They’ve lost in court. They’ve been rebuffed by government agencies. Now, the fates of hedge funds and other investors in mortgage-finance giants Fannie Mae and Freddie Mac could lie with an old adversary — Congress.
Whether shareholders make a killing or get wiped out might hinge on a yet-to-be written provision of a draft Senate bill that marks lawmakers’ latest attempt to overhaul Fannie and Freddie, which have been wards of the state for almost a decade.
The section currently reads “open pending further discussion,” said people familiar with the matter. It’s meant to deal with the bailout agreements that rescued the companies during the depths of the 2008 financial crisis, including addressing the fact that the Treasury Department owns almost $200 billion in senior preferred stock.
If the government relinquishes all or a portion of that money, profits could flow to investors who’ve sunk billions of dollars into Fannie and Freddie, including some of the biggest names in finance such as John Paulson, Bruce Berkowitz and Blackstone Group.
In 2014, the last time senators tried to pass legislation, lawmakers said shareholders likely would be left with nothing.
This time things could be different. The authors of the latest bill — Tennessee Republican Bob Corker and Virginia Democrat Mark Warner — are considering a proposal that could make investors in preferred shares whole or close to it, while owners of common shares could fare worse, said people familiar with the lawmakers’ thinking who asked not to be named because the legislation still is being drafted.
The people said whether and how shareholders get compensated in the transition to the new system still is an open question. And some political analysts have said it will be difficult to pass any housing-finance bill in 2018 — given that it’s an election year — such an effort likely would require 60 votes in the Senate and lawmakers are distracted by other issues such as funding the government.
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What happens to Fannie and Freddie isn’t just important to hedge funds, but also critical to the U.S. housing market. The companies guarantee nearly $5 trillion in mortgage bonds, which keeps borrowing costs low and helps make home loans readily available.