Fannie and Freddie causing more trouble

September 29, 2014 05:17 AM

Fannie Mae and Freddie Mac, which attracted investors such as hedge-fund manager Bill Ackman even as the mortgage giants hand over their profits to taxpayers, are tumbling again.

Fannie Mae fell 1 percent to $2.95 at 9:35 a.m. in New York, after dropping 25 percent from mid-August through last week. Freddie Mac slipped 2 percent today. The plunge erased gains for the year for the companies, which surged 1,000 percent in 2013 on speculation that investors could compel lawmakers or courts to force the government to give up exclusive rights to the earnings. Their preferred shares have also slumped.

Ackman and fund manager Bruce Berkowitz have been joined by Wall Street and individual investors betting on shares that could be wiped out without changes in U.S policy. A panel this month formally moved to the full Senate a bill that would wind down the mortgage companies, boosting the odds of debate that “could drive headline risk,” Compass Point Research & Trading LLC said. Also, a judge derailed a case by a plaintiff seeking to sue the government on behalf of Washington-based Fannie Mae.

“There have been two separate events which should be seen as incremental negatives,” Compass Point’s Isaac Boltansky said in a Sept. 22 note. He’d previously said that the pace at which another legal case was proceeding might have frustrated investors eager for quick gains who “therefore changed their near-term view.”

Earlier this month, the timeline for the sharing of information, or discovery, in that suit by Berkowitz’s Fairholme Capital Management LLC proved longer than some investors expected, according to Compass Point. A court set a March conclusion for discovery.

Preferred Stock
Ackman’s Pershing Square Capital Management LP and Richard Perry’s Perry Capital LLC have also sued the U.S. over Fannie Mae and Freddie Mac. Representatives for the investors declined to comment or didn’t respond to messages last week seeking comment.

While down this year, Fannie Mae’s common shares have climbed from 20 cents at the end of 2011. The stock closed as high as $5.82 in March, before the leaders of the Senate banking panel introduced the bipartisan bill that would replace the companies and excludes measures that would reward shareholders.

One series of Fannie Mae’s preferred shares, with a face value of $25, fell 16 percent from Aug. 15 to $9.44. Those securities, which closed as high as $12.70 in March, ended last year at $8.75, up from $1.38 at the end of 2011. Private-equity and hedge funds have generally focused on the preferred shares.

Fannie Mae and McLean, Virginia-based Freddie Mac, which help finance about 60 percent of new U.S. mortgages by guaranteeing bonds backed by the loans, were seized by the government in 2008 and later received more than $180 billion of capital injections before returning to profitability.

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