HEARD ON THE STREET
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August 20, 2012, 2:40 p.m. ET.
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Time to End the Fiction of 'Frannie' .
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By DAVID REILLY
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The case for keeping Fannie Mae and Freddie Mac FMCC +5.22% off the government's books has gotten even weaker.
Last week, the Treasury Department said it would change the way the two mortgage giants operate in terms of their government lifelines. Rather than pay 10% dividends on the $188 billion they have received in government assistance, the two companies will now pay any profit they generate as a dividend—to the government not shareholders. If the companies generate losses, no payments will be made and the government will extend additional support.
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The switch ends the curious arrangement in which Fannie and Freddie often had to take on more taxpayer funding, in the form of a preferred stock issued to the government, to make dividend payments on existing support. It also means, though, that the companies will never pay back the mountain of government-held preferred stock because all profit is now paid out as a dividend instead. While the two companies have been in government conservatorship since September 2008, this makes them even more permanent wards of the state and turns the government's preferred stock into a permanent, perpetual kind of security.
That bolsters the argument that Fannie and Freddie should be included on the government's balance sheet. Of course, that is politically unpalatable: The inclusion of their combined $5.3 trillion in liabilities would balloon the nearly $16 trillion in total federal debt outstanding and breach the debt ceiling. And, in fairness, the liabilities of Fannie and Freddie have assets against them.
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Still, as debt investors have learned in Europe, any assessment of a country's financial position needs to take into account both on- and off-the-book liabilities. It's time to stop pretending that Fannie and Freddie are private companies or anything other than arms of the government.
Agence France-Presse/Getty Images
It's time to stop pretending that Fannie Mae and Freddie Mac are private companies.
The case for keeping Fannie Mae and Freddie Mac FMCC +5.22% off the government's books has gotten even weaker.
Last week, the Treasury Department said it would change the way the two mortgage giants operate in terms of their government lifelines. Rather than pay 10% dividends on the $188 billion they have received in government assistance, the two companies will now pay any profit they generate as a dividend—to the government not shareholders. If the companies generate losses, no payments will be made and the government will extend additional support.
.
The switch ends the curious arrangement in which Fannie and Freddie often had to take on more taxpayer funding, in the form of a preferred stock issued to the government, to make dividend payments on existing support. It also means, though, that the companies will never pay back the mountain of government-held preferred stock because all profit is now paid out as a dividend instead. While the two companies have been in government conservatorship since September 2008, this makes them even more permanent wards of the state and turns the government's preferred stock into a permanent, perpetual kind of security.
That bolsters the argument that Fannie and Freddie should be included on the government's balance sheet. Of course, that is politically unpalatable: The inclusion of their combined $5.3 trillion in liabilities would balloon the nearly $16 trillion in total federal debt outstanding and breach the debt ceiling. And, in fairness, the liabilities of Fannie and Freddie have assets against them.
.
Still, as debt investors have learned in Europe, any assessment of a country's financial position needs to take into account both on- and off-the-book liabilities. It's time to stop pretending that Fannie and Freddie are private companies or anything other than arms of the government.
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