Fannie and Freddie: Thursday Financial Stock Winners (Update 2)

Updated from 2:06 p.m. ET with market close information.

NEW YORK ( TheStreet) -- Fannie Mae ( FNMA) and Freddie Mac ( FNMA) were the financial stock winners on Thursday, after the government sponsored enterprises (GSEs) announced their third-quarter results.

Following a delay in trading because OTC Markets was unable to open trading on Thursday because of a "connectivity issue," according to a Wall Street Journal report, Fannie Mae's common shares rose nearly 5% to close at $2.41, while Freddie's shares were up nearly 3% to close at $2.27.

The GSEs were taken under government conservatorship at the height of the credit crisis in September 2008. The U.S. Treasury holds $117.1 billion senior preferred Fannie Mae shares and $72.3 billion in senior preferred Freddie Mac shares. Under their modified bailout agreements, the GSEs must pay all earnings to the government in excess of minimal capital cushions of $3 billion apiece.

Fannie reported third-quarter earnings of $8.7 billion, increasing from $1.8 billion a year earlier. The company said it would make an $8.6 billion dividend payment to the Treasury in December. Following that payment, Fannie will have paid the U.S. government dividends totaling $114 billion.

Freddie Mac on Thursday reported third-quarter pre-tax earnings of $6.5 billion, increasing from $4.9 billion in the third quarter of 2013. But the company's after-tax earnings for the third quarter jumped to $30.5 billion because of a $23.9 billion release from the company's valuation allowance for deferred tax assets (DTA).

Fannie Mae recaptured its DTA during the first quarter.

Freddie said it would make a $30.4 billion dividend payment to the Treasury in December, bringing its total dividends paid to Uncle Sam to $71.3 billion.

So the government in December will have received $185.3 billion in dividends from Fannie and Freddie, for a five-year investment of $189.4 billion. That's a nifty return in a little over five years, and there's still no mechanism in place for either GSE to repurchase any government-held preferred shares.

Meanwhile, investors holding common and junior preferred shares of Fannie and Freddie have been out in the cold since September.

But with the GSEs making so much money, investors have made plays in common and junior preferred GSE shares, hoping to recapture some value.

Fannie's preferred Series S shares, which have a $25 par value and trade under the ticker FNMAS, rose 3% to close at $8.25. The shares have risen 394% $1.67 at the end of 2012.

Freddie's preferred Series Z shares, with a $25 par value and FMCKJ ticker, rose 1,2% to close at $8.20. The shares have gained 369% since closing at $1.75 at the end of last year.

Politicians in Washington have shown no inclination to help rehabilitate Fannie and Freddie so they can resume operating as privately held companies as they did before the credit crisis. The dividend gravy train also helps reduce the federal budget deficit.

With the GSEs continuing to purchase the lion's share of mortgage loans originated in the United States and holding $4.7 trillion in mortgage loans on their balance sheets as of Sept. 30, institutional investors holding common and junior preferred shares of Fannie and Freddie see real value. These investors are hoping that whatever "resolution" of the GSEs Washington comes up with, something will be left for them.

In the meantime, several institutional investors, including Washington Federal ( WAFD), Perry Capital and Bruce Berkowitz's Fairholme Funds have sued the government for destroying private shareholders' property.

The ongoing Fannie and Freddie story is a fascinating one, especially since the junior preferred shares still trade at such significant discounts to par. A court victory against the government could lead to a killing for private investors.

Then again, Thursday was " Twitter ( TWTR) Day." Following the pricing on Wednesday of the company's initial public offering at $26 a share, the shares began trading on the New York Stock Exchange Thursday at $45.10 and held their own, closing at $44.90. Not bad day's work for investors lucky or well-enough connected to get in on the IPO.

The broad indices were all down sharply, despite the Twitter excitement and the huge pop for shares of Geron ( GERN), after the biopharmaceutical company announced the results of its imetelstat drug trials.

Investors were less than thrilled after the Bureau of Economic Analysis announced that the United States economy expanded at an annualized rate of 2.8% during the third quarter, increasing from a GDP growth rate of 2.5% during the second quarter. Economists polled by Thomson Reuters had on average estimated the third-quarter GDP growth rate would decline to 1.9%.

The GDP growth rate, together with the national unemployment rate for October that will be announced Friday, are key numbers that could affect the timing of the Federal Open Market Committee's timing for the eventual curtailment of "QE3" bond purchases by the Federal Reserve.

The Fed has been purchasing a net $45 billion in long-term U.S. Treasury securities and $40 billion in long-term agency mortgage-backed securities each month since September 2012, in an effort to hold down long-term interest rates.

RELATED STORIES:





-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

More from Investing

When Is It 'Worth It' to Work With a Financial Advisor?

When Is It 'Worth It' to Work With a Financial Advisor?

Amazon, Microsoft and Google Face Backlash over ICE, Military Deals

Amazon, Microsoft and Google Face Backlash over ICE, Military Deals

3 Great Stock Market Sectors Millennials Should Invest In

3 Great Stock Market Sectors Millennials Should Invest In

Why Millennials Are Ditching Stocks for ETFs

Why Millennials Are Ditching Stocks for ETFs

Trump's 'Space Force' Could Launch a $1 Trillion Industry, Morgan Stanley Says

Trump's 'Space Force' Could Launch a $1 Trillion Industry, Morgan Stanley Says