In August 2012, a few months before Barack Obama told Mitt Romney the Eighties had called and wanted their foreign policy back, the U.S. government made a momentous and little-discussed decision. It unilaterally changed the terms of the bailout of Fannie Mae and Freddie Mac, seizing all of the companies’ profits.
The government originally insisted on a 10 percent annual dividend in exchange for what ultimately became a $187 billion rescue. In 2012, the government quietly changed that 10 percent deal to one in which the state simply seized all profits. Government regulators euphemistically described this as “fully capturing financial benefits.” The press paid almost no attention to this event.
“New Bailout Terms for Fannie, Freddie,” wrote the Washington Post, in a page-8 yawner. “Treasury Pinches Fannie and Freddie,” sighed the Philadelphia Inquirer, in 439 words on page 7.
This was not, however, an inside-pages news story. It was one of the most important decisions of the bailout era.
Also known as the government-sponsored entities, or GSEs, Fannie Mae and Freddie Mac were two of the biggest companies on earth, and held about $5 trillion in mortgage debt.
They had gone bust during the crash years for a variety of reasons, mostly due to incompetent and corrupt management. But by the summer of 2012, with the real estate market in recovery, the companies weren’t bust anymore. On the contrary, they were about to start making money again – enormous piles of it, in fact.
The government has always insisted it didn’t know this. Not just in the summer of 2012 but numerous times since, officials have insisted that they needed 100 percent of Fannie and Freddie’s profits because they wanted to protect taxpayers from likely future losses, and because Fannie and Freddie would otherwise be unable to pay back what they owed.
Mario Ugoletti, a special adviser to the director of the federal housing agency, said in 2013 of the companies’ debts that it was “unlikely that [Fannie and Freddie] would be able to meet that amount consistently without drawing additional funds from Treasury.”
But documents just released in a court case show that the government privately believed just the opposite before it made its historic decision to “sweep” the GSE revenues.
One key document is a memo from Mary Miller, assistant Treasury secretary for the financial markets, to then-Treasury Secretary Tim Geithner. Dated December 11th, 2011, Miller writes to Geithner that “Freddie is expected to be net income positive by the end of 2012, and Fannie by the end of 2013.”
In another memo, circulated through the agencies, analysts concluded that the government would end up getting more through the “revenue sweep” than it would through “if the 10% [dividend] was still in effect.”
The only reason this story is hitting the headlines at all this week is because the government’s 2012 decision triggered an all-out pitched battle between two investor groups. Those who bet on Fannie and Freddie’s revival were wiped out by the government’s 2012 decision, while those who shorted the firms have made fortunes.
The documents that came out this week were released in a lawsuit brought by Fannie and Freddie shareholders who believe that the government stole billions of dollars in profits from them.
The ordinary American is not likely to care much about the outcome of that case, unless the general principle of the government unilaterally seizing the profits of private companies strikes him as bothersome.
But this story has vast implications beyond a fight over investment returns.
Lurking underneath the scandal derisively termed “Fanniegate” is a monstrous struggle for future profits. The fight here is not just about the profits generated by the GSEs, but what to do about them generally. Finance lobbyists have successfully forged a bipartisan consensus that the companies need to be privatized. Essentially, Wall Street wants to step into the shoes of Fannie and Freddie.
In most versions of GSE reform currently winding their way through Congress, the same too-big-to-fail banks that blew up the mortgage markets in 2008 would assume most of the responsibilities of Fannie and Freddie. Crucially, securitized mortgages would continue to enjoy government backing under many of these proposals.
Privatized profits, socialized losses. Who doesn’t love that formula?
It would be the ultimate triumph for Wall Street, and the ultimate shocker ending to the crash era. After nearly blowing up the planet with a mortgage bubble and getting bailed out by taxpayers, banks would now be handed control of the real estate markets and granted permission to reap massive profits trading government-backed mortgages until the end of time.
The GSEs are essentially huge piles of money that buy mortgages. They do this ostensibly in service of a utility-like function to keep the real estate markets liquid. Part of their mission has always been to invest in low- and middle-income mortgages, to give the private sector an incentive to create and lend to those who need affordable housing.
That mandate is likely to disappear once the reform is finished. “Access to affordable housing for millions of people is at stake,” says John Taylor of the National Community Reinvestment Council. “Even a lot of Democrats seem unaware of this.”
It should be noted that despite legends to the contrary, Fannie and Freddie’s affordable housing mission did not cause the 2008 crash.
In fact, the Financial Crisis Inquiry Commission concluded that delinquency rates for GSE loans were “substantially lower” than those of the private banks and mortgage companies that were lending subprime loans to anyone with a pulse during that era.
The crash was caused by greed, not social policy. The problem was that banks were using derivative tricks to successfully disguise toxic subprime loans as good investments. All that housing credit was available because it was profitable for banks to offer it, not because they were forced by Fannie/Freddie or anyone else to lend it.
But probably because Fannie and Freddie were so unpopular after the crash – deservedly, in part, because of numerous scandals involving its executives – the companies were treated very differently than other bailout recipients.
While other Wall Street firms that needed taxpayer or Fed rescues were allowed to quickly repay their debts and get out from under additional restrictions, Fannie and Freddie were specifically barred from ever repaying their obligations.
By 2015, the GSEs had paid $228 billion to the government, or $41 billion more than the $187 billion bailout. This prompted a letter from Sen. Chuck Grassley asking why the companies had not been released from debt.
The Treasury Department answered, in essence, that the bailout had not been a loan, but an “ongoing financial commitment.”
This was not a debt that could be paid back. Like a restaurant owner who accepts protection from the mob, the GSEs were and are in an unseverable relationship.
As of today, Fannie and Freddie have paid $130 billion to the government above and beyond its original rescue, at least according to some calculations. The ongoing seizure of such gigantic sums continues to be one of the weirder subplots of the post-crash era, and these newly released documents only add to the mystery.