Against All Odds: The Long Bet on Fannie Mae and Freddie Mac

Istitutional Investor Magazine

September 6, 2013

By Robert Stowe England

The trade looks very risky. Savvy hedge funds and unsophisticated retail investors alike have piled into the common and junior preferred shares of Fannie Mae and Freddie Mac, betting that the government-sponsored enterprises will be returned to the private sector. They are wagering that the shares they purchased for pennies on the dollar will produce values not seen since before the financial crisis.

The political odds are against this outcome, however. Given the $187.5 billion cost of the bailout of the two mortgage giants, Washington political opinion across the ideological spectrum has coalesced around the idea of winding them down after a period of five years.

Investors in depressed shares of the two firms are blind to these political realities, according to Edward Mills, financial policy analyst at FBR Capital in Arlington, Virginia. “At the end of the day, there is no real political support to allow Fannie and Freddie to come out of conservatorship and reconstitute themselves as publicly traded companies,” he says.

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Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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