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Fannie and Freddie Reversal Dings Fairholme

The fund is not the only casualty, but it's one of the biggest.

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On Tuesday, the Senate may have signaled the end of the party for Federal National Mortgage Association (Fannie Mae) (FNMA) and Federal Home Loan Mortgage Corporation (Freddie Mac) (FMCC) shares, just as things really got rolling. The common shares of both government sponsored enterprises (GSEs) have fallen by about 50% on the news that the Senate may produce a bipartisan proposal for winding them down. Until Tuesday, the shares of both had more than doubled during the past three months alone, with Fannie Mae gaining an astonishing 1,900% during the past 12 months and Freddie Mac soaring 1,700%. Granted, these gains were off incredibly low bases, and the shares don't even trade on a major exchange.

This sell-off will have no impact on most fund investors, since most managers have steered clear of the two GSEs' common shares since the companies went into conservatorship in 2008. But interest has been revived by investments in both the preferred and common shares from hedge fund managers such as Bill Ackman and  Fairholme's (FAIRX) Bruce Berkowitz. Recall that Berkowitz initially bought the preferreds last summer, while Ackman bought the common.

Kevin McDevitt has a position in the following securities mentioned above: FAIRX. Find out about Morningstar’s editorial policies.