U.S. regulator says Fannie, Freddie investors stand to lose
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[April 04, 2014]
By Margaret Chadbourn
WASHINGTON (Reuters) — James Lockhart,
a former regulator of Fannie Mae and Freddie Mac who is now with
private equity firm WL Ross & Co, on Thursday said investors are
making "worthless" bets snapping up the stock of the two mortgage
As the U.S. Congress debates what to do with the taxpayer-owned
companies, some hedge funds have invested aggressively over the past
year in Fannie and Freddie, which have returned to profitability
after a government rescue in 2008. These investors hope to profit if
legislative efforts stall and the government ends up selling its
"It's a stretch," said Lockhart, the former chief of the Federal
Housing Finance Agency who is now vice chairman at WL Ross. "The
stock and the preferred (stock) is worthless and should be
worthless," he told Reuters.
WL Ross & Co is headed by Wilbur Ross, a billionaire investor who
has made big profits buying up distressed debt.
Paulson & Co and Perry Capital LLC are among the hedge funds that
have bought preferred shares in Fannie Mae and Freddie Mac, which
lost almost all their value after regulators seized the companies in
Lockhart, whose firm is shying away from investing in the two
mortgage giants, noted that they would not have survived the
financial crisis without a federal bailout.
Investors in the firms are pushing for lawmakers to reconsider plans
to wind them down, and have filed lawsuits challenging bailout terms
that require the companies to sweep all their profits into the U.S.
Treasury as dividends.
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Lockhart, who oversaw the $187.5 billion bailout, declined to
comment on the litigation. He said, however, that the rescue was
designed to be a short-term solution.
Fannie and Freddie have now returned $202.9 billion in dividend
payments to the Treasury for the taxpayer aid.
"We have to figure out how to get the private market back into the
mortgage market," said Lockhart. "It's going to be a question of how
to do that without hurting the housing market. Obviously, a lot of
that will be up to Congress."
(Reporting by Margaret Chadbourn; editing by Lisa Shumaker)
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