Fannie And Freddie Preferred Shares Fall

By Nathan Vardi

After Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo announced their plan on Tuesday to eliminate and replace Fannie Mae and Freddie Mac, the common shares of both government-sponsored enterprises tumbled 31% and 27%, respectively. But trading in the preferred shares of the mortgage giants, which receive preferred treatment to the common shares, was initially not as extreme—the most popularly traded preferred shares of Fannie and Freddie fell by some 3%.

But investors in the preferred shares of Fannie and Freddie followed the lead of investors in the common shares on Wednesday, selling the popularly-traded series of the preferred shares. Fannie Mae’s series S preferred shares plunged by 6% in Wednesday morning trading. Freddie Mac’s series Z preferred shares also fell by nearly 6% in Wednesday morning trading.

English: The Colonial Revival headquarters of Fannie Mae. (Photo credit: Wikipedia)

The more pronounced selling of the preferred’s on Wednesday is notable because the smart money trade of the speculative Fannie Mae and Freddie Mac share frenzy that has gripped the Over-The-Counter Bulletin Board in the last year has been on the junior preferred shares of the GSEs, which are operating under government conservatorship. Big shot money managers like Richard Perry of Perry Capital and Bruce Berkowitz of Fairholme Funds have taken big positions in the preferred shares and have launched lawsuits against the federal government on the basis of their preferred holdings.

Common shares of Fannie and Freddie also extended their losses on Wednesday morning, dropping by about 10%. But the trading of the common shares has always been viewed as even more speculative than the preferred trade. Bloomberg News recently reported that Perry Capital has a $500 million bet on the preferred shares and a much smaller position in the common. Fairholme’s mutual funds have reportedly been the biggest investor in the preferred and also have a sizeable stake in the common.

The Obama Administration, which appears to be backing the bipartisan agreement in the Senate, has long planned to wind down Fannie Mae and Freddie Mac. Both GSEs have been paying nearly all of their profits to the federal government in the form of dividends. But the nation’s mortgage market still largely relies on the controversial mortgage giants and the fact that the U.S. government has been “repaid” the $188 billion it used to bail them out has encouraged investors to buy the still-trading securities of Fannie Mae and Freddie Mac with the hope that some of the massive profitability of the GSEs will eventually flow to those securities because of action in Washington or the courts. The recent agreement in the Senate has clearly diminished the hopes of some investors, but this story is far from over.