Those who assumed that the recent round of TARP repayments by Citigroup and Wells Fargo signaled an end to the bailout era may want to think again.
Forgotten in all of the recent outrage over soaring bank profits and Wall Street bonuses are two bloated, bailed-out institutions that are are increasingly exposing taxpayers to hundreds of billions in losses. Bloomberg reports that Fannie Mae and Freddie Mac, the government-sponsored companies that guarantee or own nearly half of all U.S. mortgage debt, are likely going back to the government for more money.
Fannie and Freddie are seeking an increase in their $400 billion government lifeline and claim that they can no longer afford to pay dividends to the government, Bloomberg notes. Cumulatively, the two companies have lost $188 billion in the last nine quarters, and have used approximately $112 billion in capital from the government this year. As they continue to hemorrhage money, the firms are balking at the annual dividend they are required to pay to the government, which amounted to about $5 billion each this year.
Fannie and Freddie’s call for more money comes at time when much of the public discourse from policymakers has focused on bailed-out banks and financial reform. But the two companies, referred to as government-sponsored entities (GSEs), seem to be preparing themselves for the possibility of future losses. Here’s the Wall Street Journal:
“The politics of any decision are thorny. If the Treasury doesn’t increase the reserves now but needs to do so next year, it would have to appeal to a bailout-weary Congress in an election year. But upping its reserves now could remind taxpayers they still bear significant risk for the government’s rescue of the financial system.”
As the HuffPost’s Ryan Grim has reported, Fannie Mae and Freddie Mac are not only huge, massively-subsidized firms, they also lack their own independent watchdog.
Which may be part of the reason why Fannie and Freddie seem to have been largely overlooked in the latest financial reform bills. At Time.com, Justin Fox wonders why:
The lynchpin part of the nation’s financial system that is effectively owned by the government, the government has yet to ring in on. We’ve got proposed changes for credit rating agencies, over-the-counter derivatives, hedge funds, the insurance industry, executive compensation, institutions that are “too big to fail,” even individual home loans–but not for the two government-sponsored entities that own or guarantee half of the nation’s $11 trillion mortgage market.
To be fair, the Feds are working on it. And it’s probably better to take more time and get this right–or as close to right as is possible–than to rush ahead willy-nilly. Still, it’s a little annoying that there seems to be plenty of time for topics like creating jobs, which the federal government can’t really do much about anyway, and yet not for figuring out how to deal with the $111 billion albatross hanging around taxpayers’ necks.
In an interview with Time for its “Person of the Year” feature, Fed Chairman Ben Bernanke hinted at the sheer size of the exposure that the U.S. taxpayer has to the mortgage market through Fannie and Freddie. (John Carney has also written about this subject at length) Here’s Bernanke, who seems to be suggesting the government’s support for Fannie and Freddie will only deepen — or, rather, he seems to be bragging about the GSE’s accomplishments:
We’ve purchased about $1 trillion worth of mortgages that are guaranteed by Fannie Mae and Freddie Mac, and the U.S. Treasury. And in doing those purchases, we have succeeded in reducing the national 30-year fixed-rate mortgage rate from about 6-1/2% to about 4.8%. By lowering mortgage rates that way, we have helped to stabilize the housing sector, to help stabilize the housing crisis, and allow people to refinance, to buy homes. And that, obviously, should get construction started again and house prices stabilizing, and people being able to meet their mortgages. That’s obviously going to be helpful.