Money and Politics

Questions on Fannie and Freddie Have Separate Answers

Lawmakers can figure out how to conduct the overhaul while leaving the shareholder stuff blank.

An unknown future.

Photographer: Chris Rank/Bloomberg via Getty Images
This post originally appeared in Money Stuff.

"Fannie-Freddie Overhaul Might Mint Hedge Fund Riches, Or Losses," is the headline here, which seems about right. One thing that I have mentioned about the future of Fannie Mae and Freddie Mac is that it involves two unrelated questions, which are:

  1. What is the future of Fannie Mae and Freddie Mac?, and
  2. Should the government give billions of dollars to people who own Fannie and Freddie's common and/or preferred stock?

Both of those are hard questions! The first implicates difficult issues of market design and housing policy and systemically important financial institutions. The second is difficult because, when the government originally bailed out Fannie and Freddie in 2008, it did not fully nationalize them and left some stock in the hands of private holders -- and then later, when Fannie and Freddie were getting back on their feet, the government unilaterally changed the terms of the deal to zero the private shareholders. This was arguably unfair to them, though arguably it would have been perfectly fair to zero them initially. (Also, of course, a lot of the current Fannie and Freddie shareholders are hedge funds who bought it well after the bailouts for pennies on the dollar.)

QuickTake: The Future of Fannie Mae and Freddie Mac

But the answer to question 1 has basically nothing to do with the answer to question 2. If you want Fannie and Freddie preserved in their current form, or broken into smaller pieces, or privately capitalized, or backstopped by the government, or dissolved entirely, or whatever, that is one choice. And if you want to give the common and preferred shareholders billions of dollars (of cash or shares in the new entities), or no dollars, or something in between, that is another choice. There are some interactions between those choices -- if you are trying to raise private capital for New Fannie/Freddie, throwing a bone to the old capital providers might be helpful in building goodwill -- but they are analytically distinct. 

Anyway:

Whether shareholders make a killing or get wiped out might hinge on a yet-to-be written provision of a draft Senate bill that marks lawmakers’ latest attempt to overhaul Fannie and Freddie, which have been wards of the state for almost a decade.

The section currently reads “open pending further discussion,” said people familiar with the matter.

Makes sense. You can completely figure out how you want to overhaul Fannie and Freddie while leaving the shareholder stuff blank.

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    Matt Levine at mlevine51@bloomberg.net

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