Bloomberg News
Fannie Mae Liquidation Seen Sparing Preferred Holders
By Jody Shenn March 13, 2014
Fannie Mae Liquidation Seen Sparing Preferred Holders
An advertisement for mortgage broker Freddie Mac during the Mortgage Banker's Association Conference. Photographer: Justin Sullivan/Getty Images
Winding down Fannie Mae and Freddie Mac wouldn’t necessarily wipe out all of their shares.
Senate banking committee leaders announced this week they plan to introduce a bill to dismantle the two mortgage companies. The government seized them in 2008 after they helped fuel the worst financial crisis since the Great Depression. Common shares (FNMA:US) of the two firms plunged 34 percent this week through yesterday. Preferreds fell 11 percent.
Preferred stock in the companies, which rose fivefold over the past year, could recoup its full value even in a liquidation if the government or the courts reverse a measure that mandates all of their profits go to taxpayers, said Jeffrey Lewis at TIG Advisors LLC. Investors in common shares are betting that Fannie Mae (FNMA:US) and Freddie Mac would also be allowed to become private companies again and continue to dominate the market, he said.
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“It’s hard to find any reasonable outcome that’s really terrible for the preferreds, given what I perceive to be the value of the business (FNMA:US) that’s already there,” said Lewis, a senior portfolio manager at TIG, who helps manage about $400 million, and began buying the preferred shares last year.
The planned legislation, drafted with input from President Barack Obama’s administration, would replace Fannie Mae and Freddie Mac with a U.S.-backed mortgage-bond insurer that would cover losses only after private capital bears the first 10 percent, Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo said in a March 12 statement.
Corker-Warner Bill
The announcement by Johnson, a Democrat, and Crapo, a Republican, didn’t address how investors in the companies, including hedge funds Pershing Square Capital Management LP and Perry Capital LLC and mutual-fund manager Fairholme Capital Management LLC, would be treated. They said their legislation would be based on a Senate bill introduced last year by Republican Bob Corker and Democrat Mark Warner.
“The answer to that question is going to come in court rather in Congress,” Crapo said today in a Bloomberg Television interview. “They have filed suit right now in order to challenge the way the current conservatorship is managing the current profitability of Fannie Mae and Freddie Mac and we are not necessarily going to dictate the outcome of that. That will be a decision that’s made in the courts.”
Any wind down of Fannie Mae and Freddie Mac would have to address whether the companies’ values -- from the loans and bonds on their balance sheets to income from their existing guarantees on about $4 trillion of securities -- is split up among several stakeholders or left for taxpayers.
The companies have sent the Treasury Department $203 billion since turning profitable in 2012. The government is still owed about $188 billion for its bailout funding, because federal regulators adopted a policy that payments to the government would not be counted as repaying the aid.
Courts Decide
Corker, among the staunchest Congressional opponents to rewarding shareholders, has also said that the courts should decide whether that rule should be overturned.
“I have always believed that reform needs to ensure that all assets are disposed of in a legally sound manner, but my view that these shareholders likely won’t get a dime has not changed -- except possibly for small remnants, if there are any left, once reform is finished,” he said in a January e-mail.
Warner, a former venture capitalist, said in January that taxpayers should earn a return that reflects the size of the risk the government took by stepping in during a crisis.
Preferred shareholders (FNMA:US) hold notes with a face value of more than $33 billion. Common shareholders, including the government, through its option to take an 80 percent stake, are holding paper that traded at prices this week that pushed the companies’ combined market value to more than $55 billion, before crashing.
Ackman’s Gains
The slump reduced gains byBill Ackman’s Pershing Square on the stock from more than $700 million at the peak on March 11 to about $220 million yesterday, according to disclosures about the 10 percent of the outstanding shares he bought starting in October and data compiled by Bloomberg.
Fannie Mae’s common shares (FNMA:US) rose 6.9 percent today to close at $3.79, after falling yesterday to $3.54 from $5.82 on March 10. The stock is up from 29 cents a year ago. One of its preferred issues with a face value of $25 fell 5.5 percent to $10.30, compared with $12.70 on March 6 and $2.08 a year earlier.
