Freddie Mac-No Politics (FMCC)

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Fannie, Freddie Holders on the Ropes
http://online.barrons.com/news/articles/SB51517841841143733463604580188464042499370

Few Wall Street gambits have been as cynical as those of funds like Perry Capital and Fairholme Capital Management to horn in on profits of Fannie Mae and Freddie Mac that are finally being enjoyed by the U.S. government after a $189 billion taxpayer bailout saved the mortgage giants from extinction in September 2008.
Ruling against high-profile investors, a judge backed the government’s right to mortgage-agency profits. Photo: Manuel Balce Ceneta/AP Photo

But last Tuesday, investors in these so-called government-sponsored enterprises’ preseizure preferred and common stocks got a nasty surprise in federal district court in Washington, when Judge Royce Lamberth dismissed lawsuits by Fairholme and Perry without even hearing oral arguments. The judge’s 52-page decision systematically rebuffed claims that the GSEs’ conservator, the regulator Federal Housing Finance Agency, had exceeded its authority by sweeping all of their profits to Treasury. He branded the reasoning on that plaintiff argument “arbitrary and capricious.”

Naturally, the court action caused the mortgage agencies’ preseizure common and preferred to plummet over the next two trading sessions. Various classes of the preferred fell by as much as 60%; Fannie shares (ticker: FNMA), by 44%, to $1.51 a share; and Freddie Mac’s (FMCC), by 44%, to $1.48 a share. A strong bounce back in Friday’s rally still left all of the shares down sharply.

In a July 29, 2013, cover story titled “Fannie, Freddie: On Borrowed Time,” Barron’s argued that the old shares would eventually be wiped out. But to little avail. The stocks rocketed upward until March of this year, as many investors followed the supposed smart money over a cliff into what has become the valley of death. We reiterated our view in March.

Options are clearly running out for the old shares. Perry Capital’s celebrated attorney, Theodore Olson, announced that Perry had filed an appeal of the Lamberth decision. A number of other investor lawsuits are pending. And the plaintiffs are still seeking redress in federal claims court. But the Lamberth decision looms large and casts a pall over all plaintiff claims.

In any wind-down or eventual liquidation of Fannie and Freddie, the government’s senior preferred claim to repayment of its $189 billion in recompense stands in front of the common shares.

The corollary to the hoary investment dictum, don’t fight the Fed, is don’t fight the Federal government.

--Jonathan R. Laing