Preferred stocks trading thin as summer nears end; Fannie, Freddie lose ground after ruling

By Stephanie N. Rotondo

Seattle, Aug. 24 – The preferred stock market continued to be on the subdued side as the summer months wound down, according to a trader on Wednesday.

The trader noted that the primary space also remained quiet.

Fannie Mae and Freddie Mac preferreds were trading off “modestly,” a trader reported, following a court ruling that said “shareholders don’t have the right to inspect [the GSEs’] books.”

Fannie’s 8.25% series S fixed-to-floating rate noncumulative preferreds (OTCBB: FNMAS) declined 34 cents, or 7.89%, to $3.97. Freddie’s 8.375% fixed-to-floating rate noncumulative preferreds (OTCBB: FMCKJ) fell 17.3 cents, or 4.19%, to $3.957.

Wednesday’s closing levels were the first time since May that the preferreds have traded under $4.00 a share.

The court ruling contends that under the Housing and Economic Recovery Act of 2008 – the law under which the government took the mortgage giants into conservatorship – shareholders “gave up that right to the [Federal Housing Finance Agency],” the trader said.

“In the end, [the market is saying] that it hurts other shareholder lawsuits on the [net worth sweep] because it reinforces that the government can do whatever they want under HERA,” the trader remarked.

“It doesn’t surprise me,” another market source said of the ruling. He noted that when the GSEs were taken into conservatorship, “the equity was worthless. The only reason it is [currently] worth anything is because it was put into conservatorship.”

“So what are the equity [holder] rights for a company that is insolvent?” he posed.

“Should the government have stepped in? That’s a whole other question,” the source said. But without the federal government’s help, the agencies would have been kaput.

“I find it appalling that certain hedge funds were trying to play the federal government and the judicial system for fools,” the source added.

That being said, there may have been a better way for investors to put their case, as there is a “certain argument to be made for transparency,” the source conceded. But given that Fannie and Freddie operate in a “gray area” – they are not quite part of the federal government – even attempts to see the books under the Freedom of Information Act would have likely failed, the source opined.

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