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 Fannie <FNMA.OB> and Freddie <FMCC.OB> shares fell 12 percent and 17
percent, respectively, on Wednesday, one day after Senate Banking
Committee leaders agreed on a framework for a bill to draw down the
lenders.
The sharp decline has hit big-name hedge funds which jumped into the
once-failing companies as the housing market rebounded, including
William Ackman's $12 billion Pershing Square Capital, Fannie Mae's
biggest shareholder.
Despite this week's losses, several investors said they plan to stay
the course, acknowledging that they were aware they had invested in
such volatile stocks.
Senate Banking Committee Chairman Tim Johnson, a Democrat, and
Senator Mike Crapo, the panel's top Republican, outlined a framework
for legislation on Tuesday after months of talks that included input
from the Obama administration. They said they intended to introduce
a bill soon.
But several hedge fund managers, which often lock up their wealthy
investors' money for years and therefore have the ability to stick
with investments for a long time, said they would be patient and
wait.
"There are a lot of details to be worked out, and there was no
secret that Congress was planning to do this," said one investor who
owns hundreds of thousands of shares and asked not to be identified
by name.
Fannie Mae shares fell 49 cents on Wednesday to $3.54 a share on 124
million shares traded on OTCMarket. Freddie Mac ended down 68 cents
at $3.36 a share on volume of 61 million shares.
Fannie and Freddie, which own or guarantee 60 percent of all U.S.
home loans, provide a steady source of mortgage funds by buying
loans from lenders and packaging them into securities that they sell
to investors with a guarantee.
Their central role in the mortgage market led the government to bail
them out to the tune of $187.5 billion during the 2007-2009
financial crisis. Lawmakers want to make sure taxpayers are never on
the hook again.
Bruce Berkowitz of Fairholme Capital Management objected to the plan
to wind Fannie and Freddie down. His fund ranks as one of the three
shareholders in each company.
"What happened before 2008 was the result of regulatory and
management failures, accelerated by political meddling. These
failures continue today," Berkowitz said.
"Privately owned Fannie Mae and Freddie Mac are irreplaceable. All
the sincere effort expended by the Senate Banking Committee simply
confirms that there is no better alternative," he said in a
statement.
Other large investors include Capital Research Global Investors and
Seamans Capital Management.
Pershing Square has been largely mum on its Fannie and Freddie
investment, with William Ackman declining to answer questions about
it at an investment conference where he discussed every other bet.
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Investors like Ackman, who shorted Fannie and Freddie six years ago,
are essentially making a political bet. In addition to anticipating
that politicians' plans might be changed significantly, there is
something else that keeps them optimistic: lawsuits filed by both
Fairholme and hedge fund Perry Capital.
The investors argue that it is illegal for the government to take
all the companies' profits. Some investors expect the lawsuits to
prevail and for billions of dollars to eventually come back to the
companies.
Indeed, Republican Senator Pat Toomey of Pennsylvania, in a letter
Friday to U.S. Treasury Secretary Jack Lew, signaled support for
getting some cash to Fannie and Freddie shareholders. Toomey said he
wants legislation to be "mindful of investors in addition to other
considerations."
Shares of Fannie and Freddie are both down more than 30 percent on
the week, not long after both hit their highest levels since 2008.
February's rally in the shares helped Pershing Square gain 7.4
percent, putting it up nearly 12 percent on the year, handily
beating the average hedge fund's 1.4 percent gain, investors in his
fund said. Pershing owns 115 million shares of Fannie and 64 million
of Freddie.
This month's losses on Fannie and Freddie are going to hurt Ackman's
fund.
"His marks are going to stink for the month," said David Tawil,
whose Maglan Capital invests in distressed securities. He said his
fund might buy stakes in Fannie and Freddie after lawmakers'
language on the proposal is clarified.
Even though the proposal seems to harm equity holders, investors in
Freddie and Fannie debt could come out winners.
The difference in yield on Fannie Mae and Freddie Mac bonds over
Treasuries shrank broadly on Wednesday, on the view that the Senate
plan would assure the government's guarantee of their existing debt.
The yield gap between five-year Fannie Mae notes due February 2019
over five-year Treasuries narrowed 0.005 percentage point to about
0.15 percentage point.
(Reporting by Svea-Herbst Bayliss,
Rodrigo Campos and Margaret Chadbourn; additional reporting by
Richard Leong; editing by David Gaffen and Jonathan Oatis)
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