed -- in the board room and in Congress -- from here onward."
The Common Shares are Cheap
A quick back-of-the-envelope calculation shows the potential for very large gains for Fannie Mae's common shareholders, because the shares trade at a very low valuation to the company's potential annual operating earnings.