There Was No Fannie/Freddie 'Bailout': There Was a Stick-Up
“Have Fannie and Freddie Paid the Taxpayers Back Yet?” (RealClearMarkets Sept. 20) has a fundamental flaw. Author Alex Pollock states that a “giant bailout” from the federal government “kept Fannie and Freddie in existence and business.” However, documents and emails obtained in connection with shareholder lawsuits make clear that it wasn’t a ‘bailout’ at all. It was a stick-up.
A brief history lesson is in order.
Under GAAP accounting rules in effect at the time -- and as certified by their independent auditors (and regulators) -- there is no question that both Fannie and Freddie were in full compliance with capital requirements when they were forced into conservatorship. True, they had been incurring losses due to the then-raging housing finance crisis, but still, they had the highest capital cushions in their histories and were flush with cash.
It was only after the government seized control that it was able to fire the directors, replace management and order the companies to start booking billions of one-time, non-cash charges. These cookie-jar accounting entries ultimately required Fannie and Freddie to accept $191.5 billion from the U.S. Treasury Department (and issue it an equivalent amount of preferred stock bearing a 10% dividend), in order to maintain a positive book net worth. (Hence the “bailout” narrative.)
Flash forward to the summer of 2012, by which time the housing market had turned around: under the same GAAP accounting rules, the write-downs had to be written back up. Alarmed that Fannie and Freddie’s unexpected return to profitability would end up resulting in their being released from conservatorship, Treasury changed the terms of its preferred stock -- retroactively. The 10% dividend was replaced with a new one equal to 100% of their net worths (minus a de minimis reserve) payable in perpetuity.
More akin to a concrete life preserver than a rescue, the new arrangement is not unlike the restaurant owner who accepted cash from the Mob: Fannie and Freddie will be in hock to Uncle Sam for the rest of their corporate lives. Indeed, a top White House official confessed as much in an Aug. 18, 2012 email in which he disclosed that the real reason for changing the terms was to ensure that Fannie and Freddie would not be allowed to "repay their debt and escape." And so as of June 30th, the government has already collected $115 billion more than it advanced. In effect, the companies have been nationalized – without compensating their owners. That might work in Cuba or Venezuela, but not in the United States of America.
As further evidence that the basic premise of Mr. Pollock’s article is incorrect, how to explain that just three days before their seizures, Fannie and Freddie were able to tap the capital markets for $6 billion of unsecured debt in an oversubscribed offering? It was underwritten by a "Who’s Who" of Wall Street investment banks and was rated AA+/AAA-. Hardly the stuff of companies on the verge of collapse which required a government rescue.
With all due respect, Mr. Pollock is peddling a false narrative.