NEW YORK (TheStreet) -- Shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) traded in wild fashion on Tuesday, reversing early gains to show large double-digit declines in the last few minutes of trading.
Fannie Mae's common shares were down 30.8% to close at $4.03, while Freddie's common shares were down 26.8% to close at $4.04, after Senate Banking Committee Chairman Tim Johnson (D., S.D.) Senator and Mike Crapo (R., Idaho), the ranking member of the committee, announced they had come to an agreement on a bi-partisan proposal to wind-down the mortgage giants.
Fannie and Freddie -- together known as the government-sponsored mortgage enterprises, or GSEs -- were taken under government conservatorship at the height of the U.S. housing market meltdown in September 2008. The GSEs' common and preferred stocks remained publicly traded, but values plunged because dividends to non-government shareholders were suspended, and because it appeared highly unlikely at the time at the GSEs would eventually return to being highly profitable.
Over the past year, many institutional investors have jumped on what they consider to be a unique investment opportunity to scoop up common and junior preferred shares of Fannie and Freddie and wait out a long legal battle over government's treatment of private investors.
When the GSEs were bailed out by the government, the original agreement required Fannie and Freddie to pay the U.S. Treasury 10% annual dividends on the government-held senior preferred shares, however, in August 2012, after the GSEs had returned to profitability and after they had stopped increasing their borrowings form the government, the bailout agreement was changed so that all GSE profits were paid to the government, in excess of minimal capital cushions.