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Fannie and Freddie: Too big to wind down

Aaron Task
Editor in Chief
Daily Ticker

The housing market may have slowed in the first quarter but the good times kept rolling for Fannie Mae and Freddie Mac. The mortgage finance giants reported combined net income of $9.3 billion in the first quarter and announced plans to deliver another $10.2 billion of dividends to the U.S. Treasury by June 30.

Related: Why the housing market is suddenly struggling

So how did Fannie and Freddie do so well when the rest of the industry slumped? About 75% of the firms' net income last quarter came from legal settlements with big banks stemming from alleged misdeeds in the years leading up to the 2008 crisis. In sum, the banks pay Fannie and Freddie, which turn around and send the money to Treasury; think of it as the inverse of the 2008 bailout of AIG, when the government sent money to the flagging insurer, which then turned around and funneled the money to its counterparties, notably Goldman Sachs (GS).

Certainly, the money flowing back to Treasury is better for taxpayers; to date, Fannie and Freddie have paid $126.8 billion in dividends to the government, which provided $116 billion of bailout aid for the GSEs starting in 2008.

But the "banks pay Fannie/Freddie -- Fannie/Freddie send money to Treasury" is a long way from anything resembling a free market, and there's the rub: "Everyone" agrees Fannie and Freddie need to be wound down or dramatically restructured, but getting there remains elusive.

A bill co-sponsored by Senate Banking Committee Chairman Tim Johnson (D-SD) and Senator Mike Crapo (R-Idaho) appears to have stalled -- and probably never had much of a chance to pass the full Senate, much less the House.

Related: Fannie and Freddie tumble on "idiotic proposal" to wind down GSEs

"This is the group that famously gets nothing done, even simple things, and this is extraordinarily complex," says Yahoo Finance columnist Rick Newman in the accompanying video. "There are so many hands in the pot; there are so many interests at stake in housing: builders, realtors, people who want to assure affordability for low-income housing."

The latter issue appears to be behind Democratic opposition to the Johnson-Crapo bill; in addition, there's also the interests of American homeowners to consider, and legitimate concerns that unwinding Fannie and Freddie could wreak havoc on the housing market.

"There is no viable alternative" to Fannie and Freddie, hedge fund manager Bill Ackman told Bloomberg earlier this week at the Ira Sohn conference, where he gave a 110-slide presentation laying out his bullish view on the mortgage-financing giants.

“Preserving the 30-year prepayable fixed-rate mortgage -- it’s like the bedrock of the housing system -- is critical. We think the only way to do it is by preserving Fannie and Freddie.”

Ackman's Pershing Square has amassed an over-10% stake in Fannie and Freddie and the hedge fund manager believes Fannie could be worth $47 a share over time, roughly 10 times its current level.

Ackman is talking his book, of course, but "his concept is actually reasonable," Newman says. "The idea is to have a lot of regulatory oversight, make sure we never have another situation like we got into 2008 and yet turn these into private companies that can actually make a profit and that are interesting to shareholders."

In other words, back to the not-so-distant past, which didn't work out so well.

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.