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Fannie, Freddie stock rally on report Treasury knew profitable at time of sweep

Published: Apr 12, 2016 2:26 p.m. ET

Depositions from a shareholder lawsuit over the mortgage agencies’ finances suggest the government knew they were sustainable

By ANDREA RIQUIER


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Profits from Fannie Mae and Freddie Mac have been swept to Treasury since 2012.

A report the government knew that mortgage giants Fannie Mae and Freddie Mac were money-making when they decided to “sweep” all their profitable sent shares of the pair rallying on Tuesday.

In 2012, the government changed the terms of its crisis-era bailout, arguing that the two agencies were so financially shaky that it was necessary to sweep all future profits from them to the Treasury in order to protect taxpayers.

But documents released Monday cast doubt on that claim. Susan McFarland, a former chief financial officer at Fannie, said that in 2012 she told Treasury that Fannie “would be able to deliver sustainable profits over time.”

The New York Times, which has filed briefs asking that the court documents be released, posted the deposition.

Shares of Fannie FNMA, +15.96% rallied more than 12% Tuesday and Freddie FMCC, +12.50% shares were up 11%.

When the government amended the bailout terms, McFarland said, “part of my reaction was… that it was probably a desire not to allow capital to build up within the enterprises and not to allow the enterprises to recapitalize themselves.”

The truth behind the government’s actions is at the heart of several court cases brought by equity holders, including one filed by Fairholme Funds in 2013, which is now working its way through Federal Claims Court.

Neither Fairholme nor Treasury responded to requests for comment.

Also unsealed on Monday were 10 years worth of financial projections prepared by Fannie that showed the agency would not need to tap taxpayer money again.

In fact, just such a scenario may play out soon. In February, Mel Watt, director of the Federal Housing Finance Agency, Fannie and Freddie’s regulator, warned about post-crisis restrictions put on the two enterprises requiring them to shrink their capital reserves down to zero by 2018.

As those buffers dwindle, Watt pointed out, the agencies will be left with “no ability to weather quarterly losses” against things like interest rate volatility, accounting of their derivatives, and a downturn in the housing market.

Together, Fannie and Freddie have remitted nearly $60 billion more to taxpayers than they drew in the depths of the financial crisis.

http://www.marketwatch.com/story/fannie-freddie-stock-rally-on-report-treasury-knew-profitable-at-time-of-sweep-2016-04-12


Word is getting out!