Updated from 12:16 p.m. EDT with fresh share price data and additional detail about New York University law professor Richard Epstein in 12th paragraph.
NEW YORK (TheStreet) -- Fannie Mae (FNMA) and Freddie Mac (FMCC) investors dumped their holdings of preferred and common shares on Wednesday following a legal decision both stunning in its speed and thoroughness. But some investment pros are suggesting that it might be wiser to hold on to the shares -- for now.
On Tuesday, a U.S. District Court judge threw out four lawsuits claiming the federal government illegally forced Fannie and Freddie to pay the Treasury nearly all of its profits, leaving regular shareholders with nothing. The lawsuits, brought by shareholders including Fairholme Funds and Perry Capital, contended that the so-called "sweep" was a violation of their Fifth Amendment rights against the seizure of private property for public use without just compensation.
Watch the video below for more on the decision to dismiss shareholder lawsuits against Fannie Mae and Freddie Mac:
But the judge disagreed, saying the government had been granted broad powers by Congress, which "parted the legal seas" to deal with the financial crisis. Both Fannie and Freddie, which are government-sponsored enterprises, or GSEs, received a $188 billion bailout from the government. The mortgage giants have repaid that money and are now very profitable.
As expected, both Fannie and Freddie shares plunged on Wednesday following the decision.
"I'm licking my wounds this morning," conceded David Tawil, president of hedge fund Maglan Capital, an investor in common shares of both Fannie and Freddie.
Tawil called the decision "extremely authoritative," though he said he would hold on to his investment.
The reason? The shares have fallen so far so quickly he saw little point in selling.
"At 50 cents a share, I'm not going to throw in the towel," he said, adding that the "option value" is pretty good. Tawil made his "50 cents a share" comment before the start of trading Wednesday, when shares were down some 60% in premarket trading.
Less than an hour before the close of trading Wednesday, Fannie Mae common shares were down 37.17% to $1.69, and Freddie Mac shares were lower by 38.26% to $1.63. Preferred shares in both entities, investments that had been favored by many hedge funds who saw them as a safer bet, were also down sharply. The Fannie Mae "S" series preferred shares were down more than 53.48% to $4.28.