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Fannie Mae and Freddie Mac Plaintiffs Allege Companies are Treated like Government ATM Machines

seekingalpha.com | July 4, 2016

By Glen Bradford


  • FHFA's history of claiming that it is able to act in separate capacities simultaneously has been confirmed by two judges, Pratt and Lamberth.
  • Judge Sweeney's orders and dialog suggest an interpretation of the law that points to more separation of powers than pooling of powers.
  • Owning Non-Governmental GSE equity securities is a play that minority stakeholders have rights even when the government interprets the law as eliminating them in order to take everything for nothing.

Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) are the only two private companies in America at present where the government takes all of their net profits leaving little for private shareholders. In 2008, they were placed into conservatorship under their regulator the Federal Housing Finance Agency (FHFA) and are often referred to as the Government Sponsored Enterprises (GSEs).

During the period of time between 2008 and 2011, the government issued itself hundreds of thousands of dollars of GSE preferred stock by writing down GSE assets. The third amendment net worth sweep was put into place in 2012 and the writedowns were reversed sending all of the money to the government and leaving out the companies and non-governmental shareholders.

Investment Thesis: At face value, a controlling stakeholder has injected itself into the GSE capital structure and taken all of the equity for itself. In this case, the controlling stakeholder is the government and the prevailing law is The Housing and Economic Recovery Act of 2008 (HERA). In 2014, Lamberth dismissed non-governmental shareholders' lawsuits saying that "FHFA and Treasury could effectively do whatever..." Subsequently, documents and depositions have been produced in Judge Sweeney's Court of Claims seemingly undermining the government's original narrative.

Considering that the GSEs combined make $15B/annum and are both Fortune 50 companies even when they're forced to give all of their money to the government, share price estimates if the plaintiffs win start at $20 by Richard X. Bove and William Ackman. I primarily own preferreds and have modeled the allocation of my assets after Fairholme, with a smaller position in commons than preferreds. If the government's interpretation of the law is correct and indeed, they can do whatever they want, then the equity shares I own are worth less if not worthless.




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