Since both Fannie Mae and Freddie Mac were put in government conservatorship during the housing and mortgage market crashes, they are required to pay all profits to the U.S. Treasury department in the form of dividends. Shareholders get nothing.
(Read More: Inside America’s Economic Crisis)
That is why their stocks initially plummeted in value in 2008 and were delisted from the New York Stock Exchange. The shares would only have value if Congress were to take them out of conservatorship and allow them to recapitalize. That, most analysts say, is a very long shot.
“This is a congress that needs and wants a lot of money. Why would they ever give up this revenue stream, especially if it’s going to speculative bets on Wall Street?” asked Ed Mills of FBR Capital Markets.
Mills said investors are weaving an exciting tale, but one unlikely to have a happy ending. At first it was small individual investors, but now larger hedge funds, like Paulson and Co and Perry Capital, are getting in, according to several published reports. While members of Congress have yet to pass any legislation toward dismantling Fannie and Freddie or returning them to private companies, with or without a government backstop, the idea that they would just give them back to shareholders is, again, unlikely.
(Read More: Paulson Raised Bet on Mortgage Insurers in First Quarter Filing)
Sen. Bob Corker, a Republican from Tennessee who is sponsoring legislation to reform Fannie Mae and Freddie Mac, has been clear that stockholders will get nothing in his plan, despite the recent profitability of the two:
“If Treasury were to decide to sell its preferred share investment without Congress having first reformed our housing sector, we would just be returning to a time where gains are for private shareholders and losses are for taxpayers. Neither of these is an acceptable outcome,” according to a recent release.
Still, it is enticing to think about.
“Fannie/Freddie is an extremely exciting story. This year, Fannie and Freddie are likely to post combined net income of over $100 Billion—more than the combined estimated earnings of both Exxonand Apple. Pretty good for two entities left for dead in the fall of 2008,” said James Fenkner, a California-based investor who has owned Fannie Mae shares. “I’m a long term believer in the eventual recovery of Fannie and Freddie, but also believe that the story of the commons and [less so] junior preferred are not yet ready for prime time. Should Fannie and Freddie recover to their pre 2008 highs, the common shares could rally eight times and the preferred five times their current prices. Yet, such gains assumes a fairly tale ending, and that is a probability asymptotically close to zero.”
As Fannie Mae’s dividend payments to Treasury, so far $95 billion, now approach the amount it drew, $116.1 billion, investors have a better case to make.
(Read More: Fannie Mae Should Be Abolished, Says Barney Frank)
Article source: http://www.cnbc.com/id/100754423