Facing Fannie Freddie Facts

The notorious GSE bailout will probably cause the US Federal debt to be considerably lower than it would have been without the bailout. It could cause the US Federal debt to be much lower than it would have been, but that won’t be allowed to happen.

Fannie and Freddie are now profitable. They are likely to pay their debts to the Treasury which would imply that the bailout will reduce the Federal debt, because they pay the Treasury much higher interest rates than the Treasury pays anyone, because they have also paid dividends, because Fannie and Freddie will pay corporate income tax (eventually) and because even after the debt to the Treasury is repaid, the Treasury will own 80% of the equity of Fannie and Freddie.

Sorry for the out of date link to a low brow paper but here’s Rick Newman at USA Today three months and 23 days before today

It’s now possible to foresee the point at which the two agencies will pay back all the taxpayer money they required. Moody’s Analytics estimates that on their current course, Fannie and Freddie will return everything they owe by 2019. The break-even date could occur much sooner—perhaps just a couple of years from now—if the agencies are permitted to claim a tax break allowing them to deduct some portion of past losses.

So, if this happens, how much will the Treasury be ahead on the deal ? It really depends on how much 80% of the shares of Fannie and Freddie are worth to the Treasury. It could just keep collecting 87% of profits (the 7% because it doesn’t have to dodge paying taxes to itself if it doesn’t want to). Fannie plus Freddie profits were $ 28 Billion in 2012. If that grows at the rate of inflation about $ 24 billion 2013 dollars a year to the Treasury once they have used up their tax loss carryforward. Discounted at the Treasury rate (as it should be) that’s worth hmm carry the one, about well, a lot more than $ 720 billion.

But, of course I’m dreaming. There is no chance that the Federal government will keep it’s shares of Fannie and Freddie — that would be socialism. They will certainly be reprivatized. That should generate more than 360 billion. By “should” I mean “won’t” as the deal will be crooked, but it would still be a lot of money. Except that that would still be socialism because Fannie and Freddie are too big to fail.

True to it’s rep, USA Today prints a deeply dumb analysis stenographing conventional wisdom which is plainly absurd.

With Fannie and Freddie back on track, the pressure to wind them down or reform the whole housing-finance system may ease. But most experts think major changes are still needed—most importantly, reviving the private-sector market for mortgage-backed securities. The problem with having the government perform that role is that political pressure could generate bad lending incentives—such as the affordable housing mandate that caused some of Fannie and Freddie’s problems—and that government agencies could distort free-market dynamics. Several proposals—including one from the Obama’ administration—call for a hybrid model in which government agencies serve a few particular needs while private-market lenders handle the bulk of mainstream loans.

With all due respect* for “most experts” WTF

It appears that “most experts” agree that Fannie and Freddie suffered from “bad lending incentives” but Countywide didn’t ? The “private-sector market” for mortgage-backed securities almost destroyed the world economy and yet the Obama administration is convinced that they should be revived ? This is insane. It is as if Obama decided that the evidence shows that Medicare advantage is the way to reduce health care spending (that insane view is also heard in Washington, but I expect Paul Ryan to be insane).

The article of blind faith held in spite of overwhelming evidence that it is nonsense, is that Government involvement in high finance “distorts” something which is not distorted if left to its own devices.

What conceivable evidence could possibly convince “most experts” that this is total nonsense on the order of denying global warming and evolution ? I ask for information (please try to think of something and type it in comments — second comings of Christ are allowed). I can’t imagine any stronger evidence and yet “most experts” faith in free-market dynamics is untouched.

*in this case, all due respect is zero respect.

Tags: , , , Comments (17) | |