Government Misleads with Strange Math on Returns in Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA), and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC)

In a recent filing in Perry Capital, LLC, et al. v Jacob Lew et al., in the United States Court of Appeals for the District of Columbia Circuit, the government uses quite misleading math to justify their return in Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA), and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC) as modest.

I quote from this filing from the bottom of page 7 of 9:

Plaintiffs also reiterate their mistaken assertion that the Third Amendment allowed taxpayers to “reap massive, windfall profits.” Pls. Mot. 5. The facts again show otherwise. Between 2008 and 2011, Treasury invested $187.5 billion in the GSEs. J.A. 2411 (TR4351). Through the first quarter of 2016, Treasury has received $245.6 billion in dividends, which equates to an annual rate of return of around 7.5%. Given the size and risk of Treasury’s investment into the failing enterprises—an investment private investors were unwilling to make—a 7.5% annual return is far from a windfall. Indeed, a 7.5% annual return is below what plaintiffs have historically earned for their investors. See The Fairholme Fund Facts (Mar. 31, 2016), at 1 (stating the Fairholme Fund has earned a 9.47% annualized return since its inception);3 James Palmer, Looking Back at Perry Capital’s Credit Fund Pitch, Absolute Return, 2014 WLNR 37475078 (Aug, 19, 2014) (stating that the “onshore” version of Perry Capital’s flagship fund has produced a net annualized return of 12.58% since its inception, while the “offshore” version has produced 11.65% annual returns)

Questionable way of Calculating Returns

Besides ignoring the warrants for 79.9 percent of the company the government owns, the government uses preposterous math to justify its returns on preferred shares as hardly a windfall. The government ignores all future returns and counts the difference between the $187.5 billion invested versus the $245.6 billion in dividends to date. The government’s unique and strange way of calculating returns  uses the difference between the dividends paid and the amount invested.

Definitely a Windfall

The government has not had their liquidation profit reduced and the return thus far has been like an investor buying stock and receiving dividends of more then its investment in 4 years, a scenario any investor would be thrilled with. The government has on numerous occasions noted that these are dividends and do not reduce principal but now suddenly uses math that assumes they’ve been paid back.

Bottom Line

The government has returned 7.5% annual return in dividends only, during a period when interest rates are super low and investors are desperate for yield. Their liquidation preference has not been reduced in anyway and they maintain warrants for 79.9 percent of Fannie and Freddie.  Any investor would be thrilled with this sort of return.  As a quick and dirty comparison, the government has received $245.6 billion for an investment of $187.5 billion, a return of about 131 percent since September 7, 2008.  For comparison sake, over the same period, starting on September 7th, 2008, the S&P 500 has risen around 69% (via Google Finance Data).

Disclaimer: Author has positions in Fannie Mae Preferred, and Freddie Mac Junior Preferred.

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