8/5/2017 | Casey Fleming | Politicians make a lot of hay talking about privatizing Fannie Mae and Freddie Mac. These formerly private companies were taken over by the government under the Bush administration shortly after the financial crisis began.
Depending on whom you believe, the purpose was either to put a halt to irresponsible lending practices and to backstop the inevitable coming losses, or to provide political cover to those who deregulated Wall Street and thus allowed the dangerous lending practices that led to the collapse.
Winners and Losers
Through the government take-over, the private investors who owned stock in Fannie Mae and Freddie Mac lost hundreds of millions of dollars when their investment became essentially worthless. However, the taxpayers did make good to the institutional investors (Wall Street hedge funds) who had lent money to the Government-Backed Enterprises (GSEs) through the purchase of mortgage-backed securities.
But that’s all history now. Since then (for the last 9 years) politicians have been making lots of noise about privatizing the GSEs (so as to get taxpayers “off the hook” in case of a collapse again.) So why don’t they? (Besides the fact that they don’t really ever get anything done?)
It turns out Fannie and Freddie are wickedly profitable now, and have been for many years. Who gets the profit? The taxpayers, sort of. The profits from both companies go directly to the Treasury. This money is then put into the general fund to be spent by Congress. It is “off books” in the sense that the money doesn’t come from any form of taxation that can be used to illustrate how high our taxes are. Neat, right?
How much are we talking about?
Originally the government “bailed out” the GSEs to a combined total of about $187 billion, $71 billion of which went to Freddie Mac. This money went into a reserve fund to make sure that the GSEs never depleted all of their reserves. (They did not.) Since then, Freddie Mac has returned $110.2 billion, or close to 140% of its original bailout. Fannie Mae’s numbers are similar; stay tuned for another post.
In other words, taxpayers made a killing on this deal
In the second quarter of 2017 Freddie Mac made a net profit of $1.7 Billion, and will pay another dividend of $2 Billion to the Treasury next month.
Side note: How do you send someone $2 Billion? Do they take a check? Bitcoin?
Treasury Secretary Mnuchin insists that cutting Fannie and Freddie loose is a priority of the Trump Administration. Congress, however, has not even begun to act on it.
However, this may not be a bad thing.
In the past, when government-operated organizations were privatized they were usually given away in a sweetheart deal, making billions for Wall Street investment bankers and hedge funds. Where did Mnuchin come from? Mnuchin was a long time executive at Goldman-Sachs until he left in 2002 to found several hedge funds. In 2008 one of his funds bought the infamous Indy-Mac in one such sweetheart deal, and riding the wave of the recovery made Mnuchin a billionaire.
In the meantime, Freddie Mac is delivering $2 Billion to the Treasury for the second quarter of 2017 alone. They do pose some taxpayer risk in the event of another financial meltdown, but keep in mind that after the worst financial crisis since the Great Depression, the taxpayers made money on the collapse of the enterprises.
Hanging on to the GSEs until we have an administration that will privatize them responsibly doesn’t seem like a bad idea.
This article represents the opinions of Casey Fleming, and not necessarily those of C2 Financial Corp. This analysis was prepared with the best information available at the time it was written. Neither Casey Fleming, nor C2 Financial Corp., have any magical insider information about bond markets, real estate markets or mortgage markets that would make economic projections any more reliable than any other source. No warranty is made that the outcome will reflect the projections in this article, and neither Casey Fleming nor C2 Financial Corp. are responsible for decisions that you make regarding your own choices about your real estate or mortgage or those of your clients.
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