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News: OMB Projects Bigger Returns on Fannie and Freddie
By Nick Timiraos | March 10, 2014

http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-477104/

Fannie Mae and Freddie Mac would return nearly twice the amount of money they received from the U.S. Treasury if the bailout arrangement isn’t changed over the next decade, OMB says.

Fannie Mae and Freddie Mac would return nearly twice the amount of money they received from the U.S. Treasury if the current bailout arrangement isn’t changed over the next decade, according to the White House budget office.

By the end of March, the two mortgage-finance companies that were seized by the U.S. in 2008 will have returned $202.9 billion in dividend payments, after receiving $187.5 billion in federal support between 2008 and 2011. The budget projections released Monday by the White House Office of Management and Budget show that the companies could return an additional $163.8 billion through the 2024 fiscal year if the bailout arrangement remains in place.

By that tally, Fannie and Freddie would return $179.2 billion more to taxpayers than they were required to borrow. Last year, the budget showed that taxpayers faced a net gain of $51 billion through 2023.

Even though both companies will have soon sent more in dividends to the Treasury than the amounts they borrow, those dividends don’t reduce the $187.5 billion in stock held by the Treasury. The terms of their government support don’t provide a clear mechanism for them to redeem those shares, and the companies are currently required to send all of their profits to the Treasury as dividend payments.

The Treasury faces lawsuits from nearly 20 investors challenging the dividend terms, which were modified in 2012. They say the government’s collection of the firms’ entire profits amounts to an unconstitutional appropriation of assets and that the Treasury and the firms’ federal regulator engaged in illegal self-dealing when it made those changes. The government has filed motions to dismiss the suits, which they say are without merit.

Many of the aggrieved investors bought Fannie and Freddie stock—particularly the preferred shares, which was a form of senior equity—after the government bailout. The initial terms required Fannie and Freddie to pay a 10% dividend on the shares that the government held, and many investors bet that the companies would ultimately become profitable enough to make money even after paying those dividends.

In 2012, however, the government changed the terms and upended those bets by requiring all profits to be paid out as dividends to the government and eliminating the prospect that the companies would have any residual earnings for those shareholders.

Still, shares of Fannie and Freddie are trading more than 1600% above their levels of a year ago and in the past week touched levels last seen before they were seized by the U.S. in 2008.

Senate lawmakers are working to introduce bipartisan legislation that would overhaul the firms, but many analysts assign low odds to the prospect that a bill would pass Congress this year.

Some lawmakers have said taxpayers are entitled to generous returns because the government agreed to accept nearly unlimited losses during the crisis, nursing the companies back to health. “I was a venture capitalist for a lot longer than I’ve been a politician. If I had put $180 billion into Fannie and Freddie back in 2009, I’d expect more than a 1 to 1 return on that,” said Sen. Mark Warner (D., Va.) at a conference last fall. “So once I got a 30-to-1 return…talk to me about Fannie and Freddie making money.”

Absent a change in the Treasury’s support or a court ruling that forces the Treasury to revisit the current terms, the companies can’t keep most of their earnings, meaning that, unlike other bailed-out firms such as General Motors Co. or American International Group Inc., they won’t be returned to private control on their own.

Monday’s projections represent a simple snapshot based on a series of assumptions that are highly sensitive to changes in the economy and financial markets.