Fannie Mae (OTCQB: FNMA) stock, or the Federal National Mortgage Association, is up 22%. FNMA stock moved on the verdict of a Washington DC court. Which, stripped of all the legal stuff really says that yep, back in 2012 the Federals really did steal the company from stockholders. Which is, as we can all agree, so terribly nice of the Obama Administration.
The background is that in that 2007/8 period both Fannie Mae and Freddie Mac went, effectively, bust. That’s sad and all that. But both the Federals and private shareholders recapitalised them both. Then in 2012 the Federals - effectively - said that those private shareholders were going to get nothing. That’s the bit that has been fighting its way through the courts for a decade now. And we have that verdict: “Shares of Fannie Mae and Freddie Mac jumped Monday after a Washington D.C., jury ruled in favor of stockholders who disputed the government's handling of the mortgage giants after the 2008 financial crisis.
The jury found that Fannie and Freddie's regulator acted improperly when it directed the companies to send their profit to the federal government instead of to make dividend payments to shareholders. That 2012 decision by the Obama administration, known as the net worth sweep…”
As another report asks: “Did the US Shortchange Investors $27 Billion?” and the answer is, well, yes. The government stole it. “That all changed in August 2012, when the government amended the terms of the bailout. The 10% dividend was canceled, and the companies were now required to hand over all their profits to the Treasury in a so-called “net worth sweep.” With the companies stripped of the right to retain earnings, any value left in their legacy junior preferred stock evaporated. Shareholders were not happy.” That happened just as the two, Freddie Mac and Fannie Mae were returning to profitability.
One of the biggest issues was: “An upturn in profit also paved the way for a writeback of deferred tax assets, worth around $50 billion for Fannie Mae.” If you’re going to make a loss forever then your past losses which you can set against future profits are worth nothing. But the moment you start making profit again then those are again assets. And yes, $50 billion on the Fannie Mae balance sheet made a heck of a difference. Or would have done if the government hadn’t lied about it and stolen the company.
Fannie Mae stock price from Google Finance
The effect of this is that damages have been awarded: “A federal jury has awarded shareholders of Fannie Mae and Freddie Mac $612 million saying the Federal Housing Finance Authority (FHFA) acted improperly when it transferred ownership of shares to the United States for the public benefit.”
Let’s not beat about the bush here. What the court has really said is that the government stole the two companies. Which is an interesting lesson for us as investors. The biggest danger in anything is that the people with the power - the government - will come along and steal it. Always, but always, be aware of political risk.