Has Our Government Become Too Addicted To Fannie Mae And Freddie Mac’s Profits? by Investors Unite

Last week, Ruth Mantell pulled no punches in her MarketWatch article, “After Earning Billions in Profits, Fannie, Freddie Reform Further Than Ever,” laying out in stark terms the consequences for Fannie Mae and Freddie Mac, homeowners and the economy should the status quo continue. She writes that “[a]ny law that winds down the firms and reconstructs the mortgage marketplace will strike close to the heart of family finances across the country.” She also quotes a CompassPoint analyst saying that no one in Congress “wants their name attached to a bill that helped tank the mortgage markets” should a reform bill cause (more) unintended consequences.”

But Mantell zooms in on the other reason for inaction, writing, “Some U.S. lawmakers may be loath to revamp a system that has helped the government to narrow its deficit. A bailout arrangement forces Fannie Mae and Freddie Mac to send their profits to the U.S. Treasury Department each quarter. The GSEs have sent more than $50 billion to the Treasury than the bailout funds they received.”

Remember, Fannie Mae reported a $4.6 billion second-quarter profit, and Freddie Mac reported a $4.2 billion second-quarter profit, prompting Mantell to comment, “…with windfalls like these, some officials are more interested in maintaining than slaughtering their cash cows.”

And there we have it. The justification for letting things continue as is – so long as the government benefits, the illegal deal between the U.S. Treasury and the Federal Housing Finance Agency holds (illegal because the interagency agreement supersedes federal law, which is actually not allowable).

The GSEs are compelled to turn over their profits each quarter, which is draining the companies’ capital buffers – buffers that are required of every other financial institution as a precaution against an ill financial wind. Of course, Fannie Mae and Freddie Mac are especially large, backing a little over half of new mortgages, totaling more than $230 billion in new mortgages for the second quarter of this year alone. This makes the government’s cavalier approach to the lack of capital buffers all the more stunning.

The stakes are high, indeed, and a fellow at the Yale Law School Information Society Project wrote in The Hill newspaper (whose primary audience is Capitol Hill in Washington, DC) that the federal government’s case in at least one of the shareholder lawsuits “may be unraveling.” From the op-ed from scholar Logan Beirne, in which he writes that the “federal government has gone to extraordinary lengths to keep secret the discussions surrounding its seizing control” of the GSEs:

“Last month, a judge exposed a new tear in the federal government’s shroud of secrecy in its battle for Fannie Mae and Freddie Mac. On July 21, Judge Margaret Sweeney of the United States Court of Federal Claims for the D.C. Circuit granted the hedge fund Fairholme’s motion to use in its court battle ‘protected information,’ which the government had fought to keep secret. This development may very well indicate that Judge Sweeney believes the Feds are talking from both sides of their mouths in the multiple investor suits over their handling of the mortgage giants.

… “But the government has fought tooth and nail against the investors’ discovery requests. Incredibly, the Justice Department has asserted presidential privilege to prevent production of certain draft memos, emails, press releases, and other documents created by government officials since 2008. And this is on top of the confidential treatment that Justice has secured for nearly all of the hundreds of thousands of pages of documents that the FHFA and Treasury have submitted.”

The whole situation is just a mess. An interagency agreement usurping federal law. Legislative inaction in the wake of market settling. Bureaucrats actively seeking to thwart judicial orders. The close of Mr. Beirne’s op-ed is the most common-sense thing we’ve read in a while:

“It’s time for the government to end this shroud of secrecy before this farce goes any further.”

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Has Our Government Become Too Addicted To Fannie Mae And Freddie Mac's Profits?