Monthly Archives: December 2001

U.S. News

Fannie, Freddie Payments Nearly Match Aid

Agencies Set to Make $39 Billion in Dividend Payments by Year End

Updated Nov. 7, 2013 7:36 p.m. ET

Fannie Mae and Freddie Mac will pay $39 billion to the U.S. Treasury by the end of the year, the companies said Thursday, putting the firms close to having paid as much as the government injected in the mortgage-finance giants—nearly $188 billion—to keep them afloat through the housing bust.The payments were disclosed Thursday, when the two companies reported strong earnings for the third quarter. Freddie Mac posted a $30.5 billion third-quarter profit, largely due to a tax benefit, and said it would pay $30.4 billion to the Treasury. Fannie reported an $8.7 billion third-quarter profit and will pay $8.6 billion to the Treasury.

But unlike other financial companies that were bailed out by taxpayers, Fannie and Freddie will continue to send the bulk of their profits to the Treasury indefinitely, as dividends. They aren’t allowed to earn their way out of government control.

Still, the fact the companies are achieving such large profits is likely to reshape the debate in Washington and on Wall Street over how and when to restructure Fannie and Freddie.

In the aftermath of the companies’ takeover, lawmakers and policy makers frequently called for phasing out the firms as part of a more radical overhaul of the nation’s $10 trillion mortgage market. But in recent months, comments from lawmakers, from current and former Obama administration officials, and from industry groups have indicated growing support for preserving significant pieces of the mortgage-market infrastructure provided by Fannie and Freddie, even if the corporate entities themselves are ditched.

The profits “kind of lessen the political need to eliminate them for some. It doesn’t eliminate it entirely,” said Jeb Mason, a Treasury policy adviser in the Bush administration who is now a partner at Cypress Group, a financial-services consultancy. He said he doesn’t think the profits will dim the urgency for an overhaul because they “are a symptom of a still-broken housing-finance system.”

With a coming payment to the Treasury, Freddie will have paid the government nearly $9 million more than the $71.3 billion that taxpayers were forced to invest in the company. Fannie will have paid $113.9 billion, compared with $116.1 billion invested by Treasury.

Beginning this year, Fannie and Freddie have been required to send nearly all profits to the Treasury as dividends. Together, the companies will have paid more than $185 billion in dividend payments by year-end.

“We are quickly approaching the point where taxpayers will receive a positive return on their investment in this company,” said Timothy Mayopoulos, Fannie’s chief executive.

Profits could also complicate any overhaul by triggering a change in federal budgeting. If government accountants now conclude the firms are revenue-generating entities for the government and positive to the budget, Congress would either have to raise new revenue or cut spending as part of a revamp of Fannie and Freddie.

The companies owe their turnaround to the sharp home-price rebound, particularly in California, Arizona, Florida, and Nevada, where the firms have guaranteed a significant share of mortgages. Fannie and Freddie were forced to build large reserves in anticipation of rising mortgage defaults and foreclosures during the housing bust.

Now, housing demand has rebounded, led initially by investors buying up cheap foreclosures and later by traditional owners looking to take advantage of low mortgage rates. The result: Fannie and Freddie are losing less money on sales of foreclosures than they had initially anticipated. That has boosted their bottom lines.

While Freddie should remain profitable for the foreseeable future, the recent level of earnings “is not sustainable in the long run,” said Donald Layton, chief executive. “At some point, home-price growth will moderate as housing markets reach the end of their recovery cycle.”

While discussions are heating up in Washington over what to do with the companies, it isn’t clear whether a bill will pass any time soon. And most legislative proposals have contemplated at least a five-year transition period. The upshot, Mr. Layton told lenders at an industry conference last week, is that “Freddie Mac is going to be doing business with you roughly in the same way, roughly in the same setup, for an awful lot of years to come.”

Write to Nick Timiraos at

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White House Rejects Fannie-Freddie Recapitalization Plans

Updated Nov. 20, 2013 7:43 p.m. ET

The White House dealt a setback to a prominent investor’s bid to recapitalize Fannie Mae and Freddie Mac, saying that a restructuring alone wouldn’t put the $10 trillion U.S. home-loan market on sounder footing.

Gene Sperling, President Barack Obama‘s top economic adviser, said the administration views a sale or recapitalization of the mortgage companies as a nonstarter because it wouldn’t address their central role in mortgage finance. Mr. Sperling’s remarks follow a proposal last week by investor Bruce Berkowitz of Fairholme Capital Management LLC to restore value to the companies’ shares. Mr. Sperling didn’t address the Fairholme proposal specifically.

The government bailed out the companies in September 2008, staving off an outright collapse in the U.S. housing market but imposing terms that led to a plunge in the value of the firms’ common and preferred shares. The futures of Fannie, Freddie and the U.S. housing market have been a subject of continual debate in Washington since the companies, facing tens of billions of dollars of losses on mortgage defaults in the housing bust, were placed under government control.

Fairholme views its proposal, which would restyle Fannie and Freddie as state-regulated bond-insurance companies, as having negotiable terms and already includes possible limits on the market share of the new companies, a Fairholme representative said.

“I want to make clear our administration believes the risks are simply too great that this would re-create the problems of the past,” said Mr. Sperling, director of the White House’s National Economic Council, at a conference in Washington.

Fannie and Freddie don’t make loans. Instead, they buy them from lenders and package them into securities that are then sold to investors with guarantees to make investors whole if the underlying loans default. That has created deep, liquid markets for mortgages, particularly the 30-year fixed-rate mortgage that isn’t widely available in other countries.

Saving the companies at the height of the financial crisis required taxpayer infusions that ultimately totaled $188 billion. But with the U.S. housing market rebounding and the economy gradually expanding amid low interest rates and growing employment, Fannie and Freddie have become very profitable over the past year.

They will send $39 billion to the U.S. as a dividend payment next month, and by early next year they are likely to have repaid more in dividends to the government than the amounts the U.S. injected into the firms over the past four years. The U.S. government has warrants to acquire nearly 80% of the common stock of both companies; it hasn’t exercised them.

Fairholme last week made a proposal to recapitalize the companies using the preferred shares of both. Two days later, las Friday, William Ackman‘s Pershing Square Capital Management LP disclosed nearly 10% stakes in the common shares of both companies. A Pershing spokeswoman declined to comment.The moves set off the latest surge in the companies’ shares, which aren’t listed by any major U.S. exchange following a 2010 delisting. On Wednesday, shares of Fannie rose 23 cents, or 8.9%, to $2.76, and Freddie rose 18 cents, or 7.7%, to $2.52. The companies’ shares have mostly traded below $2 since the government takeover in 2008.

Gene Sperling says a Fannie and Freddie
recapitalization is a nonstarter.
Associated Press

Mr. Sperling said the administration isn’t willing to entertain proposals to recapitalize parts of the companies and sell them back to investors because it wants to rebuild a stronger mortgage market not dominated by two large institutions.

Even if restructured, Fannie and Freddie would retain significant advantages over any new entrants, Mr. Sperling said, because they have relationships with hundreds of lenders and economies of scale that could confer funding advantages, among other benefits.

“New entrants to the market would have a sensible reason to fear that they would find competing against this structural advantage to be prohibitively costly,” Mr. Sperling said. “All of us should fear that we could re-create a duopoly that the market would perceive as too-big-to-fail market entities.”

The administration and top Republicans and Democrats haven’t shown any support for a recapitalization or sale of the companies, but a consensus has been building that supports allowing new mortgage-bond guarantors to purchase government insurance for loans that are sold to investors. It isn’t clear exactly how those firms would be capitalized.

Mr. Sperling said he was optimistic that bipartisan discussions between the Democratic and Republican heads of the Senate Banking Committee would create an opening for the government to address the futures of Fannie and Freddie.

He said an earlier bill introduced by Sens. Bob Corker (R., Tenn.) and Mark Warner (D., Va.) in June to replace Fannie and Freddie with a new system of federal reinsurance of mortgage-backed securities was a “good and constructive” start and that while the administration didn’t support every piece of it, the areas of disagreement were “bridgeable,” he said. Five additional Republicans and four Democrats have co-sponsored the Corker-Warner bill.

“There is genuine bipartisan progress on this issue,” he said.

Some advocates of recapitalizing Fannie and Freddie as new mortgage-bond guarantors say that other proposals simply won’t meet the policy goals of the administration. “No one has suggested a workable alternative to recapitalize the mortgage-guarantee businesses of Fannie and Freddie as a responsible way to transition to the new system,” said Jim Millstein, a former Obama administration official who oversaw the restructuring of American International Group Inc. He has invested in Fannie and Freddie.

—Juliet Chung contributed to this article.

Write to Nick Timiraos at

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Capital Flows, Contributor

11/22/2013 @ 8:00AM

Fannie Mae And Freddie Mac Exemplify The Horrors Of Crony Capitalism

Fannie Mae
Fannie Mae (Photo credit: NCinDC)
By Ike Brannon

Nothing exemplifies the the cost of crony capitalism like Fannie Mae and Freddie Mac.  For years these fiefdoms were run as little more than as piggy banks for connected politicians, who could count on substantial financial support for re-election, and retiring members and staffers from their committees of jurisdiction could expect a lucrative lobbying contract. Even their relatives got in on the act.

A major shareholder recently offered a reform plan that would replace them with two fully-capitalized private entities, which Treasury officials dismissed out of hand. Before anyone puts a knife in the heart of privatization efforts, it’s worth reviewing how they got into their current plight.

For a long time Fannie and Freddie had been managed by political entities rather than mere businessmen, and they had two masters–the politicians who wanted campaign contributions and increasing home ownership rates, and shareholders. Eventually, regulatory oversight went by the wayside and they chased their twin, conflicting goals with impunity.

Their collapse revealed the stark cost of this corruption for all to see-a debt of hundreds of billions of dollars on their books. Treasury placed Fannie and Freddie into a conservatorship, assuming ownership of almost 80 percent of each.

Taking them over via a conservatorship rather than receivership–whereupon it would have assumed complete ownership–allowed the government to keep the combined debt of Fannie and Freddie off the government’s books. Since this totaled well over $1 trillion at the time, this maneuver helped the government avoid any potential fiscal or political ramifications from reporting an annual deficit the over $2 trillion.

To recoup some of the government’s money, Treasury assigned itself preferred stock that paid a 10% dividend on its $188 billion capital injection. Few complained about this: taxpayers were on the hook and it was likely that a resumption of economic growth and robust financial markets would eventually return Fannie and Freddie to profitability.

With the uptick in the economy and improvement in real estate markets, Fannie and Freddie have returned to profitability, with reported profits greatly exceeding the $18.8 billion dividend owed Treasury.

Seeing a golden political opportunity,Treasury re-wrote the rules to allow it to go beyond its dividend and instead lay claim to all of the profits generated by the GSEs. Such a move allowed the federal government to report lower deficits while also allowing it to declare its GSE intervention a rousing success.

The only problem with this maneuver is that it contravenes the rule of law. Under the terms of a conservatorship the bondholders retain a stake in the company and, as a result, are entitled to be repaid. The government’s brazen maneuver shuts them out despite the fact that they still own twenty percent of the company.

While it may be tough to feel sorry for bondholders, many of whom (but far from all) purchased them knowing the inherent risk of the asset, it doesn’t take much effort to feel uneasy about the government changing the rules of the game in mid-stream to screw over investors.

The Administration has done this sort of thing before, of course, when it forced GM’s secured bondholders to take a massive haircut in deference to the UAW even though bankruptcy law gives their debt a higher priority. The ostensible excuse in 2009 was that it was the only way to garner enough political support to make their bailout work. This time they don’t even have this flimsy excuse:  it’s solely for political expediency.

The rationale for Fannie and Freddie remaining as full-fledged government-sponsored enterprises evaporated long ago. The implicit backing of the federal government (which was called upon in 2008) allowed these entities to make imprudent investment decisions and ultimately squander hundreds of billions of taxpayer dollars.

There are two paths out of this morass: the first would be to end the current ownership structure of Fannie Mae and Freddie Mac but keep them as government sponsored enterprises, with strict limits placed on their portfolios and continuing the prohibition on lobbying, the two activities that led to their unraveling.

The other way would be to disentangle Fannie and Freddie from the warm bosom of the Treasury, shorn of the full faith and credit of the government,  and make them go their own way in the world.

Last week one of the aggrieved GSE shareholders, Fairholme Capital, sent a letter to acting FHFA director Ed DeMarco detailing one way to go about doing such a thing.  Its proposal would wind down Fannie and Freddie and introduce new private entities that would provide mortgage insurance as well as the capital necessary to perpetuate a robust housing market in the U.S.  Its plan contends that the phase-out Fannie and Freddie and the capitalization of their replacements can be done so that Treasury (and their other owners) can be paid what they are owed while creating the new entities and without putting any residual debt on their balance sheet.

The administration’s reaction to the proposal has been predictably cool, with a Treasury official expressing wonder as to how housing loans could possibly be made without the government being involved in some way, which is a perfect encapsulation of the general philosophy of the current regime. It’s worth noting that the reaction from the Hill has focused more on political hurdles of doing such a thing rather than attacking the notion of privatization.

Regardless of how reforms of the mortgage market proceeds, it is clear that continuing the status quo and letting the Treasury become the effective owner of the GSEs threatens to take Fannie Mae and Freddie Mac down the same politicized path as before, with similarly disastrous results as during the financial crisis of 2008.

Ike Brannon is a Senior Fellow at the Bush Institute and President of CapitalPolicy Analytics, a DC-based consulting firm. 


Wall Street’s Romance With Fan & Fred

Nov. 29, 2013 6:54 p.m. ET

Astonishingly, certain big-name investors don’t take the federal government very seriously. Activists like Bill Ackman continue to fascinate the media but few have noticed that Fannie Mae and Freddie Mac are the biggest activist projects going right now, with investors maneuvering to profit from shares that Washington repeatedly has insisted will end up worthless.

Mr. Ackman, famous for his Herbalife and JCPenney jousts, is the latest to join, buying nearly 10% of Fannie and Freddie’s publicly available shares, in a scramble that also includes Richard Perry of Perry Capital, Bruce Berkowitz of Fairholme Capital and several others. Mr. Ackman, in a statement issued by his Pershing Square Capital, grandly declares his readiness to “engage in discussions with management, the board, other stockholders of the issuer, representatives of the federal government, and other relevant parties.”

Four reasons seem to explain why these superinvestors believe both political parties are blowing smoke when they claim they intend to put Fannie and Freddie out of business.

Firstly, it’s just politics. Fannie and Freddie are toxic politically, so the political incentive is to talk up their demise. That doesn’t mean the political incentive is to follow through.

Secondly, Fannie and Freddie are one of the few things holding up the mortgage market. Privatizing their functions, which politicians claim to favor, would lead to a tightening of lending standards, which politicians surely don’t favor.

Thirdly, Fannie and Freddie have become insanely profitable.

Even so, what makes private investors think they would ever be allowed to share again in the profits now flowing in profusion to the government? This brings us to the fourth reason: a lawsuit.

When the federal government took Fannie and Freddie into what it called conservatorship in 2008, it allowed 20.1% of their common shares to remain with private shareholders for reasons that were never explained. A likely motive is that, under accounting rules, the federal government would have been obliged to add Fannie and Freddie’s $5 trillion in outstanding debt overnight to the federal government’s then-debt of $10 trillion, which would have been politically explosive even if meaningless in economic terms.

Understand: The legal claim that some investors, including Mr. Perry and Mr. Berkowitz, already are asserting in court doesn’t concern the 2008 takeover itself but a subsequent move by Treasury on Friday, Aug. 17, 2012.

On its own whim, Treasury decided that Treasury would be entitled to 100% of Fannie and Freddie profits despite owning less than 80% of the stock. This decision undoubtedly came because Treasury could see that Fannie and Freddie were turning a corner and, in the distorted postcrisis mortgage market, were about to start accruing huge profits.

Yet the decision was never justified in light of the deal that left a 20.1% stake in the hands of private holders, presumably in return for some unstated benefit.

Legal beagles are divided on the merits of any claim. For a happy precedent, some hark to the famous Constitutional “takings” victories after the 1980s thrift crisis. The Supreme Court ultimately authorized billions in compensation for the benefit of private investors who were similarly manhandled once they’d served Washington’s purpose in the S&L bailout.

More important, the hedgies buy themselves a seat at the table. They are speculators in the least unflattering sense. They’ve put down a gutsy bet on their ability to maneuver, lobby and litigate in a situation of extraordinary complexity and uncertainty, hoping to extract something of value at the end of the day.

Our own guess is that, all things considered, the path of least resistance is some restoration of Fannie and Freddie to their pre-crisis form (as regrettable as that would be), which could pay off nicely.

Mr. Berkowitz of Fairholme has drawn up the most explicit proposal. Fannie and Freddie’s existing portfolio and related liabilities would remain with existing common shareholders and the government. Their mortgage-insurance businesses would be recapitalized as two new companies in the hands of preferred shareholders. These firms would carry on as purely private operations without any implicit federal guarantee.

The latter part is a joke, of course. The federal government has been utterly unable to figure out how to stop providing implicit guarantees to “too big to fail” financial institutions, which the new Fannie and Freddie would certainly continue to be.

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