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GSEs Inch Closer to Repaying Bailout

Robert Ottone
Nov 07, 2013

After sharp third-quarter profits, both Fannie Mae and Freddie Mac are close to repaying the United States taxpayers’ money for the 2008 bailout. Interestingly, less than a year ago, The New York Times jumped the gun with demanding the money back, so, the fact that the two government-sponsored enterprises (GSEs) are close to repaying their debt should surprise quite a few. The conventional wisdom is that both have supplied more money to the U.S. Treasury than initially imagined possible after announcing their third-quarter earnings. While the two GSEs aren’t officially “allowed” to repay the money they received in the bailout, The Wall Street Journal did a great job highlighting exactly how Fannie and Freddie got around not being “allowed” to pay it back. In exchange to prevent solvency, the Treasury took “senior preferred” shares in companies that originally paid a 10 percent dividend; they also received up to 80 percent of common shares. Fannie and Freddie are unable to buy back the shares from the Treasury, as per the agreement. "These are big numbers, but it's important to remember they included a few extraordinary items," said Donald Layton, Freddie Mac’s chief executive. Some of those extraordinary items include tax benefits and favorable legal settlements. While not a tremendous amount of money, Freddie Mac will reportedly pay $9 million more in dividends back to the government for the $71.3 billion investment made back in 2008. A drop in the bucket, it’s still $9 million that can be used for government funding. Fannie Mae’s chief executive Timothy Mayopoulos declared the third quarter “terrific,” adding “We are quickly approaching the point where taxpayers will receive a positive return on their investment in this company.” Nearly all profits posted by Fannie and Freddie have been sent to the Treasury in an effort to repay the nearly $188 billion the two entities received as part of the 2008 bailout. "We are quickly approaching the point where taxpayers will receive a positive return on their investment in this company," said Mayopoulos. Both GSEs made use of reversing write-downs of deferred tax credits, which are essentially unused tax credits to offset future tax bills. Those credits are deemed worthless if a company doesn’t use them or if the company is predicted to not make any money. Freddie used this system to generate nearly $24 billion in gains, while Fannie generated over $50 billion. “This aspect of the recovery, particularly when coupled with the reduction in foreclosures and other credit delinquencies, seems a very positive step towards insuring the long-term sustainability of the country's overall economic recovery,” said Doc Compton, a consumer credit expert. “As always, if the housing industry shows gains, there's a very measurable, quantifiable impact on sectors across the board. Given that, for the foreseeable future anyway, government involvement and heightened regulation are unavoidable, it's good to see that entities that they're running are at least profitable and that consumers are able to reap the rewards. Only after an extended period of profitability, will the government begin to loosen its grip on lenders.” The growing recovery of the housing market has resulted in both Fannie and Freddie becoming profitable again. After five years of ugly housing economics, perhaps some solace can be taken in these two humongous entities making good on their loans, even if it took five years to do so. It’d be interesting to know whether or not President Barack Obama has changed his stance on dissolving Fannie and Freddie after putting so much stock into Sens. Tim Johnson (D-SD) and Mike Crapo (R-ID)’s opinion on Dodd-Frank.
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