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Is The Freddie Mac Bailout A Faux Bailout?

Glen Bradford profile picture
Glen Bradford


  • Because both Fannie and Freddie reported net losses in excess of their capital buffer as of 12/31/2017, both had a negative net worth at that time.
  • It is now two months later, and Freddie Mac has already likely made enough money to be net-worth positive, but the same isn't likely true for Fannie Mae.
  • Why are we bailing out a company that doesn't need it with US Tax dollars?

Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) are two companies slated for their second bailout later this month. Their first bailout took years, 2008-2011. This one will take just a month. The reason their first bailout took years is because FHFA used its discretionary accounting authority in conjunction with the Senior Preferred Securities Purchase Agreement to strengthen the government's control over the companies by writing down their assets under the implicit assumption that they would never make money again. This is in contrast to the cash profits they were making during that same time period. That's the past. The two companies have non-governmental equity shareholders who have effectively had their shares zeroed out. The net worth sweep makes it impossible for their shares to have any value unless there is a court victory or recapitalization settlement. The purpose of this article is to highlight that the bailout this month for Freddie Mac probably isn't even necessary.

Investment Thesis: If nothing changes or if the companies are put into receivership and the lawsuits are all lost, the equity shares publicly traded on the open market are worthless. The government's liquidation preference is by design insurmountable despite the fact that the net worth sweep eliminates any net worth being available for distribution to other equity shareholders. The court cases have raged on for years. There's even a new one Owl Creek v. U.S. If any lower court lawsuit were to be won by plaintiffs, it would be sent to appeals court, and recently we've even seen dismissed by the Supreme Court. The prevailing legal interpretation of HERA 2008 is that the government can do whatever it wants. Even the American Enterprise Institute acknowledges this in its advocacy to eliminate Fannie and Freddie. Their hope is to convince Trump to tell Mnuchin to eliminate the twins because

This article was written by

Glen Bradford profile picture
Glen Bradford MBA contributes to Seeking Alpha primarily to read people's negative feedback so that he can avoid generating unnecessary losses. "Uncertainty will certainly work for me." - Glen Bradford March 2009.Glen wishes you a bright sunny warm day filled with smiles, laughter, and love.The Supreme Court got it wrong, which is sad, but it's not over yet.

Analyst’s Disclosure: I am/we are long FMCCH, FMCCI, FMCCL, FMCCN, FMCCP, FMCCT, FMCKP, FNMFN, FNMFO. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (253)

ziaakbari profile picture
long f/f
Just read Tim Howards comments on the Influence that Williston (sp) and the AEI has on the GSE Reform and Court efforts. I see two "Smoke Screens" being used by the detractors.

"Tax Payers Liability and Explicit Government Guarantees"

So my quest to all, Did the TBTF Banks and the Auto Industry each have Explicit Government Guarantees to bail them out when they got into trouble back in 2008. Well they still bailed them out and will do so again if they once again get into trouble, and they will. Why do you think the Federal Reserves controls Interests Rates?

"Explicit Government Guarantees on MBS and Tax Payers Liability" are both Smoke Screens that have been used effectively for years. Open your eyes !!
And the U.S. Government and IRS in Tax Exemptions.
And Federal Grants and Loans.
I have to admit that Fannie and Freddie paid more than their fair share of money back! Why are their profits still being stolen? Why didn’t the government put all bailed out companies into conservatorship? My eyes are totally open!
I don't understand how the government can hire a private lawyer. I have never heard of it happening before. The government is always represented by the DOJ.
Mike Vieira profile picture
I know why but let's just say that I do not want to get into it here. This is not the place for it.
Poor Dude profile picture
Following GSE_links.com, I saw something interesting today. If I am not mis-reading it, it seems that the Treasury has today enlisted the support of Bernstein - Litowitz - Bergman - Grossman (sp?) on their behalf. That is a major law firm, easily distinguished from "Jim-Bob's Tax and Financial Services Advisory Company" (name made up, but which was previously the highest-rated law firm in our nation defending and supporting our government's actions in this case).

So I must now retract my earlier statement that our government has not a single major law firm on their side. They now have one. Considering the history of BLBG, that doesn't surprise me. In my experience, they are for sale to the highest bidder. But nevertheless, they are a formidable opponent. And it saddens me beyond belief that they have chosen to throw their lot in with our government in this case.

The lines are being drawn.

And EVERYONE should choose their side. At the end of the day, only ONE side will stand ...
Poor Dude profile picture
And then, there is always the other possibility. BLBG has just now been brought into the fray. And it is possible that their staff, once given the opportunity to read up on the history and get up to speed on what has happened (and IS happening), will advise their client (the US Treasury) to either release the companies intact to their original owners --- or prepare to write checks in the amount of $6 trillion to $8 trillion to the companies' shareholders.

That would both solve the problem, AND save the reputations of BOTH BLBG and the US Government ...

A slam dunk excuse to delay proceeding. Also clear sign our thieving elected are worried about something. As well they should be.
Not true that this law firm is representing the government. They are representing the class plaintiffs .
don_nguyen profile picture
Traffic pickup heavily on preferred past couple days.
Checkout FMCKI. someone bought 1,368,068
Maybe Trump bought those shares!
What’s the newest latest family?
don_nguyen profile picture
Judge Willett "Why not unwind the whole thing, and not just the sweep?"
jtdundee profile picture
When and what case was this a part of?!?
Poor Dude profile picture
Oral arguments in the Collins case, I believe. There is a link on gse_links.
I have always believed that based on all the information out there we will be rewarded I have 100k+ shares and am still buying Long Fannie
Well there maybe is a God. An article posted tonight in the Wall Street Journal entitled, "The Raid on AIG's Equity was Illegal", once again bringing up the same argument that both Fannie and Freddie have.

The Federal Government through the U.S. Treasury just walked in and took control of a Private Stockholder Company and started running and extracting funds. The argument like both Fannie and Freddie is "Property Rights".

Good Read
08 Mar. 2018
I'm feeling optimist lately and I'm a pessimist who always expects the worst to happen. Almost optimistic enough to buy more.
Lol... so you’re not THAT optimistic huh. I hear ya. It’s a freakin rollercoaster of emotions.
don_nguyen profile picture
The judgment will come soon for all stakeholders.
ziaakbari profile picture
long f/f
Something tells me a few traders are buying small amounts of FNMA at the opening of the bell to drive the price up then selling the Puts at a few cents lower and waiting out the day.

Therefore, the daily stock price I do not believe truly reflect the current sentiment on the share price.
Even though there is no formalized mechanism to do this I do believe there is a back channel way of accomplishing this same goal.
The current sentiment? Absent any news, I would say there’s a negative sentiment, in spite of our hope that the rule of law will prevail. We know it. “They” know it. We just need someone in the admin, a judge or two, or five, to acknowledge it. We need a win in the courts. Unless and until that occurs, we’re prisoners stuck in our own heads - applying available data and augmenting it with wishful thinking. Stay strong and long - but be smart and nimble.
Is there a ruling or something coming up? Just weird that the stock price ended higher the last two days.
Mike Vieira profile picture
Liquid stocks trade on mostly technicals unless there is a major event and the whales move in. Only then does it trade on both fundamentals and technicals. Unfortunately, by then it will be too late for the average person to get in. This is why people like me are holding on to the common stocks no matter what happens out there.

Look at facebook when it traded at $14. Those who waited for good news never got a chance to get in. Look at the stock price now.
Day Trader gaming
Amended Complaint in Court of Claims case due soon.
in this case you're right taxpayers is a smoke screen for the gov't stealing all the money
anything that constantly need tax payer to bailout is not worth it. close it down or put into receivership already. lol...
they are still around because fed and tax payer stand behind backing it. without tax payer, it is worthless. its anything is worthless.
Well, maybe if they damn government gives back the $100,000,000,000 they stole then they wouldn't be. Imagine that.
The use of the Taxpayer as an excuse is only a Smoke Screen. Look back through history and who always profits, Financial Institutions and not consumers. Look it up !!
After following Mnuchin since his inception, I would say he is no friend to Fannie, Freddie and the GSE but you be your own judge.

If our luck holds out he may be the next after Cohn and in only 4-6 months, Corker and Hensarling will only be a bad memory.

This country deserves better than this Big Money Group.
Mnuchins not going anywhere. Whitehouse staff are what they are. Mnuchin is the most important piece to Trumps agenda, and between him as the head of Treasury and Tillerson at state, Trumps primary pieces are in place.
Don't count on that !!!

Been meaning to ask, can't we honestly say that FnF have been reformed enough over the past decade? The credit risk transfer pushes a big portion of the risk out is they are allowed to recapitalize I feel like theres nothing else needed. your thoughts?
I agree Joey, they are different entities from the last 10 years and direct over site with FHFA. At this point it’s a money grab, and politics for “affordable housing” with holding onto them.
gazerbeam profile picture
You should check out Tim Howard’s blog. He has some very informed opinions on the credit risk transfers.
Been reviewing a comment from several days ago and have now concluded that with a little tweaking and the use of Block Chain Technology it is possible for the American public to vote on the fate of Fannie, Freddie and the GSE.

Have all serious proposal put into user friendly language and place on the 2018 Mid-Term Election Ballot and see what the American Public Wants.

After almost ten years our Government and the Courts are incapable of finishing the last piece of the 2008 Financial Crisis and returning 20% of our economy back to normal.

Place this issue on the 2018 Mid-Term Election Ballot as a referendum. Let the Public Decide. California does it all the time.
The public would vote them away because they have no clue as to what role they actually play in the housing market.
If Bloomburg, WSJ, NYT, Washington Post, Forbes, etc., would all explain each proposal as they are written, I disagree.

Whatever we get then is what the citizens of this country want and are willing to pay for, Boomers through Generation Z.

Generation Z's are protesting Gun Control right now.
"The public would vote them away because they have no clue as to what role they actually play in the housing market."

Exactly. A sudden switch to a direct democracy would be a disaster. It would basically eliminate the government.
Did y’all see this article from The R street? Pretty interesting take actually:

Valuemonster profile picture

Great article. Thank you.

The article didn't give a lot of hard support for the 10% figure, but if true, then FMCC (as the article points out) is in de facto better shape vis-a-vis Fannie.

What concerns me is that since we are so close to the 10% presumed annual dividend rate on the SPS INCLUDING the 'repayment' of the face SPS, WHERE WE GO FROM HERE is critical. We get a nice little dip in housing (or a nice big dip), then we are below 10% and we get the 'optics' that the USG is due more $$$ for the risk they are taking in backstopping F&F.

If that number has been truly reached THEN the USG needs to get out of housing PRONTO. Trump/Mnuchin should not be waiting around, nor is there anything IMHO more important than getting out of a gigantic cyclical asset that show many signs of topping out. This includes a nuclear armed N. Korea, terrorism, et al IMHO.

Get out of housing now. Don't wait and don't mess around. Gary Cohen is gone, do what needs to be done B4 it is too late.....

Great luck to all..... Victory or Death......VM
The Cohn move was a shock, and the market tomorrow will defiantly show its disdain.

With housing though, I still hold to what I’ve always said, there is an unwinding of the current regs that needs to be done prior to the GSE plan. The financial services committee passed 4 bills today that affect this. Conversation has now focused on reworking the Volker rule. A lot of changes are taking place now which is setting up the new landscape that the GSE’s will operate in.

One interesting thought, what if when all is said and done, only Fannie, and not Freddie are rolled into a new entity? Fannie is downsizing and streamline while Freddie is ramping up and expanding. We discuss both as being tied to the hip but from a political standpoint, Fannie Mae is defiantly the hotter topic than Freddie due to size. If they split the difference and Freddie remains and Fannie changes, I’m curious how the market would react.
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