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These 2 Companies Made a $10.2 Billion Profit, But Investors Won’t See a Dime

Fannie Mae (NASDAQOTCBB: FNMA  ) and Freddie Mac (NASDAQOTCBB: FMCC  ) earned a very impressive profit of about $10.2 billion in the first quarter of 2014.

Thanks to their bailout arrangement, 100% of this amount goes straight into the pockets of the U.S. Treasury.

While the Treasury deserves to be compensated for its bailout of both companies during the financial crisis, don't the shareholders deserve some of the profits as well? After all, these are people who put their faith in businesses that were left for dead and have now returned to profitability, so it makes sense they want a cut.

However, it's looking pretty unlikely they'll see anything and may even get wiped out altogether. Congress is actively trying to wind down both agencies, and unless the shareholders are successful in forcing a change of the arrangement, they will be entitled to nothing if and when it happens.

That's quite a rebound
For the first quarter; the Treasury is receiving $10.2 billion in profit from Fannie and Freddie. These two companies that looked like they were down for the count have now posted their ninth consecutive quarterly profit. If you recall, when the bailouts were originally given to the companies, there was a lot of opinion that the government would never see that money again.

However, Fannie Mae has now paid the Treasury back $126.8 billion, more than the $116.1 billion in borrowed, and Freddie Mac has now returned $86.3 billion to taxpayers for their $71.3 billion "investment". Now that the Treasury has been made whole on their bailout, shareholders are screaming louder than ever that now is the time to share some of the profits.

Several ways investors can lose
If Congress succeeds in its attempts to wind down Fannie and Freddie; it's entirely possible that current shareholders could be left with nothing. In fact, under the current Senate bill, 100% of the proceeds from selling Fannie and Freddie's assets would go straight into the pockets of the U.S. Treasury. Even the preferred shareholders would be left with nothing.

Not surprisingly, the shareholders aren't thrilled about the possibility of their investments being wiped out. Fannie and Freddie's shares were trading for less than one-tenth of their current value until a little over a year ago, so a lot of people are sitting on some pretty impressive gains they really don't want to see get wiped out.

Led by hedge fund managers Bill Ackman and Bruce Berkowitz, shareholders have filed a lawsuit to try and change the current arrangement. Basically, they say investors were "duped" by the government, who allowed shares to continue to trade, and now are illegally taking profits from shareholders who took the risk and bought shares.

In addition, there is a movement to stop the attempted winding down of the companies in its tracks.

Stay and play, or walk away?
Sure, if the investors happen to win the lawsuit, it could mean a very nice payday. According to Ackman, who owns about 10% of both companies, the shares could have a long term value of between $23 and $47, and that's factoring in the Treasury's stake.

Now, I know the Treasury pocketing all of the profits isn't fair to shareholders. Not even close. If the government wanted shareholders to get nothing, they shouldn't have let the stock trade on the open market after taking control of the companies.

Whether the government's actions are right or wrong, I have to think now might be a good time for investors to get out.

Look, the potential for a huge gain from the current share price might make it very tempting to stick with Fannie and Freddie, but you're gambling your entire investment on the outcome of a shareholder lawsuit and congressional action working out in your favor.

This just doesn't seem like a risk worth taking to me.

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Read/Post Comments (6) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 25, 2014, at 5:33 PM, soad34 wrote:

    What a poorly written article!!! This is yet another fool writing an article that is based nothing on facts. First, you forgot to mention how the bill to wind down fannie and Freddie have close to no chance of passing in the near future. The longer it takes, the less likely fannie and Freddie will be wound down as they are only improving how they conduct loans and as a result, they keep making billions in profit. Second, you forgot to mention how the initial agreement was to take only 10% of the dividends. Lastly, you claim that this is a good time to take profits yet you provide absolutely no reason as to why it is a good time to sell? I just don't see how people like you land these jobs and write these articles as if you are stating facts that are new and beneficial to shareholders.

  • Report this Comment On May 25, 2014, at 6:33 PM, infinitemf wrote:

    We need to create an absurd award for the author as absurd as this article the author has written.

    This article does not meet minimum standards for publishing such articles.

  • Report this Comment On May 26, 2014, at 1:57 AM, Retiree2 wrote:

    Hey Motley Fool,

    First, thank you so much for your outstanding coverage and insight for FNMA and FMCC!

    Note: I hope you can convey this to our government:

    As an old guy, I've always trusted my government. As a baby-boomer, I was encouraged to buy Savings-Bonds as they were so beneficial to the war effort just a few years earlier.

    In 2009, after the government took conservatorship, I figured it was a good time to invest in our country again. Like millions of Americans, I took every penny of my retirement savings to invest in America.

    I felt if America failed, I would be willing to live under a bridge with my fellow Americans. In my heart, I knew we would fight our way back.

    In 2012, the government secretly stole the potential dreams of those retirees who've spent our lives devoted to our country.

    So as I still believe in our country's checks and balances, I will leave my life in the hands of the fairness of our constitution.

    Mr. President, please do not steal from the people under the pretense that you are being Robin Hood, you are not being Robin Hood! (Yes, I am a Democrat.)

    Thanks again :-)

  • Report this Comment On May 26, 2014, at 4:25 AM, maestrolindo wrote:

    The legality of conservatorship.. let alone the sweep amendment is questionable.

    Why would a company with $883 billion in assets need a $116 billion 'bailout'. Look at Fannie's balance sheet from 2007.

    This whole thing is a scam and the public is now well aware of it. No way out but to recapitalize and release from conservatorship. This isn't Venezuela.

  • Report this Comment On May 26, 2014, at 7:47 AM, hongchang wrote:

    Fools keeps putting out the foolish article like this. A few weeks ago, another fool said stock would be wiped out and suggested everyone should sell. That's when stock is at $3.70 and now 20% higher than that.

  • Report this Comment On May 28, 2014, at 1:27 AM, pawncracker wrote:

    Always question the purpose or motivation of the article. The purpose of the article is to tell readers to sell FNMA and FMCC. Why? Because "you're gambling your entire investment on the outcome of a shareholder lawsuit and congressional action working out in your favor."

    I don't think this is a gamble because their is a high probability that the lawsuits will work in favor of shareholders as well as govt. I think the outcome will be relatively fair for all sides. The govt. has a vested interest in keeping FNMA/FMCC shares valuable. Secondly, they are under conservatorship not receivership; meaning they cannot liquidate the companies or declare them bankrupt without shareholder restitution. Thirdly, they are fundamental institutions responsible for the housing recovery in which housing composes 20% of economy. Finally, I believe Congress is incapable of passing a law that will fundamentally change FNMA/FMCC---just too many interests involved, who do not want to change the status quo too much.

    FNMA/FMCC investment is looking more and more attractive in my opinion. Long and strong FNMA/FMCC.

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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Related Tickers

8/28/2015 3:59 PM
FMCC $2.18 Up +0.10 +4.81%
Freddie Mac CAPS Rating: **
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Fannie Mae CAPS Rating: **