Fannie Mae-No Politics (FNMA)

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Fannie And Freddie Shares Tumble Again After Legal Ruling

Investors continued to flee Fannie Mae and Freddie Mac on the second trading day following a legal ruling that made it seem less likely that anyone but the federal government would ever get their hands on the mortgage giants’ profits.

Shares of Fannie Mae fell by more than 11% in Monday morning trading to $1.51 and shares of Freddie Mac fell by 20% to $1.50. Shares of both the government-sponsored enterprises plunged on Wednesday by nearly 40%. Shares of Fannie Mae have now tumbled by 75% since spiking to their 52-week high of $6.35. Shares of Fannie Mae’s popularly trade Series S preferred shares fell by 15%.

Right after markets closed on Tuesday, U.S. District Judge Royce Lamberth threw out lawsuits filed by Richard Perry’s hedge fund and Bruce Berkowitz’s Fairholme Funds that claimed the government acted illegally by getting Fannie Mae and Freddie Mac to pay the government nearly all of its massive profits in the form of dividends.

Big hedge fund investors like Perry, together with retail investors, had made legal actions a key part of their campaign to score big on the securities of Fannie Mae and Freddie Mac. The Obama Administration wants to wind down the mortgage giants that have been operating in conservatorship since receiving $188 billion from the Treasury Department amid the financial crisis. Fannie and Freddie have paid the bailout out money back and are now hugely profitable.


English: The Colonial Revival headquarters of ...
English: The Colonial Revival headquarters of Fannie Mae, designed by architect Leon Chatelain, Jr. in 1956, located at 3900 Wisconsin Avenue, N.W., in the Cathedral Heights neighborhood of Washington, D.C. (Photo credit: Wikipedia)




Perry and Berkowitz bought Fannie and Freddie junior preferred securities a long time ago in the hopes that some of those profits would eventually flow to them. Other investors, including Berkowitz and, more recently, William Ackman’s Pershing Square Capital Management, took positions in the common shares of the GSEs. Ackman’s position was particularly big.

Judge Lamberth struck a huge blow to the legal argument championed by investors that the Treasury Department acted improperly by implementing a so-called sweep amendment in August 2012 in which all of the profits of the GSEs would go to the Treasury’s senior preferred stock. In essence, Judge Lamberth said that hedge fund and other investors in Fannie and Freddie securities could not get around the Housing and Economic Recovery Act that President George W. Bush signed into law that created the Federal Housing Finance Agency and gave it the authority to place Fannie Mae and Freddie Mac into conservatorship and regulate the GSEs.

“It strikes this court as odd that a statute like HERA, through which Congress grants immense discretionary power to the conservator, and prohibits courts from interfering with the exercise of such power, would still house an implicit end-run around FHFA’s conservatorship authority by means of the shareholder derivative suits that the statute explicitly bars,” Judge Lamberth wrote. “The plaintiff’s grievance is really with Congress itself.”

There are other legal cases pending against the government, including Ackman’s Pershing Square lawsuit. But clearly investors are taking a dimmer view of the potential for private investors to be successful in their effort to wrestle some of the GSEs’ profits away from the government.
http://www.forbes.com/sites/nathanvardi/2014/10/02/fannie-and-freddie-shares-tumble-again-after-legal-ruling/