It was the biggest bailout in an era of unthinkably big rescues – and by next month, the U.S. taxpayer will come out on top.
On Friday, mortgage-finance giant Fannie Mae announced profit of $84-billion (U.S.) for 2013, a record result that will generate a hefty dividend payment to the federal government.
When the payment is made in March, Fannie Mae and its competitor Freddie Mac will have returned to U.S. taxpayers in dividends more than the $187-billion they received in bailout funds.
“I’m very proud of what our employees have achieved and I’m very happy for the taxpayers,” said Timothy Mayopoulos, the company’s chief executive.
The watershed moment would have been hard to imagine even three years ago: The U.S. housing market was struggling to recover and the two companies seemed destined to remain a drain on the public purse.
Now the situation is reversed. The two government-sponsored entities are producing enough profit that it may be hard to generate pressure to reform them, even though both U.S. political parties acknowledge change is necessary.
The milestone for Fannie and Freddie is part of a new phase in the recovery from the 2008 financial crisis. Rather than shoring up shaky institutions or bolstering a weak economy, policy makers are trying to disentangle themselves from such measures without causing havoc.
“The government is extricating itself step by step from the economy and the financial system,” said Mark Zandi, chief economist for Moody’s Analytics. “My guess is that Fannie and Freddie will be the last things that the government exits from.”
Overall, the bailouts turned out not to be a disaster for the U.S. taxpayer: $609-billion was disbursed in total, according to an analysis by Pro Publica, a public-interest journalism initiative, while $621-billion has flowed back in to the government in the form of repayments, interest and dividends.
Fannie and Freddie are the linchpins of the U.S. housing system, buying qualified home loans and repackaging them into securities which they guarantee, relieving lenders of risk.
Since the summer of 2008, they have operated as wards of the federal government under a “conservatorship” agreement. That arrangement does not include a process for exiting government control. The government absorbs nearly all the profit generated by the firms in payments that are considered dividends, not a repayment of loans.
Resolving the fate of the two housing giants remains the chief unfinished business of the financial crisis. Three years ago, the Obama administration made several proposals for the “orderly and deliberate wind-down” of Fannie and Freddie, which were created in 1938 and 1970, respectively (Fannie’s official name is the Federal National Mortgage Association; Freddie Mac was born as the Federal Home Loan Mortgage Corp.).
The mandate for the two firms was to expand homeownership and they succeeded. But they operated in a grey area: they were for-profit companies which investors believed had the tacit support of the government. When the housing market unravelled, that support became unambiguous.
“Most people in the U.S. recognize that Fannie and Freddie are a terrible idea and you cannot have the government backing private organizations like this, because the result is always going to be disastrous,” said Peter Wallison, a former Treasury Department official and a fellow at the American Enterprise Institute in Washington, D.C.
Lawmakers have assembled several proposals for reforming Fannie and Freddie, including a bipartisan bill under discussion by the Senate Banking Committee. But Mr. Wallison and others believe it has little chance of moving forward. “I just don’t think there is going to be any reform this year,” he said.
Meanwhile, the government is facing legal challenges to its conservatorship arrangement from shareholders who say it is acting improperly in absorbing Fannie and Freddie’s profits for itself. Others see an intriguing investment: hedge-fund manager Bill Ackman’s Pershing Square Capital Management bought just under 10 per cent of the shares in both companies last year.
Whatever the future for Fannie and Freddie, experts say any changes must be done carefully, given the importance of the two institutions not just to the U.S. economy, but to the global financial system. “You can’t mess it up,” said Moody’s Mr. Zandi. “The first thing is do no harm and I’m not sure we’ve nailed down all the moving parts.”