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The Shockingly Idiotic Johnson Crapo Bill

|About: Freddie Mac (FMCC), Includes: FNMA

Summary

Experts Call the Johnson Crapo Bill Idiotic.

The Bill is Dead on Arrival without Industry Support.

Lawsuits Against the Treasury Have Merit.

As you might have seen, the latest Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) Reform bill caused quite a stir over the past couple of days. Shares of the two mortgage giants peaked at around $6.35 per share on March 11th, prior to the release of a mortgage industry reform bill by Senators Johnson and Crapo. After the release of the bill, shares dove to $3.14 per share.

Barry Ritholtz, chairman and CIO of Ritholtz Wealth, called the Johnson Crapo Bill an "idiotic proposal" and criticized the politicians for "beating the same dead idiological horse." Industry experts were shocked by the proposal and completely caught off guard.

Matt Levine brings up an interesting point brought by the new bill.

"The other question is where you raise the $450 billion of new capital for private mortgage insurers. Now it happens that a lot of people are in fact clamoring to provide new capital to private mortgage insurers. Unfortunately, those people are doing their clamoring in the form of owning Fannie and Freddie stock, and whining/suing/lobbying to try to get paid for that stock. Those people are considerably more likely to be interested in capitalizing the new system if they can, in effect, "credit bid" their existing preferred stock at some value other than zero. And it will be considerably harder to get private capital in the new system if there's a recent precedent of let us just say arbitrarily zeroing the last guys who provided private capital to the system."

Within 24 hours of the crash, Ralph Nader went on CNBC to advocate for shareholders and suggest the public utility model. He also said that unless the powerful lobbyist groups support the bill, it is "dead in the water." Interestingly enough, Senator Mark Warner also went on CNBC and was heard saying that he believed the shareholder's claims against the government for the Net Worth Sweep had merit!

The famed Bill Maloni weighed-in by saying "nothing revealed with the Johnson-Crapo announcement, no set of principles, no draft bill, can change what the courts will need to decide in the multiple and massive cases against two Treasury Departments and the Federal Housing Finance Agency over the original [Fannie Mae and Freddie Mac] Conservatorship and the subsequent major alteration in how [Fannie and Freddie] return money to the U.S. Treasury."

All the action has inspired shareholders to create yet another petition on WhiteHouse.gov. Ralph Nader's recent petition got more than 1,000 signatures. It should be interesting to see how many this latest petition brings.

The key takeaway here is that fundamental reasons for holding the stock have not changed. Discovery in the Fairholme Funds vs The United States case begins March 20, 2014.

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.