Original post:
This is a confused and confusing story. It's not for any lack of effort on NBR's part but because the cross-currents of the various interests are incompatible.
We post it not because it gives answers for the final resolution of the financial black holes that are the former GSE's but for some insight into the thinking that might shape their final disposition.
We will have more clarity on the administration's ideas when the White House presents its budget on February 1st.
From NBR:
TOM HUDSON: President Obama is expected to lay out plans to overhaul mortgage giants Fannie Mae and Freddie Mac as part of his budget due out early next month. Taxpayers could be on the hook for an estimated $400 billion in losses over the next decade. Recently the administration quietly lifted the $400 billion cap on government aid for Fannie and Freddie. As Stephanie Dhue reports tonight, that move raises questions about their future.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: Fannie Mae and Freddie Mac don't make loans; they buy mortgages from lenders and sell them to investors, with a guarantee against default. Losses at the mortgage giants weren't expected to exceed $400 billion. But now that Uncle Sam is offering unlimited aid, economist Dean Baker worries the administration will use the firms for a back-door bailout.
DEAN BAKER, CO-DIRECTOR, CTR. FOR ECONOMIC & POLICY RESEARCH: There's zero accountability, so are they going to Citigroup and buying up their mortgages? Are they doing it with a whole range of banks? Who are they favoring? Who are they not favoring? We have no idea what they're doing.
DHUE: Congress and the administration still have to figure out what to do with the mortgage siblings in the future. The CEO's of Fannie and Freddie recently received $6 million pay packages. Some read that as a sign the companies will ultimately return to private ownership. But House Financial Services Committee Chairman Barney Frank says that would be a misread.
REP. BARNEY FRANK, CHMN., HOUSE FINANCIAL SERVICES COMMITTEE: That doesn't foreshadow anything about them going forward. In fact, Fannie Mae and Freddie Mac will not exist in anything like what they now are going forward. Exactly what, we don't know.
DHUE: One idea is to fully nationalize the firms, putting them on the government's balance sheet. Another is to return the companies to private ownership, but under tight controls over their fees and how much money they could make. James Lockhart was the regulator for Fannie and Freddie until August of last year. He says there could also be a return to private ownership with a different kind of guarantee.
JAMES LOCKHART, FORMER DIR., FEDERAL HOUSING FINANCE AGENCY: It may take some sort of reinsurance, some sort of catastrophic insurance by the government maybe. The FDIC is not necessarily the best model, but something like that, that there would be an insurance program for whoever is providing these mortgage- backed securities pays into up front, so that there's a fund there if there's a problem in the future.
DHUE: But Frank says what there won't be is a return to the way Fannie and Freddie were.
FRANK: There will be entirely new forms. You will not see the kind of hybrid you saw before. There will not be a private stock company with a public function the way they had.
DHUE: While the president is expected to lay out overhaul plans for Fannie and Freddie, analysts don't expect any major policy decisions until it's clear mortgage markets and home prices have stabilized.
Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
The most honest approach would be to nationalize the former GSE's. The problem is in the word honest. If the administration were to acknowledge the truth of the existing situation it would have to take the balance sheets of the two entities onto the government's books.
I just don't see how they can do that. It appears we will have to maintain the polite fiction that these institutions are distinct from the rest of the government. This will cost the U.S. taxpayer the 'agency spread' on Fannie and Freddie's debt, currently around 2/3 of a percentage point more than comparable Treasury's, multiplied by the trillions in debt they will be issuing. Even a single basis point is $100 million in added interest expense when multiplied by a "T".
As we've pointed out, analyzing this stuff is more about reading the mood of the regulators and politicians than it is about balance sheet or cash flow analysis.
Although I don't have any inside information on this, my best guess is that current common shareholders will get wiped out with maybe some warrents or an equity stub as a bone to this rather powerless constituency.
For more thoughts on how this might end up see:
Fannie Mae, Freddie Mac: "Estimated GSE Losses = $448 Billion" (FNM; FRE)
For a Quicker Housing Fix: Nationalize Fannie, Freddie? (FNM; FRE)
Rep. Barney Frank: Lenders Fannie and Freddie now a 'public policy instrument' (FRE; FNM)Fed economist calls for US government Mortgage Backed Securities guarantees (FNM; FRE)
U.S. to Lose $400 Billion on Fannie, Freddie, Wallison Says (FRE; FNM)
After TARP: Hidden bank subsidies-12/30/2009 (BAC; C; FNM; FRE)
Lawmakers Want Probe Into Treasury Aid for Fannie, Freddie (FRE; FNM)
The Price for Fannie and Freddie Keeps Going Up (FNM; FRE)
Fannie Mae, Freddie Mac exec pay suggests stock worth nothing (FNM; FRE)
Credit Suisse: Fannie, Freddie Action Means Large Scale Buyouts of Loans in Their Securities (FNM; FRE)
Fannie, Freddie Soar 20% on Treasury’s “Blank Cheque” (FNM; FRE)
Big Decision Looms on Fannie, Freddie (FNM; FRE)
