FHFA officials say this controversial arrangement -- instituted in 2012, the very year the GSEs returned to profitability -- make another rescue, however small, all but inevitable. The regulator has quietly examined whether it can suspend the payments unilaterally to build up the GSEs’ capital cushion, among other options.
‘Serious Risk’
“The most serious risk, and the one that has the most potential for escalating in the future, is the enterprises’ lack of capital,” Mel Watt, director of the FHFA, said in a speech in February.
Also at stake are Fannie and Freddie preferred shares, with a face value of $33 billion, along with common shares, potentially worth even more.
Investors including Perry and Bill Ackman, another prominent hedge fund manager, have sued over the bailout terms, so far with little success. A federal judge dismissed one suit in 2014; an appeals court is expected to decide soon whether the investors deserve damages or at least another shot at making their case.
“We only need to win one of those claims in any of the courts in order to ultimately be successful on the legal front,’’ Ryan Israel, a partner at Ackman’s firm, Pershing Square Capital Management, said on a conference call with investors in July.
Stark Differences
The differences are equally stark in Washington. The 2016 Republican party platform has characterized Fannie Mae and Freddie Mac as a “corrupt business model” that has enabled executives and investors to reap the profits while sticking taxpayers with the losses.
In the Democratic camp, two Clinton advisers, Gene Sperling and Jim Parrott, have said they favor merging the GSEs into a single government-owned corporation. In a March report, the two men, former advisers with the National Economic Council, and other authors suggested that the new organization be required to sell mortgage credit risk to private investors, thereby taking taxpayers off the hook for most future losses.
‘Original Problem’