The shareholder-return machines that were Fanie & Fredie

You wonder why Wall Street will so miss Fannie Mae and Freddie Mac?

In their golden years -- and there were many of them -- Fannie and Freddie generated spectacular returns for their shareholders.

Check out the accompanying chart. It measures the "total returns" of Fannie and Freddie, meaning stock price appreciation plus dividend payments, from the end of 1989 through the end of 2006. I wanted to see how well the stocks performed before the bottom began to fall out of the housing market in 2007.

Freddie was the star: The stock’s total return was 1,536% in the 17-year period, an average of 17.9% a year -- compared with a 475% (10.8% a year) return for the Standard & Poor’s 500 index.

What’s more, Freddie’s return far exceeded the 900% gain of the average financial stock in the S&P 500.

Fannie Mae, with a 909% total return in those 17 years (14.6% a year, on average), performed just slightly better than the average financial stock, but left the S&P 500 in the dust.

The poor Nasdaq composite index could do no better than a 431% return (10.3% a year) in the period, which encompassed both the tech boom of the late-1990s and the bust of 2000-’02.

How did Fannie and Freddie do it? Leverage, of course. On relatively small capital bases the companies dramatically expanded their mortgage portfolios. They could do so because they were able to borrow at such low interest rates, thanks to the implied government guarantee of their debt.

In the boom years the payoffs were great, and they flowed like water to the shareholders -- not to the taxpayer, whose money always stood behind Fannie and Freddie, and who now is being tapped to clean up the mess they helped make in the housing market.

Privatizing gains, socializing losses -- that’s the enduring story of Fannie and Freddie.