A Summer Daydream and Dialogue

August is a good time for mental relaxation and exercise.  And opening the windows at night, on vacation, for cool night air.

Which leaves one time for chimerical thoughts that have little grounding in reality.
Let's try this mental exercise--just for fun.

Freddie and Fannie just had a quarterly profit run rate, annualized, of $60B based on 2Q. This won't keep up for a host of reasons, including the ending of the refit boom and the shrinking of the retained portfolios. (At the same time though, g [guarantee] fees will continue to rise.) So let's say the companies make a much smaller amount quarterly and annually. Call it not $60B, but half that--$30B. Give it a P/E multiple--let's say 9, which is uber-conservative for steady, utility stocks (no more "growth stock" Fannie and Freddie--that was clearly an error.) That gives us a total capitalization of the two at 9x$30B, or:

$270 billion.

Bear with me. 

Yes, I know, the political current thinking is they ain't going back to anything that they were.  (This is an August mental exercise only, not an expression of any current Washington reality.)   

But here goes:  the Feds, the US taxpayers, us folks, are about to get their money back, early in 2014 ($187B), and they (us) will STILL have a claim on 80% common stock warrants of the two.    

This means, again just for fun, that if the government spun the companies back out, a la AIG, taxpayers could have a claim on 80% of $270B, or:

$216 billion.


Which means taxpayers would receive, all in, $187B plus $216B, or over $400B.

"It's not going to happen, Padre."

Fine, fine. But Washington policy decisions have costs. And this one, apparently--the decision to snuff bad Fannie and Freddie, will end up "costing" we the taxpayers $216B. Of foregone money we could have had in our hands. Real money.

"They're bad. We have to kill them."

Why are they bad now? They need reform, of course. And real shrinkage. But they still had lower default and delinquency rates than Wall Street or the prime market overall, all through the downturn.

"Well, among other reasons Padre, because they cost us $187B. Maybe you forgot that."

Well fine.  But killing them will cost us $216B. Which is larger than the original losses that made them "bad."

"You know, you just don't get it. And besides, it's too late. We're gonna kill 'em. You're not grounded in reality."

Don't I know that. I live inside the Beltway, after all.

Key the birds calling outside the vacation open window. It's time for a swim, following baseball scores. Surf fishing?

This is only an illustration of cost/benefit thinking. Was the Iraq invasion worth it? Maybe. Setting aside the human lives, was it worth an expenditure of $1.5 Trillion? It's a good question--what else could the US have done with that money? 

Is killing Fannie and Freddie worth it? Could be. But is it worth $216 billion of real money?

Don't ask me. I'm on vacation. 


The only thing I’ll add to my friend’s wonderful fantasy is that the real cost will be far greater when a politically driven Congress tries to implement its “square peg in a round hole” untested mortgage finance model, and scrambling all of the mortgage finance eggs, while the President wistfully talks about all of the new family formations who will need housing.

The F&F fix is simple, examine that thoroughly before junking the whole model.

Bill Maloni
Fannie Mae Senior Vice President for Government and Industry Relations (1983-2004)
Board Member at the Fannie Mae Foundation

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