In February, as expected, Fannie Mae and Freddie Mac announced that they will require a combined $4 billion “draw” from the U.S. Treasury in order to maintain positive net worth. This is due to their having to write down certain tax assets whose values were negatively impacted by the new tax law.
Having earned over $100 billion since the financial crisis ended, and with combined assets of over $5 trillion, how can Fannie and Freddie be so broke that they require another cash infusion from the taxpayer?
The answer is simple: Our government has already sucked out all of their profits, leaving them with virtually no equity cushion whatsoever. Thus, when Treasury cuts checks to Fannie and Freddie at the end of this month, those payments should be considered as nothing more than the return of stolen money.
Recall that in September 2008, the government seized the two government-sponsored enterprises and forced them into what was supposed to be a temporary conservatorship. As numerous lawsuits allege — and as court documents recently made public over the government’s strenuous objections strongly hint — the takeover may not have been the bailout Treasury claimed it was at the time. To the contrary, the “bailout” is starting to look more like a “stick-up.” (Full disclosure: I am in plaintiff in one of these lawsuits, which is pending in a Delaware federal court.)
Shortly after seizing control and ousting management in the fall of 2008, the Federal Housing Finance Agency, purporting to act as conservator for the GSEs, ordered the companies to book several non-cash accounting charges, ultimately resulting in Treasury’s purchase of $187 billion in preferred shares (bearing a 10% dividend) so they could maintain a positive net worth.
By the summer of 2012, however, the housing market had turned around, the accounting entries had to be reversed and Fannie and Freddie suddenly became massively profitable. Within days of the announcement of robust second quarter earnings — which far surpassed the dividend on the government’s preferred shares — Treasury demanded that the dividend rate be changed to 100% of the companies’ earnings and net worth in perpetuity.
By the end of the current quarter, it is estimated that Fannie and Freddie will have repaid the government over $100 billion more than the $187 billion they received under the so-called “net worth sweep.” Nonetheless, none of that money can be used to retire Treasury’s preferred shares. The government’s position is that the GSEs will continue to owe $187 billion for the rest of time — and must remit to it all their profits between now and then.
Upon examination, the government’s purchase of “preferred stock” more closely resembles a mafia-type “loan.” What responsible board of directors — or in this case, a conservator, no less — would borrow $187 billion and agree that no matter how much money they repay the lender, not a dime could be applied toward principal?
And here’s a reality check for you: Who borrows that kind of money and pays it all back in just four years? Someone who probably never needed it in the first place.
Under the terms of the net worth sweep, Fannie and Freddie were to have seen their net worth each drained to zero by year-end 2017. However, on Dec. 21 of last year, Treasury agreed to allow them to maintain a tiny sliver — $3 billion each — of equity capital. That’s $6 billion undergirding over $5 trillion of assets — a capital-to-assets ratio of just 0.1%. Put another way, their capital will continue to round to zero, instead of being precisely zero.
Everything above that 0.1% percent will continue to be swept to the government — again, in perpetuity.
Among the documents the government resisted making public are Aug. 18, 2012, emails from Jim Parrott, a senior advisor to President Obama. Written the day after the net worth sweep was announced, once such email makes clear that the purpose of changing the dividend rate on Treasury’s preferred stock was to saddle Fannie and Freddie with concrete life preservers so that they could not “repay their debt and escape.”
So far, it’s worked.