Fannie, Freddie profits don’t sway ex-official’s views

by 27 Jun 2016
The U.S. government’s decision to take all profits from Fannie Mae and Freddie Mac was the right thing to do even in light of the companies’ subsequent return to profitability, a former Treasury Department official said in documents released this week.

The comments from Timothy Bowler, who left the Treasury last summer, were included in deposition excerpts and documents that are the latest to be made public in the long-running struggle between the U.S. and private shareholders of the two companies.

The U.S. seized control of Fannie Mae and Freddie Mac amid soaring losses in 2008 and provided $187.5 billion in aid to keep them afloat. In 2012, the government changed the bailout terms so that it would take almost all profits, leading to a taxpayer windfall and dozens of shareholder lawsuits after the companies returned to profitability.

In the newly unsealed documents and excerpts, U.S. officials reiterated their long-stated goals of winding down Fannie Mae and Freddie Mac and concerns that the old bailout structure could erode investor confidence. They also show some alternatives to taking mortgage-finance companies’ profits that officials considered and suggest that they had settled on the general concept of sending the profits to the Treasury months before signing the agreement.

Shareholder Lawsuit
Shareholders have brought dozens of lawsuits against the government challenging the current terms of the companies’ bailouts. A judge in one prominent case allowed the plaintiffs to collect documents and witness depositions, but the vast majority until recently were kept under seal.

Now, as plaintiffs in related cases seek to use the evidence, the judge has started to allow a trickle to become public, shedding new light on government officials’ thinking as they made one of the most controversial decisions on Fannie Mae’s and Freddie Mac’s futures.

When the government took control of Fannie Mae and Freddie Mac in 2008, it put them under the auspices of the Federal Housing Finance Agency, while Treasury provided the bailout money.

Original Terms
Under the original terms of the agreement, Treasury received warrants to acquire nearly 80 percent of the companies’ common stock along with a new class of “senior” preferred shares that originally paid a 10 percent dividend.

At issue in the lawsuits is the 2012 decision by Treasury and FHFA to change the bailout terms so that instead of a set 10 percent dividend, the government would take all profits and not require a dividend when they had a loss.

At the time, Treasury officials said the change would accelerate the wind down of Fannie Mae and Freddie Mac, while sidestepping a situation in which they could require bailout money to make dividend payments. The officials said they worried that such a situation could cause investors to doubt the safety of the companies’ mortgage bonds and disrupt the economy.

Soon after the change, Fannie Mae and Freddie Mac began posting huge quarterly profits, and private shareholders sued, arguing that the profit sweep was illegal.

Huge Profits
In the deposition excerpts unsealed this week, Bowler told attorneys that even knowing now that Fannie Mae and Freddie Mac would soon post huge profits, he would have made the same decision.
“The core tenets and core merits” of the changes to the bailout terms still exist, said Bowler, who served as a counselor to the Treasury Secretary on housing and other issues.

He pointed to mortgage-bond investor concerns as reasoning for changing the dividend rate, but also said winding down the companies was top of mind.

“The only core policy in regard to the two enterprises at Treasury and their structure during the time period we’re discussing ... was to wind down the GSEs over time. That was the policy,” he said, referring to the companies as government-sponsored enterprises.

Bowler’s deposition and other unsealed documents also showed that Treasury officials considered alternatives to sweeping all profits from Fannie Mae and Freddie Mac. He said thought was given to lowering the dividend rate, but that the idea was dismissed because it would mean less money for taxpayers.

Timothy Geithner
An unsealed January 2012 memo for Treasury Secretary Timothy Geithner raised the possibility of transferring Fannie Mae and Freddie Mac assets to a special purpose vehicle in what was described as a “good bank/bad bank-type strategy.” Treasury officials didn’t pursue that option.

Instead, in August 2012, officials announced the profit sweep. Bowler’s deposition suggests that the dividend change had been agreed to conceptually by FHFA and Treasury officials months earlier.
A federal judge in 2014 dismissed one major case between shareholders and the government, stating that the government’s reasoning for the change in bailout terms wasn’t relevant. Shareholders appealed, and the appellate court is expected to issue a decision sometime this summer.

Bloomberg News

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