Thursday, September 10, 2009

The Government Will Be Stuck Owning Fannie Mae and Freddie Mac FOREVER (FRE; FNM)

From Bloomberg:

‘Credibly’ Privatizing Fannie, Freddie Too Difficult
“Credibly” privatizing Fannie Mae and Freddie Mac, the mortgage-finance companies seized by U.S. regulators last year, may be too difficult given the precedent set by the Treasury Department’s financial assistance, according to a Government Accountability Office analysis.

“The financial markets likely would continue to perceive that the federal government would provide substantial financial support to the enterprises, if privatized as largely intact entities, in a financial emergency,” the GAO said in a report today from Washington. “Consequently, such privatized entities may continue to derive financial benefits, such as lowered borrowing costs, resulting from the markets’ perceptions.”

The Treasury today reiterated that the government intends to make recommendations on Fannie Mae and Freddie Mac next year. The companies, which own or guarantee about $5.4 trillion of U.S. residential debt and have accounted for about 70 percent of all new home loans this year, would need a “potentially lengthy transition” given their size, the GAO said.

“Any transition to a new structure would need to consider the enterprises’ still-dominant position in housing finance and be implemented carefully (perhaps in phases) to ensure its success,” the GAO said

The GAO, the investigative agency of Congress, provided a 66-page analysis of three main options for restructuring Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac: privatizing or eliminating the companies; turning them into government agencies; or reestablishing their structures as shareholder-owned, government-sponsored enterprises.

Plenty of Drawbacks

The GAO doesn’t make recommendations on the best course of action, and cites drawbacks to every option the report explores, as well as steps that could be taken to deal with those problems....MORE
Here's the report:
Analysis of Options for Revising the Housing Enterprises’ Long-term Structures

(73 page PDF)