The two government-supported housing giants were decimated by the financial crisis, and now in the face of a bipartisan effort to extinguish them, an ideological motley crew wants “respect” for their shareholders.
Fannie Mae and Freddie Mac shareholders, who haven't received a dividend on their preferred or common stock since the companies were saved from collapse via a government takeover in 2008, have attracted the sympathy of a strange group of allies, ranging from New York Times columnist Gretchen Morgenson and former Presidential candidate Ralph Nader to a conservative senator and hedge fund managers.
The collective outrage of this ideological motley crew stems from several factors, not the least of which was a new bill released Sunday by the two ranking members of the Senate Banking Committee, Tim Johnson and Mike Crapo, calling for Fannie and Freddie to be wound down and replaced with a government-guaranteed entity that would insure bonds made from mortgages but only after private investors took a loss first. Right now, Fannie and Freddie help prop up the U.S. mortgage industry, and especially the standard 30-year fixed rate mortgage by guaranteeing bonds made up of mortgages.
The proposed bill added that any actions to wind down Fannie and Freddie would be done to "maximize the return" of "senior preferred shareholders," — meaning the government. A provision of the bill also enshrines the 2012 decision by the Treasury Department to sweep nearly all of Fannie and Freddie's profits and not allow them to rebuild their capital base.
By next month, Fannie and Freddie will have paid the government $203 billion, more than the $189 billion infusion in warrants they received in the form of "senior preferred stock" from the government in 2008 for 79.9% of the companies in order to avoid liquidation. The common stock of both companies has gained almost 2000% from the end of 2012 through the beginning of last week as they returned to profitability and made huge payments to the government from their earnings.
Yet none of that has gone to the holders of the stock, like hundreds of community banks. According to a paper by Federal Reserve economists some 600 banks have suffered $8 billion in loses on investments in Fannie and Freddie shares they owned, sometimes at the behest of their regulators, and that "fifteen failures and two distressed mergers either directly or indirectly resulted from the takeover" by the government.
Fannie's and Freddie's common stock has gone up 2000% since the beginning of last year.
Via Bloomberg
Several lawsuits from investors with large stakes in the preferred stock of the two companies are working their way through the courts to declare the sweep illegal.
The government's actions prompted Nader to call shareholders' treatment "uniquely reprehensible." And crusading New York Times investigative reporter Gretchen Morgenson gave the shareholders perhaps their biggest public boost by writing a column critical of the government's actions last month.
Morgenson was one the harshest critics of Fannie's and Freddie's actions before the crisis. Other critics of the "sweep" include libertarians like New York University law professor Richard Epstein and conservatives like University of Pennsylvania law professor David Skeel, who said that the government was "astonishingly duplicitous" in sweeping away the compnay's profits.
And Fannie's stock has been violently volatile since news of the Johnson/Crapo bill.
Via Bloomberg
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