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Nader: U.S. has Duty to Fannie, Freddie Investors

marketwatch.comJune 2, 2013

By Ruth Mantell

WASHINGTON (MarketWatch) — The federal government has a moral obligation to Fannie Mae and Freddie Mac shareholders and needs to end the current state of limbo, activist and consumer advocate Ralph Nader tells MarketWatch in an interview.

“They should put out a statement saying that whatever organization or reorganization there is of Fannie and Freddie, they will respect the shareholders’ equity and not vanquish it,” Nader said. “The U.S. government has got to treat Fannie and Freddie common shareholders the way they treated Citigroup and AIG. They bailed them out and gave them a chance to recover.”

Mortgage buyers Fannie FNMA +22.86% and Freddie FMCC +21.67% were placed into federal conservatorship in 2008. They send their profits to Treasury, shareholder dividends are suspended, and the firms can’t rebuild capital.

Several months before conservatorship of Fannie and Freddie began, officials such as Federal Reserve Chairman Ben Bernanke said the GSEs were “adequately capitalized,” comments echoed by then-Treasury Secretary Henry Paulson.

“Government officials clearly misled the common shareholders of Fannie and Freddie,” Nader said.

In recent months, volume has shot up as the firms’ earnings have strengthened on the rebounding housing market, along with news of hedge funds investing in preferred shares. Shares of both firms have climbed hundreds of percentage points over the past year, and seen large swings.

Nader is a shareholder in both companies. He said he bought his stake before the firms entered conservatorship. Nader declined to provide further details about his investment, but said he has not traded within the past 12 months.

Lawmakers agree that reform is needed to pare back the government’s outsized role in the U.S. housing-finance system, though Congress has made little progress. The firms’ futures are unclear, but investors are banking that Fannie and Freddie will be able to shed government control after they’ve repaid all of the nearly $190 billion received in government support. However, with recent quarterly earnings reports showing growth at Fannie and Freddie, there’s concern that urgency will dim.

Here’s an edited transcript of Nader’s conversation with MarketWatch.

MarketWatch: Why are investors buying over-the-counter and preferred shares?

Nader: They believe that equity will prevail in any reorganization. These are enormously wealthy companies in terms of assets and profits. The more [investors] believe, the more they become lobbyists for it. They are getting themselves into a self-fulfilling prophecy.

People are wondering what’s going on. There’s no parallel for this in American history. On the one hand there are people saying these are worthless, on the other hand people are saying how can they be worthless? These are valuable companies.

MarketWatch: Should shareholders who bought GSE stock before the firms were placed into conservatorship receive preferential treatment over those who bought shares after conservatorship began?

Nader: That’s a good question. Certainly they have a higher moral claim because they relied, like I did, on Paulson and Bernanke.

MarketWatch: You recently wrote a letter to Treasury Secretary Jacob Lew, noting several plans for GSE reform. Which do you see as the best?

Nader: I would like to see a public utility…once they pay Treasury back. An alternative would be… keeping it as it is, but regulating it so that the top guys don’t make $20 million or $30 million a year.

The penchant for doing nothing is strong in Congress. My guess is that two or three years from now, you’ll see the same Fannie and Freddie as you do now.

MarketWatch: What’s your next move on this issue?

Nader: The problem with any attempt to change the status quo is that from a financial viewpoint, Fannie and Freddie are working very well today. The housing market is recovering and the last thing that the housing and financial and real estate community wants is uncertainty and instability regarding Fannie and Freddie. In the meantime, they are reporting huge profits and by the end of next year they will have repaid the government.


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