James Lockhart, a former regulator of Fannie Mae and Freddie Mac who is now with private equity firm WL Ross & Co, on Thursday said investors are making "worthless" bets snapping up the stock of the two mortgage finance firms.
As the U.S. Congress debates what to do with the taxpayer-owned companies, some hedge funds have invested aggressively over the past year in Fannie and Freddie, which have returned to profitability after a government rescue in 2008. These investors hope to profit if legislative efforts stall and the government ends up selling its controlling stake.
"It's a stretch," said Lockhart, the former chief of the Federal Housing Finance Agency who is now vice chairman at WL Ross. "The stock and the preferred (stock) is worthless and should be worthless," he told Reuters.
WL Ross & Co is headed by Wilbur Ross, a billionaire investor who has made big profits buying up distressed debt.
Paulson & Co and Perry Capital LLC are among the hedge funds that have bought preferred shares in Fannie Mae and Freddie Mac, which lost almost all their value after regulators seized the companies in 2008.
Lockhart, whose firm is shying away from investing in the two mortgage giants, noted that they would not have survived the financial crisis without a federal bailout.
Investors in the firms are pushing for lawmakers to reconsider plans to wind them down, and have filed lawsuits challenging bailout terms that require the companies to sweep all their profits into the U.S. Treasury as dividends.
Lockhart, who oversaw the $187.5 billion bailout, declined to comment on the litigation. He said, however, that the rescue was designed to be a short-term solution.
Fannie and Freddie have now returned $202.9 billion in dividend payments to the Treasury for the taxpayer aid.
"We have to figure out how to get the private market back into the mortgage market," said Lockhart. "It's going to be a question of how to do that without hurting the housing market. Obviously, a lot of that will be up to Congress."
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