Fannie Mae-No Politics (FNMA)

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"Without a victory shares will be rendered worthless". That's a little disheartening ..

Juliet Chung And Joe Light Shares of Fannie Mae and Freddie Mac plunged on Wednesday, following a federal-court decision that dealt a blow to big stockholders such as money managers Fairholme Capital Management LLC and Perry Capital LLC. A U.S. District Judge on Tuesday threw out lawsuits brought by Fairholme, Perry and other shareholders that challenged the U.S. government's 2012 decision to sweep nearly all of Fannie and Freddie's profits to the U.S. Treasury rather than collect set dividend payments. Fannie Mae's common stock declined 37% to $1.70 on Wednesday, while shares of Freddie Mac were down 38% to $1.65. Some classes of the companies' preferred shares fell by more than 50%. The single-day declines in the market capitalizations of the companies were the steepest in dollar terms since March 11. For the year, shares of Fannie Mae common stock are down 44%. Freddie Mac has suffered similarly steep declines. Investing in Fannie and Freddie shares largely has been a political and legal bet that the courts would strike down the government's 2012 decision to change how it collects money from the mortgage-finance giants. Wednesday's losses underscore the nature of those wagers. Without wins in the court system or a change in policy from the U.S. government, hedge funds and other Fannie and Freddie shareholders aren't likely to see the companies' future profits. While a victory would earn investors big profits, continued defeats could render shares nearly worthless. Some analysts say Wednesday's declines also highlight the risks of investing in entities mostly controlled by the government. "It shows the idea that any time you commit private capital alongside the government or in a government creation, you're at risk," of the government changing the terms, said Jim Vogel, a strategist for FTN Financial Capital Markets. Hedge fund Pershing Square Capital Management LP bought nearly 10% stakes in the common shares of Fannie and Freddie last November, and as of Tuesday's close had gains on the investment. But it turned into a losing stake on Wednesday after Pershing Square lost more than $175 million on paper. A spokesman declined to comment. Pershing Square in August filed separate lawsuits in the U.S. Court of Federal Claims in Washington, D.C. and U.S. District Court in Washington, D.C. against the government on behalf of common shareholders. Those cases are ongoing. Money manager Fairholme, which is among the firms that began buying Fannie and Freddie's preferred shares at large discounts over the past few years, also suffered losses. It last reported its holdings of the Fairholme Fund in May, according to Morningstar Inc. If the number of preferred and common shares the firm owns has remained the same since then, the fund's paper losses for Wednesday on its holdings of Fannie and Freddie common and preferred shares would have totaled more than $640 million. Fairholme in a statement Wednesday said it was "disappointed" by the judge's decision and that it would "vigorously pursue the enforcement of existing contractual claims and our inalienable rights of property ownership"--though it stopped short of saying it would appeal the decision. Others that have bought shares over the years include hedge fund firms Paulson & Co., Claren Road Asset Management and GSO Capital Partners, owned by Blackstone Group LP. Hedge-fund firm Claren Road has told some investors it is starting off October down several percentage points because of its Fannie and Freddie bet. A spokesman declined to comment. "While it's a setback," Claren Road said of the court ruling in a message to clients, "there are still many avenues we are pursuing. In the next few days, our investment team will be evaluating more information." Perry didn't respond to requests for comment. Spokespeople for Paulson and for Blackstone declined to comment. In all, the federal judge dismissed four lawsuits on Tuesday. The plaintiffs haven't said if they will appeal the judge's decision. While Fairholme lost the U.S. District Court case, another case brought by the company in the Court of Federal Claims is in the discovery process. Analysts cautioned that the U.S. District Court decision could influence the direction of the cases still pending. The lawsuits stem from the government bailout of mortgage finance giants Fannie Mae and Freddie Mac in 2008. As part of the bailout, the government received warrants to buy common stock and received preferred shares that paid a 10% dividend. In August 2012, it changed the terms of the agreement to take nearly all the profits when Fannie and Freddie made one, but didn't require a dividend when they suffered losses. Soon after the agreement was changed, Fannie and Freddie started to make huge profits on the back of the housing recovery and large legal settlements with lenders. Most of the cases challenge the government's decision to change the treatment of the companies' profits. To date, the companies have received nearly $188 billion in government aid and have sent $218.7 billion to the Treasury in dividends. Several investors in hedge funds with bets on Fannie and Freddie expressed concern Wednesday. One said it was difficult to see a way forward for the suits that were dismissed given what he described as the "unequivocal" nature of the decision. Another investor said the court's dismissal underscored the risky nature of the wagers and said he worried they had the potential to take up a disproportionate amount of the funds' time and attention if legal processes drag on. Write to Juliet Chung at [e-mail] and Joe Light at [e-mail] Subscribe