Steven Mnuchin Meets Fannie and Freddie

Kill, replace, or recapitalize? The new Treasury secretary suggests Fannie and Freddie are finally on the brink of change.

With Donald Trump’s Treasury secretary pick Steven Mnuchin talking about privatizing mortgage giants Fannie Mae and Freddie Mac, long-debated change may soon arrive for the pair. “It makes no sense that these are owned by the government and have been controlled by the government for as long as they have,” Mnuchin said in a November 30 Fox Business Network interview. The entities’ common stock rose a stunning 45 percent on his comments and has more than doubled this year.

During the financial crisis, then-Treasury secretary Henry (Hank) Paulson Jr. won authority to put the two government-sponsored enterprises, or GSEs, in conservatorship, and by 2009 they were slated to receive a bailout of $187 billion, based on provisions for bad loans and the write-off of deferred tax assets. The vast majority of those losses never materialized.

In 2012, Fannie and Freddie were on the verge of turning profitable when the Obama administration abruptly enacted what’s known as the “net-worth sweep.” Arguing the GSEs would never be profitable again, the Treasury said it needed to take all their profits to pay itself back. Since then, the GSEs have sent some $240 billion to the Treasury, which has been used to fund the government. That has left the GSEs bereft of capital needed in the event of another housing crash and led to at least 18 investor lawsuits against the government. Various members of Congress and the Obama administration have circled the pair, hoping to wind them down and turn over their lucrative fee business to big banks.

Investors argue that the Treasury should allow the companies to rebuild capital instead of turning over all profits to the government. The change could be done without approval from Congress, which has bickered for years about reforming or replacing the mortgage giants. (Republicans don’t like their affordable housing mandate; Democrats say they’re uncomfortable about implicit government backing.)

The U.S. taxpayer would be in for a huge windfall if the federal government sold its stake to the public — a point Bill Ackman has been making for years. His hedge fund firm Pershing Square Capital Management owns roughly 13 percent of the common stock not owned by the government, which has warrants on 79.9 percent. This summer, Ackman met privately with Republican Bob Corker of Tennessee, the Senate’s main proponent of killing Fannie and Freddie.

With support from Corker and others, several banks have entered the lucrative mortgage-guarantee fee business that is Fannie and Freddie’s main source of profit. While Mnuchin’s comments got investors excited that the bank takeover will cease, think tank experts from the Milken Institute and the American Enterprise Institute who support the bank model quickly threw cold water on the privatization idea. “It’s the dying last gasp for the effort to essentially hand over the market to the big banks,” says Josh Rosner, managing director at research consultancy Graham Fisher & Co. Rosner wants to see the organizations run like utilities, as do Ackman and Bruce Berkowitz of Fairholme Capital Management, who owns a chunk of the preferred shares. Other big investors include hedge fund managers John Paulson and Richard Perry.


Mnuchin seems to be thinking like the investors: “We’ll make sure that when they’re restructured they are absolutely safe and they don’t get taken over again. But we gotta get them out of government control.” •