WILL FANNIE AND FREDDIE BE A GIFT OF THE TRUMP ADMINISTRATION? / THE FINANCIAL TIMES OP EDITORIAL

Will Fannie and Freddie be a gift of the Trump administration?

Reprivatisation and profit harvesting plans have became more realistic

John Dizard


The price of one junior preferred issue, the Fannie Mae 8.25 per cent non-cumulative Series T, has risen by more than 136 per cent over the past 12 months © AP


The US autumn political season is not only about earnest debates, vicious tweets and tendentious Congressional hearings. It is also about who gets paid before the clock runs out on the Trump administration’s first and possibly last term.

Even with a divided Congress, there is a lot of value in the gift of the administration. Not much can be done in the way of tax advantages, but there are decisions on antitrust cases, tariff carve-outs, and regulatory agency appointments that can involve real money.

Possibly the biggest prizes (or losses) of all are those to be had through the administration’s restructuring of Fannie Mae and Freddie Mac, the quasi-public housing government-sponsored enterprises (GSE). These two GSEs have more than $4tn of government supported corporate debt and guaranteed mortgages outstanding. Oh, and before I forget, some common and junior preferred shares which went into penny-stock pricing land after the crisis-era bailout of Fannie and Freddie.

The GSE equities were rendered virtually worthless by the post-bailout sweeps of the GSE’s profits into the Treasury. The sweeps were not that controversial, except among some plaintiffs’ lawyers, until after the Treasury was fully repaid for its nearly $200bn in support for GSEs. But the sweeps continued after the Treasury got back its money, to the outrage of the securities holders and libertarians, if not the public.

As long as a Democratic administration was in office, the prospect that the sweeps could end and the equities regain real value was quite dim. The GSE paper looked like American cousins to yellowing Russian Imperial bonds.

However, libertarian and conservative think tanks and securities lawyers continued to puzzle out an array of plans for GSE “reform”, “recapitalisation” or “catch and release”.

With the advent of the Trump administration, these reprivatisation and profit harvesting plans became more realistic. Mark Calabria, the director of the Federal Housing Finance Agency, the GSE’s regulator, has been busy developing recapitalisation plans that can be carried out administratively, without the approval of sceptical Congressional Democrats.

The common shares have been volatile speculative vehicles played by day traders and professional investors. Even many GSE privatisers are not convinced of their long term value. The senior preferreds have been owned by the Treasury. The junior preferreds, though, of which some $30bn are outstanding, have a less toylike quality than the common and have been more concentrated in the accounts of hedge funds and other large investors.

These holders have become among the most active lobbyists around the Trump administration and the GSE regulator. Some, including John Paulson, the hedge fund manager, have been significant political contributors to Trumpworld vehicles. Mr Paulson is hosting a New York fundraising event for the president at the end of this month.

The market seems to believe these efforts will work. For example, the price of one junior preferred issue, the Fannie Mae 8.25 per cent non-cumulative Series T, has risen by more than 136 per cent over the past 12 months. If, in a settlement between the preferred holders and the government, it is redeemed at par it could nearly double again in value.

On September 6, a federal appeals court handed down a junior-preferred-holder friendly opinion, just in time for the political and liquidity crisis season. The Democratic left has seized on the people v hedge funds angle. Most Republicans, particularly Treasury Secretary Steven Mnuchin, believe the GSEs’ “conservatorship” is unnatural. Last week, Mr Calabria’s FHFA issued a report laying out an array of proposals for GSE “catch and release”.

Chuck Gabriel of Capital Analytics, a Washington advisory group that is working with junior preferred holders, says: “Mnuchin wants this all wrapped up by midsummer of next year. We know there are some mixed feelings on [Capitol] Hill, but they should have an opportunity to come in [on the planning].”

On the not unreasonable assumption that the Democrats will scoff at that, Mr Gabriel says: “There is a road less travelled in [Calabria’s] road map that Mnuchin is committed to. Suspend the earnings sweep, renegotiate the senior preferreds [presumably with himself], get leverage and capital ratios set, and set a commitment fee to cover the value of an explicit [Treasury] guarantee [on outstanding GSE securities] going forward.”

And, incidentally, “maybe cut a deal to handle challenges from the junior preferreds”.

Interestingly, according to Gabriel and the other junior preferred-reprivatisation advocates, the deal with the juniors could be cut and carried out before the fall 2020 elections.

Just a couple of minor issues would stand in the way. The first of these is that most mortgage market people do not believe it is possible to sell Fannie and Freddie mortgage-backed securities without a government “wrap”. They have seen all the recapitalisation plans and leverage ratios and do not believe them. “This is the children’s hour,” says one.

And then there is the $4tn of outstanding Fannie and Freddie paper out there. What if the “catch and release” privatisers are almost entirely right, and writedowns in the value of GSE paper only amount to a couple of hundred billion? Would you want to take the calls from large foreign investors?