Freddie Mac (OTCQB: FMCC) stock is up 32% (more formally, Federal Home Loan Mortgage Corporation). FMCC stock is up because a court just said that the Feds did indeed steal it from stockholders back in 2012. Not only that, the Feds have to pay compensation for having done so. This is the same issue that we noted over Fannie Mae yesterday. “ 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.”
It’s possible to get much more detailed about this but we don’t really need to. The base lesson the court is teaching us is that in 2012 the Administration confiscated without compensation, compensation that should have been due. Thus that compensation must be paid now.
Freddie Mac stock price from Google Finance
In that more detail about Freddie: “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.”
And the court now says that this was wrong: “The jury determined the Fannie Mae junior preferred shareholders should receive $299.4 million in damages, the Freddie Mac junior preferred shareholders should receive $281.8 million in damages, and the Freddie Mac common stock shareholders should receive $31.2 million.”
There is a distinction to be made here. Fannie Mae had $50 billion in tax credits that were just returning to having balance sheet value as a result of operating profits reappearing. Freddie Mac did not. Therefore the confiscation at Fannie was greater than that at Freddie.
But as we said yesterday, the really big lesson here is that political risk is always with us. We really just never do know when government is going to come in and steal everything.
