Could This Democrat's Support Lead to Fannie Mae And Freddie Mac Going Away?

There has been talk of winding down Fannie Mae (NASDAQOTCBB: FNMA  ) and Freddie Mac (NASDAQOTCBB: FMCC  ) for some time now, which would put shareholders at great risk of being wiped out entirely. A bill to do just that passed the Senate Banking Committee earlier this year, but opposition from Democrats provided some comfort for the agencies' shareholders. However, a new development could get the other side of the political spectrum on board.

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New support
Julian Castro, President Obama's nominee to head the Department of Housing and Urban Development (HUD), urged Congress to continue its efforts to shut down Fannie and Freddie.

He said the current housing finance system is not serving Americans well, and that there are much better alternatives that should be explored.

This could go a long way toward increasing Democrats' support of a bill to wind down the two agencies. And, in its current form, the Senate bill calls for the sale of both companies' assets and ensures the Treasury (and American taxpayers) maximizes its return on the bailout investment before Fannie and Freddie's shareholders, and even the preferred shareholders, see a dime for their investment.

Shareholder efforts
Not surprisingly, shareholders are not too happy about the prospect of being wiped out, nor are they satisfied with the current arrangement, under which the U.S. Treasury is entitled to 100% of the profits earned by Fannie and Freddie.

They make some very valid arguments. If the government didn't want shareholders to profit, why were the shares allowed to continue to trade?

And, as of the latest data, Fannie Mae has paid the government back almost $127 billion on their $116 billion bailout and Freddie Mac has paid $86.3 billion, about $15 billion more than it borrowed. So, now that the Treasury has been paid in full and then some, shouldn't investors start seeing some profit?

So, a group of shareholders lead by hedge fund giants such as Bill Ackman and Bruce Berkowitz have filed suit against the U.S. government to try to change the arrangement. Even well-known activist investor Carl Icahn is getting into the mix, having purchased 6.8 million shares of Fannie Mae and 5.7 million of Freddie Mac from Berkowitz's Fairholme Funds.

Tread carefully
One thing is for certain – the U.S. Government cares more (as it should) about creating a healthy housing market than it does about shareholders making money.

Because of this, the shareholders are at the mercy of the courts. Senator Mike Crapo, who co-authored the Banking Committee's bill has said the structure of Fannie and Freddie's conservatorship is a matter for the courts, and Congress should not dictate the outcome.

While it's tough to make the case that shareholders shouldn't get some return now that Fannie and Freddie are profitable, I'm not sure if I have enough faith in the lawsuits' outcome to throw my money into the agencies.

And, if I had been holding for a while, with shares up tenfold over the past couple of years, I'd have to think about taking my profits and getting out, whether it is morally right or wrong. Or, at least think about taking some money off the table to lock in some profits.

FNMA Chart

Either way, if you're invested in Fannie and Freddie, you need to pay very close attention to the news and make decisions accordingly. Just know that at this point, owning shares in either company is much more of a gamble than an investment.

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Read/Post Comments (6) | Recommend This Article (0)

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 June 26, 2014, at 9:50 AM, smauney wrote:

    Copy/Paste/Print-it!

  • Report this Comment On June 26, 2014, at 10:12 AM, PaulApp wrote:

    Fool caught with their pants down on "better"! Any fool can say they have better alternatives. But turned into idiots when they put it down on papers!

  • Report this Comment On June 26, 2014, at 10:16 AM, PaulApp wrote:

    Fool is caught with pants down on "better"! Any fool can say they have better alternatives. But they are all idiots when they put them on papers!

  • Report this Comment On June 26, 2014, at 11:29 AM, casahanson8 wrote:

    The real facts surrounding the current and future status of these GSE's are compelling to say the least! Words backed up by unbiased facts can add value to this huge story. However, another article with broad generalizations that neither educate nor inform an investor serve only to erode the credibility of the Motley Fool brand. The cherry on top is the statement that somehow there is a clear difference between stock market investing and gambling! More Kool-aid for Fools....

  • Report this Comment On June 26, 2014, at 2:40 PM, nlefev25 wrote:

    nobody cares about the opinion of legislators concerning this company

  • Report this Comment On June 26, 2014, at 11:07 PM, maestrolindo wrote:

    Fannie and Freddie did more than give tax payers back their money with interest for an unnecessary bailout. They bailed banks out to the tune of $40 billion!

    http://www.bloomberg.com/apps/news?sid=aDjJYMSphyM0&pid=...

    Read the article. This was criminal.

    Who's going to bail those banks out under the Johnson Crapo proposal?

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