Taking Stock Of Fannie Mae and Freddie Mac: Bailout to Burnt Out
Bailed out in the trenches of the financial crisis, the GSEs are back at it, but in a no-mans land that could leave taxpayers on the hook once again. These “government-sponsored-entities” exist at the benevolence of the US government as independent entities with a federal charter. One way of looking at this structure is to imagine a very large, very liable stock holder in a company that acts and invests independently while answering to the discretion of that one shareholder — The US Government.
For taxpayers, this is concerning for many reasons. There is no clear line of risk abatement drawn in the sand post-2012 when the GSEs finished their payback to the US government. For now, if the firms were to suffer another catastrophic event like they did in 2008, the conservatorship status they’re in would remain.
For Fannie and Freddie, the issue is much larger than their ties to the government; the issue at hand is their ties to the US and global economies as a whole. In 2008, the government had no choice but to infuse them with $188 Billion — YES, Billion with a capital B — in order to stave off the systemic collapse of the global economy. Our financial services sector is so inextricably tied to these companies that ignoring the problem would do nothing but exacerbate an already unprecedented crisis. In 2015, the GSEs exist as a free market entity that conducts operations on the open market like a private institution, but with the backing of a the government. Unprecedented may ring a bell.
A bigger question comes to mind: what is the economic implications behind their continued existence? There is no question that the services they provide are unparalleled, even indispensable to the degree that they provide liquidity to the secondary markets while gobbling up individual mortgages originated by (comparatively) smaller banks. As the secondary consumer, their job is to repackage and sell these investments to the market with a a guarantee- a guarantee produced by the federal government’s charter which implicitly insures the product they sell.
Bailout money totaling $239 Billion has been repaid plus some to cover the risk that taxpayers are still facing. Their status as an independent entity is in flux again with some troubling signs coming out of their Q3 2015 in which they reported a $475 million loss.
What isn’t guaranteed it the troubling part. Profits are the matter of the market, no matter how secured their existence is by the federal government. A part of the capital infusion sponsored by Uncle Same in 2008 was the thinning of their capital reserves. Each year, in addition to a profit distribution heading straight to the government, they are mandated to repay $600 million which will wipe them clean of capital by 2018.
A second bailout is a reality that might be coming sooner rather than later. Greed and mismanagement as a private entity occurred in 2008 resulting in a collapse larger than anything imaginable. During the escalation to the financial crisis, Fannie Mae stock plummeted from $62 to $0.48. That’s an unimaginable loss for any investor, much less the federal government. The only difference is how deep their pockets are.
The future is murky indeed for our big, bad GSEs. Taking stock in retrospect shows a very spotty pattern that could be repeating the same mistakes of the past. Trends indicated by their most recent P&L statements indicate that they’re slowly losing money. Net profits are down for the fourth year in a row along with their capital reserves. It may only be a matter of time before they reach out to Uncle Sam for another rescue.
