Investors are Ready to Discover Fannie Mae and Freddie Mac

Plaintiffs suing the U.S. government are a little better off.

Apr 8, 2014 at 7:00AM

Magnifying
Source: Flickr / Georgie Pauwels.

After an amendment to the preferred stock purchase agreement with the U.S. government was added in 2012, shareholders of Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC) are forced to rely on the courts to realize any value from their investment.

A recent decision from the court hands an early win to Fannie and Freddie investors and we could soon learn a lot more about their situations.

Early win
For Fannie and Freddie investors, overturning the Sweep Amendment put in place in Aug. 2012 is critical to giving shares any value. Since politicians are generally more eager to wind down the GSEs than give shareholders any value, the courts are the most likely way for the Sweep Amendment to be overturned.

Although there are many parties suing the U.S. government over its handling of Fannie and Freddie, the case put forward by Fairholme Funds is one of the most critical and where the current news comes from.

Last week, a federal judge sided with the plaintiffs, Fairholme Funds, and granted discovery beginning April 7 and ending Jul. 31. In other words, the defendants, The United States, will have to start releasing information beginning at the start of this week.

What it means
The case against the government in the Fannie and Freddie case largely rests on the idea of collusion within the government. The pro-shareholder side alleges that the Federal Housing Finance Agency (FHFA), the conservator and controller of the GSEs, acted with the government to steal the profits of Fannie and Freddie through the Sweep Amendment.

Right now, the story would suggest that something to that effect happened, considering the Sweep Amendment was enacted soon after the GSEs returned to profit, and that no manager of a profitable company would agree to give up its entire future profits for no compensation. However, finding hard evidence to support these allegations has been difficult.

Discovery could grant new insights into the internal acts of the government leading up to the Sweep Amendment and possibly bring hard evidence to back up the allegations of the plaintiffs.

Terms of discovery
First, by granting discovery to begin soon, the plaintiffs are put in a much better position. The battle to save Fannie and Freddie's shareholders is a race between the courts and Congress, the latter of which is looking at different ways to wind down the GSEs and almost certainly wipe out common shareholders. Having discovery begin on April 7 means the lawsuit can progress faster and possible information can come to light before Congress can pass legislation to end Fannie and Freddie.

The terms also call for status conferences every two weeks between the court, the plaintiffs and the defendants. Although status conferences are fairly common in legal proceedings, having one every two weeks should help to keep the government from slowing down the release of requested information and allow the proceedings to move along faster.

Lawsuit investment
In the past decade, Fannie and Freddie have gone from being blue chip stocks, to near worthless penny stocks, to bets on the legal rulings from the nation's courts. Fairholme Funds has been granted discovery to begin next week and they could soon know a lot more about what happened inside the government around the time of the Sweep Amendment.

But we are no where near the end here. Discovery is one of the first parts of a lawsuit and even this stage will continue through the summer. So for Fannie and Freddie investors, your prospects just improved a bit but be prepared for a long, and possibly bumpy, ride.

Take advantage of Uncle Sam's little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Alexander MacLennan owns common shares of Fannie Mae and Freddie Mac. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers