Fannie Mae-No Politics (FNMA)

[Mikey Mike]

Sen. Toomey Goes to Bat for Fannie, Freddie Shareholders

By
Nick Timiraos
3:10 pm
Mar 12, 2014

Sen. Pat Toomey is going to bat for Fannie and Freddie shareholders–a disparate group that includes the likes of Ralph Nader and hedge-fund titan Bill Ackman.

Mr. Toomey, a Republican from Pennsylvania, wants Treasury Secretary Jacob Lew to explain why Fannie MaeFNMA -12.16% and Freddie MacFMCC -16.83% shareholders shouldn’t be entitled to some of the companies’ profits now that the government’s $188 billion bailout has returned them to health.



Mr. Toomey submitted written questions to Mr. Lew after a hearing last Thursday. In them, he questioned the government’s decision to require the mortgage-finance giants to send all of their profits to the U.S. as dividend payments.

Those payments forced Fannie and Freddie to repay the government faster than anyone thought possible a few years ago. But because the revised bailout terms prevent the companies from retaining most of their earnings, it means that shareholders that invested in the companies before and after their bailouts can’t share in the firms’ renewed profitability.

After requiring $188 billion in infusions, the companies will by April have paid nearly $203 billion to the U.S. in dividends.

The so-called profit “sweep” that the Treasury enacted in 2012 “raises serious concerns, including whether these actions lawfully respect the rights and interests of all Americans,” wrote Mr. Toomey. “Taxpayers should be fully compensated, but once they are, investors…should not be denied their fair share of any remaining value.”

Pressed by Mr. Toomey at another hearing on Wednesday, Mr. Lew defended the government’s actions. The agreements the government has made “serves the public interest,” he said. “The policies in place are right.”

The Treasury, he added, “sent clear signals of what our policy intent was. So no one was not warned of what the goal was.”



Republican lawmakers so far haven’t spoken up in defense of Fannie and Freddie shareholders, which makes the statement from Mr. Toomey—who sits on the Senate Banking Committee—particularly noteworthy. It also puts the former Club for Growth president on the same page as Mr. Nader, the former third-party presidential candidate who now owns shares of Fannie and Freddie and has organized a group of like-minded shareholder activists.

Investors in the two mortgage companies also include hedge funds—including Paulson & Co., Fairholme Capital Management and Mr. Ackman’s Pershing Square Capital Management—that have bought shares on the cheap, betting that the government will ultimately be forced to restore value to them. Several have sued the Treasury to challenge the terms.

Defenders of the profit sweep have argued that the government is entitled to all of the upside in Fannie and Freddie because its nearly explicit backing of the firms’ $5 trillion in mortgage guarantees, which is still in effect, is the only reason the firms are viable.

“It is a remarkable feat that the hedge funds have convinced both Ralph Nader and an avowed conservative such as Sen. Toomey that our focus in reform should be on the interests of investors looking to game a taxpayer bailout,” said Jim Parrott, a former White House housing adviser who is now a senior fellow at the Urban Institute.

Before the firms’ collapse, investors included many community banks, retail investors, and pension funds. Mr. Toomey’s questions followed a letter he received last month from a commissioner in York County, Pa., who said the local pension fund had invested millions in the two companies. (UPDATE: The commissioner was mistaken about the investment. See below for more details.)

Mr. Toomey asked Mr. Lew if investors would shy away from the mortgage market after “the government arbitrarily changed the rules of the game mid-stream?” He also asked Mr. Lew if the Treasury had considered what its stake in Fannie and Freddie might be worth if it exercised the warrants to acquire up to 79.9% of the firms’ common stock.

Separately, the top Republican and Democrat on the banking committee announced Tuesday that they had agreed on a bill to wind down Fannie and Freddie. The bill’s text hasn’t been released and aides to Sens. Tim Johnson (D., S.D.) and Mike Crapo (R., Idaho), wouldn’t elaborate on how it treats existing shareholders, but the firms’ shares dropped sharply anyway on Tuesday and Wednesday.

The Treasury Department rescued the two mortgage companies from likely collapse during the financial crisis in 2008, agreeing to inject massive sums of aid and initially taking a 10% dividend on those stakes in exchange. It also acquired warrants to 79.9% of the firms’ shares, but it didn’t take full ownership to avoid consolidating the firms’ assets and liabilities onto the federal ledger.

In legal filings last year, the Treasury said it changed the bailout terms in 2012 because of concerns that Fannie might ultimately exhaust the hundreds of billions in aid the government had pledged in order to pay the 10% dividend, which would trigger receivership. The new terms don’t require the firms to pay any dividends when they post losses.

UPDATE: Chris Reilly, the county commissioner who sent the Feb. 11 letter to Mr. Toomey, said in an interview Wednesday that he was mistaken about the pension fund’s investments in Fannie and Freddie, which are often referred to as government-sponsored enterprises, or GSEs. He said the fund had invested in securities of a different, more obscure GSE, the Private Export Funding Corp. News of the slip-up was first reported by TheStreet.com.

Mr. Reilly said he learned shortly after he sent the letter that the county didn’t have any exposure to Fannie and Freddie.

A spokeswoman for Mr. Toomey said that the questions his office had submitted to Mr. Lew had been resubmitted Wednesday to remove any reference to the York County pension fund.

Mr. Reilly said he had become interested in the issue through a friend, Dan Hayward, who Mr. Reilly said earlier this year had asked if the county was invested in Fannie and Freddie and had warned that the county could be “blindsided” by any investments, given the Treasury’s bailout changes.

Mr. Hayward didn’t return a message seeking comment on Wednesday. He works for Novak Strategic Advisors, a lobbying and government affairs firm in Harrisburg, Pa.