With the release of third quarter earnings this week, we are reminded that eight years into their conservatorships, Fannie Mae and Freddie Mac are unique amongst the financial institutions and automobile companies that received federal bailouts during the nadir of the financial crisis.
Following the latest round of earnings, the GSEs have returned nearly $70 billion more than they were loaned to the Treasury, making for a staggering 136% return on investment for the federal government. Compared to the payback from other government bailouts this has been a great deal for taxpayers, much less so for Fannie and Freddie shareholders.
The Bedford Park Opportunities Fund returned 13.5% net of all fees and expenses in the second quarter of 2021, bringing its year-to-date return to 27.6%. Q2 2021 hedge fund letters, conferences and more In the fund's second-quarter investor letter, which ValueWalk has been able to review, Jordan Zinberg, the President and CEO of Bedford Read More
Let’s look at the bailout balance sheet. Under the Toxic Asset Relief Program (TARP), which was authorized separately from the GSE bailouts, the Treasury has doled out some $434 billion to various banks, automobile companies, and investment funds. According to ProPublica, taking into account the revenues acquired through the sale of assets in companies that have repaid the loans, the government has profited by just under $9 billion on the entire package.
The taxpayers’ biggest losses, by far, came on the bailout of General Motors, whose toxic assets were liquidated in Chapter 11 bankruptcy while the healthy portions of the automakers’ business were converted into a new, government-owned company. In 2014, the government sold off the last of its stake in both the “new” and “old” GMs at an estimated $11.2 billion loss.
Other losses came on the mortgage servicing subsidiaries of the Big Banks, including Wells Fargo and Bank of America. Those banks and many others have since paid out tens of billions of dollars in lawsuit settlements for their role in causing the crisis by issuing subprime mortgages and selling them to Fannie Mae and Freddie Mac.
Outside of the GSEs, the biggest returns were from Citigroup, AIG, and Bank of America. Combined, those three companies, which received a total of $157.8 billion in taxpayer assistance, have returned about $23 billion in profit to the Treasury (the bulk of which comes from Citigroup). That’s about $15 billion less than the roughly $38 billion in profit returned by Fannie Mae, which received $116 billion in bailout funds, and about $6 billion less than the approximate $29 billion in profit returned by Freddie Mac, which received about $70 billion in funds.
Aside from government profits, the glaring difference between these companies and the GSEs is that the banks and auto manufacturers are back to functioning as private companies. They retain profits and their shareholders benefit. While the shareholders in “old” GM were wiped out as part of the bankruptcy process, shares in “new” GM are trading at more than $30. Meanwhile, the financial institutions are now required to hold so much capital that they have lobbied against those requirements as being too stringent.
This is all in sharp contrast to Fannie and Freddie. Despite being the most profitable post-crisis bailouts by orders of magnitude, the GSEs remain wards of the state, trapped in a limbo where they remain private companies but send all of their earnings to the government.Much has been said and written about the dangers posed by this ongoing arrangement, including by GSEs’ own chief regulator. Though taxpayers have profited handsomely from the conservatorships, they now stand to foot the bill for another bailout if earnings were to drop even slightly in subsequent quarters. That is because the companies have been required to systematically whittle down their buffer against losses to practically zero. That this theoretical bailout would come because Washington policy dictates that two of the most profitable companies in the world should actively put themselves at risk, in direct contrast to the policies that govern the rest of the post-crisis financial sector, is an absurdity of historic proportions.
There is another key difference between the GSEs and the other bailout recipients. Fannie and Freddie perform a critical public service in making homeownership accessible and in their duty to serve underprivileged borrowers. They have been the lynchpins in a system that has facilitated access homeownership for America’s low- and middle-income families since the wake of the Great Depression. This stands in stark contrast to the Too Big To Fail Banks, which bear so much responsibility in causing the housing crisis by taking advantage of those same borrowers in a greed-fueled binge on fast profits, and which continue to participate in jaw-dropping acts of malfeasance to this day.
When the next Congress descends on Washington, there will be two broad consensuses on housing finance reform: 1) The current arrangement is untenable and dangerous and 2) Fannie Mae and Freddie Mac are the irreplaceable cornerstones of housing in this country. Congress cannot afford to kick the can down the road any longer, nor can it afford to continue the fundamentally misguided endeavor of attempting to “reform” the housing system through risk-sharing transactions. Instead, it must work with the next administration to draw up a plan to finally end the conservatorships before the tremendous gains of the last four years are squandered. As Tom Forrester recently wrote for the Washington Post, “let’s quit while we’re ahead.”