Reports that failed government-run corporations Fannie Mae and Freddie Mac are close to “paying back” taxpayers for the largest bailout in American history are completely false, said Financial Services Committee Chairman Jeb Hensarling (R-TX).
“Fannie and Freddie have not ‘repaid’ taxpayers one thin dime. Reports to the contrary are pure Washington spin,” said Chairman Hensarling. “Legally, they can’t pay back taxpayers because their nearly $200 billion bailout was a draw from the Treasury, not a loan. But the truth is Fannie and Freddie cost the taxpayers a whole lot more than the amount of their bailout. Their failed business model was at the epicenter of the financial crisis – a crisis that threw millions of Americans out of work and ruined people’s lives. Fannie and Freddie can never make amends for the catastrophic damage their failed business model caused our economy – a failed model that is still alive today and must be terminated. Any positive cash flow Fannie and Freddie are experiencing is due to the government-sanctioned monopoly they retain over the market.”
As the Wall Street Journal’s Nick Timiraos explained just yesterday, Fannie and Freddie cannot “repay” taxpayers:
“The agreement doesn’t provide any mechanism for Fannie and Freddie to buy back the government’s senior preferred shares, which now total $188 billion. If it sounds like Fannie and Freddie are making interest payments on a loan that can’t ever be repaid, that’s because they are. So any discussion of ‘repayment’ needs this disclaimer: Even once Fannie and Freddie have paid $188 billion in dividends, they’ll still owe $188 billion.”
Further, while Fannie and Freddie have seen recent profitability, these institutions would not be in existence but for the extensive and continued taxpayer support; a point acknowledged in Fannie Mae’s quarterly financial statement:
“Our ability to issue long-term debt has been strong primarily due to actions taken by the federal government to support us and the financial markets. We believe that continued federal government support of our business and the financial markets, as well as our status as a GSE, are essential to maintaining our access to debt funding. Changes or perceived changes in the federal government support of our business and the financial markets or our status as a GSE could materially and adversely affect our liquidity, financial condition and results of operations.”
The PATH Act (Protecting American Taxpayers and Homeowners), which passed the Financial Services Committee in July, ends the bailout of Fannie and Freddie and phases out their failed taxpayer-backed business model as it creates a sustainable housing finance system for the nation.
In exchange for letting Fannie and Freddie draw their bailout money from Treasury, they sold to Treasury one million shares of Senior Preferred Stock with an initial “liquidation preference” equal to $1,000 per share, for a total of $1 billion in aggregate liquidation preference.
Section 3.3 of the Senior Preferred Stock Purchase Agreements states the “aggregate liquidation preference of the outstanding shares of Senior Preferred Stock shall be automatically increased by an amount equal to the amount of each draw.”
In other words, American taxpayers own a million shares of stock in each company, the value of which has increased dollar-for-dollar with each dollar they took in the bailout.
The money Fannie and Freddie are sending Treasury now is a dividend on that stock. Under the Senior Preferred Stock Purchase Agreements, they are forbidden from reducing that dividend or paying anyone other than Treasury a dividend on any other outstanding stock.
So, taxpayers have not been repaid, they are not being repaid now, and all of the dividend money that Fannie and Freddie have sent in to Treasury has been a fee for the privilege of being under the Senior Preferred Stock Purchase Agreements, not a redemption of previous Treasury draws.