Hypocrisy in Bailout Terms for Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA), and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC)

One of these things is not like the other when it comes to bailouts.  Federal National Mortgage Assctn Fnni Me (OTCMKTS:FNMA), and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC) have gotten a raw deal. The sky was failing in 2008 and 2009 and the Federal Government took extraordinaire actions bailing out a variety of entities. Let’s look at how several bailouts were handled which ended up very different then Fannie Mae and Freddie Mac.

Bank Bailout Terms

On October 14, 2008. The treasury announced their intention to buy senior preferred stock and warrants from the nine largest banks, and hundreds of smaller banks. A clear example of this action was Bank of America which received $20 billion investment in preferred shares and warrants. On January 16, 2009 the government bought an additional $20 billion in preferred from Bank of America and agreed to protect the bank in up to $118 billion in potential losses related to risky mortgage loans.  The additional payment was part of a deal to preserve the Bank’s merger with Merrill Lynch.  On December 2nd, 2009 Bank of America paid back the entire $45 billion. The government would later auction off the warrants it received. This is how a bailout is supposed to work, as soon as the company can they pay it off and the government is no longer involved.

GM Bailout Terms

GM received $13.4 billion in short term relief financing through the Troubled Asset Relief program on Dec 31st, 2008. On April 22, 2009 the Obama Administration provided $2 billion in working capital. On May, 20, 2009 an additional $4 billion was added. On June 1st, GM filed for bankruptcy and the Obama Administration provided an additional $30.1 billion in debtor in possession loan. On April 20th, 2010 GM made its final loan repayment leaving the Government with a 61 percent stake in common and preferred stock.  On Dec 15, 2010 GM was allowed to repurchase all of the Treasury’s preferred stock. On Dec 9th, 2013 the last of four stock sales was completed and the government completed the GM bailout at a loss. The government lost $11.2 billion on General Motors. The government spent $50 billion to bail out GM and was happy to get out with a loss.

AIG Bailout Terms

During the financial crisis the Treasury and Federal Reserve committed a combined total of $182 billion to stabilize AIG.  The Treasury made investments of $22.3 billion in preferred shares, and over $47 billion in common shares.  The preferred would later be converted to common and sold. In December of 2012, the US sold the final amount of common shares. The overall repayments and share sales totaled $205 billion for the Fed and Treasury. The over $182 billion rescue of AIG would later be criticized by Judge Wheeler as punitive in nature.  The Judge did not offer any damages partially because AIG shareholders had not suffered financially, which isn’t the situation with our last case.

Fannie and Freddie Bailout Terms

Between 2008 and 2011 the government invested $187.5 billion in preferred shares in Fannie Mae and Freddie Mac, carrying a 10% dividend or payment in kind option (an option the government has ignored consistently). The government also obtained warrants for an ownership stake in each GSE for 79.9 percent.

On August 17th, 2012, long after the authorization for any future bailouts or purchases of securities via H.E.R.A expired, the government took unprecedented action and amended the terms of the Fannie Mae and Freddie Mac’s bailouts requiring them to send every dime of profit they make to the Treasury, without the payments offsetting any of the original bailout. Shortly after the GSEs would become profitable again, profitable enough to begin repaying $245.6 billion, an action the government claimed it was surprised by, despite recently unsealed legal filings showing otherwise.

To date, the GSEs have not been allowed to pay back a dime of principal despite having paid back $245.6 billion.  These terms would be considered preposterous by free market capitalists if they were applied to any other entity.  We don’t know why anyone besides the hedge funds have protested but one can guess that conservatives have looked the other way because they never liked the GSEs and Liberals have looked the other way because they want even deeper control of the housing market by the government.

Everyone can win in a bailout if it is executed fairly and properly but the government has changed the rules half-way through and treated certain entities much worse then others. The Banks and General Motors in particular got much better deals than AIG and Fannie and Freddie.

Disclaimer: Author has positions in Fannie Mae Preferred, and Freddie Mac Junior Preferred.

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