Fannie Mae-No Politics (FNMA)

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Determined To Ignore Ways To Recap Fannie Mae & Freddie Mac & End Conservatorship

There are a lot of ideas on how to follow the law and end the conservatorship of Fannie Mae and Freddie Mac. This would enable them to resume their historic role in providing countercyclical liquidity in the home lending market and also make shareholders whole. But there is just as much creative thinking to justify why this is impossible.

The Wall Street Journal’s John Carney is again insisting there is simply no way for the GSEs to rebuild and maintain an adequate capital base. In a blog last week, he took aim at a proposal by Tim Howard, the former CFO of Fannie, to keep the companies in place with a risk-based capital requirement of two percent. The reason why this is a bad idea in Carney’s eyes is that two percent is not nearly enough to fend off a future crash, which he assures could be as bad if not worse than 2008. This, presumably, could mean more taxpayer-funded bailouts.

He concluded the GSEs are Systemically Important Financial Institutions, or SIFIs. As such, they need to be subject to a more rigorous capital standard – capitalization at the 11% to 14.5% level.

Using the Basel III formula for such large institutions, Fannie Mae, based on an estimated $3.2 trillion in assets, would have to maintain from $176 to $232 billion in capital. Looking at Fannie’s 2015 earnings of $11 billion, the capital would be far less than 11 percent he says would be needed. Plus this amount does not even include the fees Fannie would have to pay the government for the backstop.

So where could that amount of money come from? Carney acknowledged it won’t be from capital markets. The rate of return on the investment is too low, he concedes. On the other hand, if we simply let the GSEs accumulate capital from their earnings, it would take decades. Until then they would remain moribund, undercapitalized companies worth hardly anything to shareholders. The answer, not surprisingly is to put them out of everyone’s misery and replace them “with something new.”

http://www.valuewalk.com/2016/04/fannie-mae-freddie-mac-conservatorship/