As the lawsuits against the US government, the Federal Housing Finance Agency, and others over preferred shareholders unpaid dividends wind their way through the courts, one of the central questions that is being raised is how much taxpayers ought to get back for the risk they took on during the crisis.

Fannie Mae Freddie Mac FHFA Federal National Mortgage Assctn Fnni Me (FNMA)

Income sweeps as an accounting, legal, and economic question

“As an accounting matter, one could argue that [Richard] Epstein is correct; the dividends equal the amount of Treasury funds provided to the GSEs,” writes Larry D. Wall, executive director of the Center for Financial Innovation and Stability at the Federal Reserve Bank of Atlanta. “As a legal matter, the issue may ultimately be resolved by the federal courts. However, as an economic matter, the value of the government’s contribution clearly exceeds $188 billion once the risk borne by taxpayers is taken into account.”

The $188 billion that Wall and others refer to is the total amount that Fannie Mae and Freddie Mac drew from the US Treasury, but Wall argues that expecting the same amount paid back ignores three different issues. First, if the government is repaid the same amount that it put in, taxpayers would get no return on their investment. Assuming that Treasury is entitled to dividends on top of its initial investment, the figure should be roughly $18 billion higher based on 2012 dividends alone, Wall estimates with a “back of the envelope” calculation.

Second, even though Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) drew $188 billion from Treasury, it’s clear that they could have drawn more if it was necessary. Based on Treasury estimates of its outstanding liabilities in 2009, Wall argues that the nearly $300 billion in implicit capital should also have value, just as a line of credit has value.

Fannie Mae, Freddie Mac cannot repay economic value to Treasury: Wall

But his main argument is that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s current profits are due entirely to risks borne by taxpayers, not private shareholders. Even with the $188 billion cash injection, Fannie Mae and Freddie Mac had a net worth of essentially zero. Since their main business is acting as guarantor of mortgage-backed securities, and the guarantee of a company with zero net worth is equally worthless, Wall argues that the current value of Fannie Mae and Freddie Mac rests solely on the government’s willingness to guarantee their liquidity.

“The Treasury claim that the value of the aid was ‘incalculable’ is an exaggeration; the value surely can be fixed within reasonable bounds,” writes Wall. “However, the implication of this claim, that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp’s (OTCBB:FMCC) cannot repay the economic value on behalf of their common shareholders, is nevertheless accurate.”