Shareholders Of Government-Sponsored Enterprises Get Maxine Waters's Respect

Mar.27.14 | About: Freddie Mac (FMCC)


GSE Shareholders Getting Some Respect.

New Bill Raises New Questions.

The Common Stock may be Worth Something.

Last night, it was announced that Maxine Waters would unveil her version of GSE Reform today. This bill, presented by a ranking member of the House Financial Services Committee, would outline a method of reforming the mortgage market, including the role of Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC). Details are forth-coming.

For investors, this bill may be a welcome sign and shareholders may finally be getting some respect. The New York Times writes,

"Ms. Waters's bill also clarifies who would get paid first in a wind-down of Fannie and Freddie, starting with the Treasury, which would be paid according to the original terms of its bailout of the mortgage giants. Those terms were later altered, prompting shareholder lawsuits."

Many of the lawsuits are seeking that the so-called "3rd Amendment" be struck down as an unlawful self-dealing contract between two arms of the same government. This self-dealing contract amended the original Conservatorship agreement that was made in 2008 when the companies were seized. Many investors relied on the original agreement when buying shares. Then, in August 2012, after the companies returned to profitability, the Treasury amended the agreement, taking 100% of each company's net worth. Investors claim that this is not only a self-dealing contract, but a breach of their Constitutional Rights.

Striking down the 3rd Amendment would certainly be good news for junior preferred stock holders. These investments would be next in line within the capital structure and may eventually go to full redemption value, if the bill passes. In the two companies combined, there are approximately $34 billion in liquidation value claimed by the junior preferred stockholders.

It is uncertain how fair this bill might be for common stockholders of the companies. Recent estimates of the two firms liquidation value puts the combined value close to $200 billion. If senior and junior preferred stockholders are paid first, this may leave significant value for the common shareholders. This is all dependent on how the bill calculates the remaining investment made by the Treasury.

Additionally, the punitive value of the warrants must be examined. Due to the Treasury's unprecedented and perhaps unlawful actions in August 2012, should the government exercise the warrants?

These questions and others will remain unanswered until the details of the bill are released today.

Disclosure: I am long FNMA, FMCC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.