Freddie Mac and Fannie Mae Face Reality Check After Court Ruling

Freddie Mac (FMCC) and Fannie Mae (FNMA) are being sued for breach of contract for allegedly not paying promised dividends and liquidation preferences to investors. These claims were ultimately dismissed, finding that the government is allowed to sweep “nearly all” profits to the U.S. Treasury. Investors did not take to this news well, and the best verbal statement may be from the market itself based upon massive sell-offs.

Investors voiced their displeasure in terms of a massive combined sell-off of over 200 million shares shortly ahead of the closing bell –both companies combined move an average of only about 10 million daily.

Fannie Mae gapped down roughly 36% at $1.72 from its previous close $2.69. Over the course of the day, Fannie Mae had fallen nearly 37% to $1.68 in the last hour of trading. The trading range on the day is $1.49 to $1.98. Fannie Mae has a 52-week trading range of $1.31 to $6.00, with a market cap of over 9$ billion.

Freddie Mac gapped down at the opening bell by about 33% at $1.75 from the previous close $2.64. Its drop was down by roughly 38% at $1.63 in the final hour of trading on Wednesday, and the trading range on the day was $1.45 to $1.99. Freddie Mac has a 52-week trading range of $1.37 to $6.35, and it has a market cap of roughly $5 billion.

The big news is that Fairholme’s Bruce Berkowitz was in the team that lost out here in the legal bid. One concern could ultimately be not just that the profits are at risk for sharing. Many in the government want Fannie and Freddie either combined in a restructuring, while others want them effectively wound down.

24/7 Wall St. cannot help but wonder if this setback for investors makes the worst case scenario for the remaining stockholders into the likely wind down that so many outsiders and insiders have called for. With these remaining over the counter, we will not be covering these from any value analysis views.

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