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Obama Administration removes caps on capital to Fannie & Freddie before holiday

The Wall Street Journal has a story on the Obama Administration's move to in essence provide unlimited capital to cover mortgage losses to Fannie Mae and Freddie Mac, just before the holiday, presumably to sneak it through when the nation is preoccupied with the Christmas holiday season.

  • DECEMBER 26, 2009
U.S. Move to Cover Fannie, Freddie Losses Stirs Controversy By JAMES R. HAGERTY and JESSICA HOLZER

Unlimited access to bailout funds through 2012 was "necessary for preserving the continued strength and stability of the mortgage market," the Treasury said. Fannie and Freddie purchase or guarantee most U.S. home mortgages and have run up huge losses stemming from the worst wave of defaults since the 1930s.

The announcement itself, was bound to be quite controversial, and the timing itself adds yet more controversy:

The Treasury announced Thursday it was removing the caps that limited the amount of available capital to the companies to $200 billion each.

"The timing of this executive order giving Fannie and Freddie a blank check is no coincidence," said Rep. Spencer Bachus of Alabama, the ranking Republican on the House Financial Services Committee. He said the Christmas Eve announcement was designed "to prevent the general public from taking note."

Treasury officials couldn't be reached for comment Friday.
One has to wonder whether this isn't just more of a consolodation of government power as it solidifies its "temporary" taking of the reins during the height of the crisis:
In exchange for the funding, the Treasury has received preferred stock in the companies paying 10% dividends. The Treasury also has warrants to acquire nearly 80% of the common shares in each firm.

The Treasury removed the cap on the size of available bailout funds by amending agreements it reached with the companies in September 2008, when the government seized control of the agencies under a legal process called conservatorship. The agreement allowed the Treasury to make amendments through the end of the year, without the consent of Congress. Changes made after Dec. 31 would likely involve a struggle with lawmakers over the terms.

Some Republicans are angry the administration is expanding the potential size of the bailout without having a plan for eventually ending the federal government's role in the companies.


Another controversy mixed in with the others is over the pay of the U.S. hand picked CEOs of these companies:

The companies on Thursday disclosed new packages that will pay Fannie Chief Executive Officer Michael Williams and Freddie CEO Charles Haldeman Jr. as much as $6 million a year, including bonuses. The packages were approved by the Treasury and the Federal Housing Finance Agency, or FHFA, which regulates the companies.

The FHFA said compensation for executive officers of the companies in 2009, on average, is down 40% from the pay levels before the conservatorship.

The focus of the agencies also appears to be shifting slightly, or perhaps solidifying an earlier shift away from sound financial practices to a governmental micromanaging of the economy with a focus on governmental subsidization of home ownership".  The bonuses paid to these new CEOs is apparently tied to the new goals set by the Treasury:

Under the conservatorship, top officers of Fannie and Freddie take their cues from the Treasury and regulators on all major decisions, current and former executives say. The government has made foreclosure-prevention efforts its top priority.

The pay packages for top officers are entirely in cash; company shares have been trading on the New York Stock Exchange at less than $2 apiece, and it isn't clear when the companies will to profitability or whether common shares will have any value in the long term.

The adventurous journey in this Brave New World continues...


Disclosure: I have no positions in Fannie Mae or Freddie Mac