Do It Yourself Stock Investor

Why I Think Fannie Mae Will Recover

by DIYSI
September 02, 2014

When Fannie Mae (OTC: FNMA) went into federal conservatorship I was not sure what all that would entail. Would it be the quick recovery and assistance program offered to General Motors (NYSE: GM)? The Executive Branch isn't renown for its lay term transparency. It includes oversight of many agencies including: FBI, TSA, CIA, NSA and Secret Service. The whole alphabet soup is our discreet protector; what you don't know, you don't need to know.

The Department of Treasury's activity with Fannie Mae has been difficult to understand. In the 2011 report to Congress, the intent was clear: "...ultimately, wind down both institutions." The narrative summarized the Government Sponsored Enterprises (GSEs) as Depression-era reforms and that they had run their course. They had allegedly strayed away from sound judgment in order to increase earnings for market traders. Much has changed since then.

A Change In Course

Three years after the 2011 summary to Congress, the stock is still available for trade and the dividends are substantial. Additionally, the new posture is that the 2008 crises was worse than the Great Depression. So, is closing a federal assistance program that supports home ownership a time-appropriate measure or not? If winding down was the objective, we are not seeing the signs of its execution, rather the opposite:

The estimated profits kept by the federal conservator are calculated with Freddie Mac (OTC: FMCC) combined. There was $187 billion invested in the bailout, $213 repaid via dividends, for a gross of $26 billion. Compare that to most of the damages recovered by DOJ.

Gross Dividends and Settlements

The DOJ has been resolving these legal actions at a steady pace since Q4 2013 with JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC).

Settlement Pace

If the profit from the dividends could be considered as payment for services, the settlement awards would be a success; having taken on such prominent entities and surpassed the attorney's fees. It remains to be seen if these settlement awards will benefit the common share holder. Aside from how settlement awards might be distributed, the rule of law is valuable. The retribution for misuse of the federal mortgaging system allows for a precedent to be set and reduces the likeliness of recurrence. A mere repayment for the bailout would not have achieved this.

Nader and Ackman

The executive authority has been met with some resistance from Fannie Mae/supporters. The negotiation has included an increase in leverage from Fannie Mae's side. This has been done via new common share lawsuits and lobbying. Ralph Nader and Bill Ackman became additional factors to help Fannie Mae exit conservatorship. They work as a safety net to insure that common share holders will benefit from this unique ordeal.

Ralph Nader:

Nader continues to meet and correspond with Congress and present arguments on behalf of the public taxpayers and common share holders:

We don't argue that the GSEs should be maintained as is; but instead that they should be strongly regulated to prevent their previous missteps and abuses, and that shareholders should be allowed to participate in any future recovery.

[T]here is no reason that the shareholders (of whom I am one) should not be allowed to benefit from the recovery of the GSEs much in the same way that shareholders of other bailed out large corporations did - like those of AIG and Citi.

As early as May 2013, Nader had been lobbying for GSEs to be relisted on the NYSE. The timing of his work was to influence a proposal to Congress being drafted by President Obama's administration. Additionally, Nader identified H.R. 2435: Let the GSEs Pay Us Back Act of 2013, to be wrongful action against the GSEs and common share holders. That bill today has a 1% chance of being enacted.

Bill Ackmen:

Bill Ackmen's following activities in August 2014, have in turn, spurred other groups to follow suit. His Pershing Square Capital Management, owns 10% of FNMA and FMCC shares and has sued the government for, "taking of private property for public use without just compensation."

Conclusion

A wind down of GSEs requires a political will. It is not an intuitive decision or one that makes financial sense. Fannie Mae and Freddie Mac have provided more profitability and repayment than TARP recipients and were of less fault for their crises.

I complement the new, 2014 FHFA Director, Melvin Watt's change of directives; with the pace and award size of DOJ settlement actions. I correlate the activism of Nader and Ackman with a recent development: a possible listing on NYSE. I then add to Rick Raider's analysis of a slow and bearable rate rise; with a repaired and timely release of (GSEs). I further think that the restoration is going to happen and it is worth my continued long term investment.

*****

Disclosure: I am long FNMA. I have no business relationship with any company whose stock is mentioned in this article.

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