![]() Mnuchin could also decide not to have any more profits sent to the Treasury, which would signal that the administration wants to let the GSEs build reserves so they can operate independently again. Then again, tax reform might push Mnuchin to act sooner: A lower corporate rate could force the GSEs to write down their deferred tax assets, which could hurt their balance sheets and necessitate another bailout. For the Trump administration, Obamacare “repeal and replace” and corporate tax reform are the top priorities. It’s unclear when Mnuchin might act, however. That’s 20% of what Donald Trump needs for his infrastructure spending,” says Tim Pagliara, CEO of CapWealth Advisors of Franklin, Tenn., who put his clients into preferred shares in 2008. “Fannie and Freddie have a value of $200 billion. Were the GSEs to go fully public, taxpayers would have a lot to gain. “It makes no sense that these are owned by the government and have been controlled by the government for as long as they have,” Mnuchin said in November. The target of the prayers is Mnuchin, who has signaled his sympathy for GSE shareholders. “People who are buying the common shares are acting on a wing and a prayer,” says banking analyst Dick Bove, vice president of equity research at Rafferty Capital Markets. ![]() But since those profits don’t flow to common shareholders, the primary reason to own the GSEs is to bet that they’ll be set free. Since 2012, Fannie and Freddie have sent some $255.8 billion in profits to the Treasury for 2016 they reported net income of $12.3 billion and $7.8 billion, respectively. But so far litigation has not borne fruit: A federal district court ruled in the government’s favor in 2014, and in February an appeals court upheld that ruling. Recently unsealed court documents from one of those cases suggest that the sweep wasn’t necessary-and, moreover, that Treasury officials knew that at the time. Big names like Fairholme Capital’s Bruce Berkowitz and hedge fund managers Richard Perry, John Paulson, and Bill Ackman joined the battle. That’s when the Obama administration implemented what’s known as the “net worth sweep.” Saying that Fannie and Freddie remained at risk, the Treasury deemed that it needed to take all their profits-including dividends from so-called preferred shares they issued during the crisis-to pay itself back.Īggrieved investors went to court, arguing that the Treasury had taken their property. Few losses materialized, however, and by 2012 the giants were on the verge of turning profitable again. The bailout, which totaled $187 billion, was based on the assumption that many loans on the GSEs’ books were still shaky. The remaining 20% continued to trade in the public market, where they soon fell under $1 a share. ![]() When the Treasury took over in 2008, it maintained warrants on 79.9% of their common shares. Like much of the economy, Fannie and Freddie were brought low by mortgage defaults during the Great Recession. “If you’re wrong, you’ll lose all your money, but if it works out, you can make three- to 10-fold,” says one finance pro who owns the stocks in his personal account. But that’s an abrupt departure from what many politicians have advocated, which means investors today are betting on a long-shot policy change. Mnuchin, who once headed Goldman Sachs’s mortgage securities trading desk, has vowed to return Fannie and Freddie to private ownership. Shareholders’ happiness may now depend on newly appointed Treasury Secretary Steven Mnuchin. And their crisis-era investors are entangled in a skein of costly legal battles over the GSEs’ future. But the government-sponsored entities (GSEs) remain under federal control, with their shares trading for the price of a drive-thru burrito. Housing did come back, and so did profits for Fannie and Freddie. More than eight years later, Hill, now 46, is still waiting for his payday, as are thousands of others, including several influential hedge funds. ![]() “I kind of believed all that,” recalls Hill, who lives in Sacramento. But Hill figured he would share in the gains after they were nursed back to health, as promised at the time by thenTreasury Secretary Henry Paulson. ![]() The companies had been put into conservatorship by the federal government at the height of the turmoil. , the mortgage giants that guarantee and securitize home loans for middle-class Americans. He settled on what seemed a sure bet: Fannie Mae In the fall of 2008, during the worst of the financial crisis, software architect Matt Hill began looking for stocks that were poised for a comeback. ![]()
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