First, the bank bailout proved profitable for the government. Then AIG turned out to be profitable. Now, it turns out Fannie & Freddie might be too - something even the strongest bailout supporters amongst us didn't expect. http://www.politico.com/story/2013/05/fannie-mae-to-send-treasury-big-payday-91128.html?hp=l16 Fannie Mae's big payoff: $59B sent to Feds Fannie Mae will send its largest check yet to taxpayers this summer: $59.4 billion. The government-owned mortgage finance company has been turning a profit in recent quarters thanks to the recovering housing market and the rapid pace of mortgage refinancings spurred on by the Federal Reserve’s cheap money policies. On Thursday, Fannie announced the uptick in profits will allow it to take advantage of certain tax benefits on losses that were deferred as the company was taken over by the government in 2008. This boosts the company’s net worth and frees up $50.6 billion for the government under the terms of the bailout agreement. This amount combined with the $8.1 billion first-quarter profit reported Thursday, the largest gain in its history, means the company will send the government $59.4 billion by June 30. Freddie Mac reported a $4.6 billion gain on Wednesday, its second-highest earnings report ever. Executives said they may be able to recognize its deferred tax assets later in the summer, which could result in $30 billion more sent to the Treasury. While the new profits spell good news for taxpayers, who have sent $187 billion to bail out the two companies, there is concern it could delay any urgency in Congress to replace the mortgage giants and build a new housing finance system that is controlled more by the private sector. "I think there is a risk that policymakers may look at our profitability and conclude that they do not need to take action with regard to housing reform," Fannie Mae CEO Tim Mayopoulos told reporters Thursday. "I believe that would be a mistake." Jim Vogel, an analyst at FTN Financial, said the profits will almost definitely cause problems in an already divided Congress. “Unfortunately, these profits hurt [Fannie and Freddie] reform because they give the illusion [mortgage] finance is a great business,” Vogel said in a note to clients Thursday, noting that the gains are not being felt as much by the private market. "'Profits' are going to blind policymakers to that fact. Murky indeed." Lawmakers on the Senate Banking and House Financial Services committees have said the new profits should not delay reform further, but with the budget already tight, keeping the continued flow of cash in place could be tempting. "Washington could quickly get addicted to the revenue from Fannie and Freddie," Guggenheim Partners analyst Jaret Seiberg said in a note to clients. Under the terms of the bailout agreement, Fannie and Freddie cannot get out from under government control simply by paying back the taxpayer money they have received because Treasury owns preferred shares in the company. As of June 30, Fannie will have paid Treasury $95 billion in dividend payments under its conservatorship agreement while Treasury will still hold $117 billion in preferred shares in the company. Should the government keep control of the companies for another 10 years, the Obama administration budget projects taxpayers could get $51 billion more back from Fannie and Freddie than the $187 billion they put into the two firms. A Treasury Department official confirmed that the funds returned by Fannie and Freddie will be deposited into the general fund and will be factored into how long the department can continue to pay the government’s bills before running up against the debt ceiling. The $59 billion Fannie will send, combined with the $7 billion Freddie said it would pay the Treasury by June 30, would likely push back the date when the government will breach the debt ceiling until October, if it is not raised before then, the Bipartisan Policy Center said today. Laurie Goodman, a top analyst at Amherst Securities, said rising home prices, coupled with higher fees Fannie and Freddie charge new homebuyers, will keep the companies profitable for some time. "I think the profits are sustainable. They have raised [fees] very, very considerably," Goodman said in an interview. "And bad loans are running off." What to do with the cash once the dividend payments exceed the bailouts could add an unexpected dimension to the debate and has caused some to fear that the government may look to sell off its controlling stake in the two companies. A bill introduced earlier in the year by a bipartisan group of senators led by Bob Corker (R-Tenn.) and Elizabeth Warren (D-Mass.) would prevent the Treasury Department from selling its shares in Fannie and Freddie until a new mortgage financing system is in place. "Those are all issues for policymakers to address," Mayopoulos said.
I don't exactly see the gain in celebrating the bailout money being paid back, it's a fraction of the damage the banks did to the economy at large, and to be frankly honest, it will be nothing compared to the damage they will wreak again with the kind of mindset that forgives and forgets. I personally did not dislike the bailout because of the monetary implications---obviously, these firms exist to make money well, they will pay you back---but I was more worried about the moral implications of giving the people who run the credit economy more reason to think that they would be invincible. Given what we have seen of LIBOR fraud, energy market manipulation, foreclosure fraud, London whale trades etc., this is a very pressing concern.
Because the reality is that many opponents of the bailout felt it was throwing money down a pit. Certainly, this is a concern. But not doing a bailout for that reason is like letting a heart attack patient die because you're concerned he might have another heart attack down the line if you save him.
transplant patients should be denied if their actions caused their organ failure and they continue down the same river.
Assuming the housing market stays on its current bubble course while new mortgages and it's derivatives are being minted? What can possassably go wrong? It's good the bailouts are getting money back for the taxpayer, but the inherent principles from the bailouts: moral hazard for the filthy, ridiculously, obscenely rich + socializing losses and privatizing the gains are still present just 5 years after the bust. What's the reason for not bailing out normal people again....Moral hazard? We've learned nothing while the financial industry takes this news as impetus of washing their hands of the worst loss of individual wealth and capital since the Great Depression and absolving their culpability for the current unemployment market that won't return to 07 levels until at least 2017.
I would guess the primary reason is that a bailout of normal people wouldn't have cost $0. By bailing out the banks, you can make them pay for it, as they did. But the way they were done, the bailouts did indirectly bailout normal people - they prevented a depression that would have otherwise crushed normal people. The owners of the banks also got most of their equity diluted and/or wiped out.
On a side note, on the topic of moral hazard - look at Congress and their actions over the last few years. If the banks went nuts again, does anyone think there is any chance a bailout would pass through the tea party dominated House?
Keeping people afloat in their houses when the total mortgage value exceeded the market equity would've been better than kicking them out for a nasty repo or short sale for those who couldn't make payments. I wonder if people had walked away from their non-recourse loans en masse would there have been a "hostage" incentive like what these banks pulled off. Then you could rationalize the silver lining of that hypothetical public bailout with 0 housing death spirals since time of bust.
to address both of your points, a bailout that centered around the owners of subprime mortgages would probably have been the best, all things considered, and I can get into the technical details why--- what affected the aggregate credit economy, more than anything else, was the terrible slide in house prices that accelerated much too quickly. You can probe me further on different points, but I think it's a reasonable assumption to think that if all of those houses were not foreclosed upon, we would not have the same problem. of course, who would've ever thought to give money away to poor credit scorers---as opposed to bankers who continuously prove their penchant for risk and fraud?
the only argument I can really see as a counter to this is the velocity of money. Obviously, coordinating mini-bailouts is much more difficult than shoving money to the big banks---this is why regulations must be placed so that bubbles don't shove upwards (more time), and probably why development of bigdata is going to be crucial.
Not sure if you're making pointed commentary or neutral observation... I don't think political affiliation would matter if the banks went nuts yet again. We'd ask what the Dodd-Frank reforms accomplished other than preventing popular outrage from reaching critical mass.
