Barron's was a fluff opinion piece offering nothing more. Here it is:
More Trouble Ahead for Investors in Fannie Mae and Freddie Mac
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Last Tuesday a wave of panic hit the stocks of Fannie Mae and Freddie Mac, driving the housing giants down some 30% and the junior preferreds down 5% to 10%. Even with a rebound, the common and preferreds finished the week largely unchanged from Tuesday's lows.
The selloff was triggered by word that the Senate Finance Committee was close to offering up a bill that would wind down the operations of the two agencies over a period of years. That might wipe out the equity holders of the old companies that were seized by the government in Sept. 2008 and placed in a conservatorship presided over by the Federal Housing Finance Agency.
The preferreds, which have a face value of around $35 billion, have attracted a number of speculators, including Perry Capital and Bruce Berkowitz's Fairholme Fund (ticker: FAIRX), which bought them for pennies on the dollar concluding that they would eventually be paid off in full. Meantime, Bill Ackman's Pershing Square has snarfed up 10% of the old common of both Fannie (FNMA) and Freddie (FMCC) in expectation of a big payday. A flurry of lawsuits by the preferred shareholders claims that now that the two agencies are wildly profitable, the federal government has illegally expropriated funds belonging to them without just compensation.
In our opinion, last week's stock action is just a preliminary tremor of a major earthquake that will render all the claims of the old equity holders worthless. We first expressed this jaundiced view in a cover story last summer ("Fannie, Freddie: On Borrowed Time," July 29, 2013). We're sticking with our contention.
Let's go down the checklist of reasons why. First, for clarity's sake, substitute the word taxpayers for government. The bailout of Fannie and Freddie cost taxpayers nearly $188 billion. Secondly, the FHFA, as the congressionally mandated conservator, assumed all the powers and rights of the old shareholders, agency management, and directors. Absolute power, in other words.
The suits contend that since the companies are making gobs of money and due to return some $200 billion to the taxpayers by this month's end, the old shareholders are entitled to some return like, well, a full payout on the $35 billion value of their preferreds. But that claim glosses over the fact that the only reason the companies have survived is due to taxpayer largesse. And taxpayers surely are deserving of a lot more than the $80 billion they have received so far in return for the bailout.
-- Jonathan R. Laing
