recently reported their 12th consecutive quarterly
profit, but thanks to the conditions of their 2008 bailouts
none of this money will make its way into shareholders’
Promising results from both agencies
For the fourth quarter, Fannie Mae and Freddie Mac reported
earnings of $1.3 billion and $227 million, respectively. For
the year, the agencies produced a combined net income of $21.9
As part of the bailout arrangement, however, all of Fannie
and Freddie’s profits go directly to the U.S. Treasury.
Combined, the agencies received nearly $188 billion from the
U.S. Treasury, so it makes sense that the government wants to
be paid back, right?
The only thing is that the government
been paid back — sort of. As of March, Fannie and Freddie will
have sent more than $228 billion to the Treasury, or about $40
billion more than the original cost of the bailout. But here’s
the thing: the payments to the Treasury are considered
“dividends” and have no effect on the outstanding balance of
the bailout funds.
As you might imagine, shareholders aren’t thrilled about
this, with hedge-fund managers Bill Ackman and Bruce
Berkowitz even suing the government to try to change the
terms of the deal.
It’s hard to make a case that the shareholders shouldn’t get
paid here. After all, many of them bought shares several years
ago when Fannie and Freddie were hemorrhaging money and were
left for dead by most experts. Now that the agencies have
turned things around, shouldn’t they reap some rewards?
Ackman, who is Fannie and Freddie’s largest common
shareholder, made the case that by returning the companies to
the shareholders and allowing them to build up their capital
could be a win-win
for shareholders as well as the government. In a recent
, Ackman made the case that shares could be worth from $23 to
$47 (about eight to 17 times their current value), and that the
government — which holds warrants for about 80% of Fannie and
Freddie — could see $600 billion in returns over time, much
more than they can expect by simply diverting the profits.
Finally, one thing that concerns shareholders and government
officials alike is the potential need for further bailouts if
the current arrangement continues. Not only are all profits
diverted to the Treasury, but Fannie and Freddie are required
to reduce their capital reserves by $600 million per year. Each
company currently has reserves of $1.8 billion, which will be
completely depleted by 2018.
Should you invest?
I’d definitely agree with the assertion that Fannie and Freddie
(as well as the shareholders) would be better off if they were
allowed to operate like any other publicly held company. And it
appears that public and professional opinions may be shifting
in favor of the shareholders, especially after the potential
for another bailout was mentioned.
However, this is still a gamble, and a lot of things need to
go right before shareholders would ever see a dime.
Furthermore, bear in mind that many “big time” investors —
namely, Ackman and Berkowitz — still have small positions in
Fannie and Freddie relative to their other investments and can
afford to take the risk.
My instinct tells me that ordinary investors should stay
away, as I’m not one to take on such high-risk investments.
Those investors who can stomach the risk and ensuing legal and
political drama may indeed be rewarded, but as a glance at the
agencies’ share price tells us, it still isn’t very likely.
Bank of America + Apple? This device makes it
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the secret is out
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change everything from banking to health care. In
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makes Apple’s gadget possible. And its stock price
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originally appeared on Fool.com.
has no position in any stocks mentioned since he doesn’t like
risky investments, but does have a mortgage guaranteed by
Fannie Mae. The Motley Fool has no position in any of the
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