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Wednesday, May 15, 2013 7:27:00 AM
Some of the hedge funds that made fortunes in the housing-market crash are now betting on the recovery of Fannie Mae FNMA +26.32% and Freddie Mac, FMCC +26.37% the government-controlled mortgage giants.
Paulson & Co. and Perry Capital LLC are among a handful of hedge-fund firms that have bought so-called preferred shares in Fannie and Freddie, which collapsed in value in 2008 after the companies were taken over by the federal government.
These firms are hoping Fannie and Freddie's recent return to profitability on the back of a recovering housing market will lead the companies eventually to make payments to preferred shareholders.
Former Treasury official Jim Millstein, now Millstein & Co.'s chief executive, has invested in Fannie and Freddie.
Some investors already have benefited from a recent rally in the mortgage companies' shares. The most widely traded class of Fannie's preferred shares closed at $5.38 on Tuesday, the highest level since the companies were placed into a government-run conservatorship in September 2008. Two months ago, the shares traded for less than $2.
However, the hedge funds and other investors stand to make a lot more depending on how Fannie and Freddie are restructured. The best-case scenario for the investors would be that the government raises fresh capital for the companies and sells its stake on the market. That way, the investors hope, preferred shareholders might be paid out.
But that could be a long shot. Any recapitalization of Fannie and Freddie is viewed as a nonstarter by officials in the Obama administration, according to people familiar with the matter. The administration has repeatedly said the companies should be phased out instead of sold back to investors along the lines of how the U.S. unwound its stake in American International Group Inc. AIG +3.23% Once any overhaul of Fannie and Freddie begins, the administration could take additional steps to sell off the firms' assets in a way that
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