Fannie Mae and Freddie Mac preferred shares posted their biggest weekly advance since May after two lawmakers added to speculation that the securities won’t be worthless. One of the legislators clarified his view today, saying shareholders will probably be wiped out.
Fannie Mae’s 8.25 percent preferred shares gained 14.1 percent since Jan. 3 to close at $9.93 today in New York. The notes, which have a par value of $25, jumped from $1.93 a year ago to reach $10 on Jan. 8, their highest close since the Washington-based mortgage-finance company’s 2008 government bailout.
Investors pushed the shares higher following a Jan. 8 panel discussion in Washington on mortgage-finance reform held by the Financial Services Roundtable that included Tennessee Republican Bob Corker and Virginia Democrat Mark Warner. They introduced legislation in the Senate’s banking committee last year to wind down and replace the two so-called government-sponsored enterprises. Corker, after using the phrase “appropriate settlement” at the event, said today in an e-mail that his thinking on the issue hasn’t evolved.
“I thought I was pretty clear by saying -- and then triple underlining -- that these entities would not have made one dime without the government’s unprecedented support,” he said. “I have always believed that reform needs to ensure that all assets are disposed of in a legally sound manner, but my view that these shareholders likely won’t get a dime has not changed -- except possibly for small remnants, if there are any left, once reform is finished.”
The terms of the companies’ bailout agreements require them to turn over their profits to the Treasury, leaving no way to repay their more than $30 billion of preferred securities. Hedge funds and money managers including Perry Capital LLC, Paulson & Co. and Fairholme Capital Management LLC have been speculating that the notes will have value as the firms’ future gets decided. Investors last year also sued the government seeking repayment.
Investors viewed the lawmakers’ Jan. 8 comments as providing more potential for a recovery.
“The tone of the panelist responses -– specifically Senator Corker’s -– was decidedly less bearish regarding the potential realization of value in GSE securities than at other points in recent memory,” Isaac Boltansky, an analyst with Compass Point Research & Trading LLC, wrote in a Jan. 8 report.
With the heads of the Senate banking committee now working on their own reform bill with input from the White House, the panel discussion this week also left Boltansky feeling “more confident” that no legislation will pass this year, he wrote.