March 12, 2014

FORTUNE — After it was revealed Tuesday that the Senate Banking Committee had reached a bipartisan agreement to overhaul the housing finance system and wind down Fannie Mae (FNMA) and Freddie Mac (FMCC), shares in both companies plummeted by 30% and 26%, respectively. Even the most commonly traded classes of preferred shares (Fannie’s FNMAS and Freddie’s FMCKJ) traded down Tuesday and in early trading on Wednesday.

The play on common shares, which is being made by hedge fund investors like Bill Ackman, is seen as a longer shot of a bet than on the preferred shares because the government still owns warrants to buy upwards of an 80% stake in both companies, which would heavily dilute the value of the common shares. But, ultimately, buying both the common and the preferred shares is a bet that the courts will find that the federal government stepped out of bounds during its conservatorship of Fannie and Freddie by illegally changing the terms of the bailout to funnel profits to taxpayers and away from the company’s balance sheets.

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It’s hard to figure what else these investors could be betting on. Sure, private investors have come up with proposals to have Fannie and Freddie recapitalized and returned to private control, but nobody in Washington wants to see that happen. Though Congress has been unable to agree on what the future of America’s housing finance system should look like, there have been zero calls for the restoration of Fannie and Freddie as they were once operated.

Perhaps private investors are hoping that gridlock in Washington will delay the decision-making process until the recapitalization and privatization of Fannie and Freddie becomes the easiest solution. And if that’s your calculus, then Tuesday’s news isn’t good, but it’s not really earth-shattering. After all, the Senate Banking Committee basically ratified a bipartisan plan outlined last summer by Senators Bob Corker and Mark Warner. As Politico, which broke the news, put it:

The bill is unlikely to receive a floor vote this year. But if the Banking Committee approves a plan, it could set the stage in the next Congress for the first serious negotiations since taxpayers rescued Fannie and Freddie … The immediate challenge facing the two senators is to build support beyond the 10 committee members who endorsed the Corker-Warner bill — five Democrats and five Republicans. To attract liberal Democrats, the affordable housing aspects of the proposal have to be robust, while many Republicans are wary of keeping a large role for the government in the housing market.

In other words, there’s no reason to believe that this proposal has the votes to make it out of the Senate as is. Meanwhile, the Republican-controlled House has taken a completely different approach, outlining a far smaller role for the government in housing finance. And Congressman Jeb Hensarling, who has led the House’s effort, wasn’t exactly singing the praises of the Senate plan on Tuesday, saying in a statement, “Such an approach could very well perpetuate the cycle of boom, bust, and bailout we tragically just witnessed.”

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Meanwhile, the lawsuit that Fannie and Freddie shareholders filed against the federal government last year continues to work its way through the court system, and nobody knows how this will turn out because it’s a completely unprecedented situation. There’s more than $150 billion in dividends resting on the outcome of this suit, which would make even the diluted common shares worth more than they are trading at now.

Investors who have bought Fannie and Freddie in recent years knew they were taking a high-risk, high-reward bet, and even with Tuesday’s news, there’s still a chance it will pay off.

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