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Fannie Regulator Willing to Wipe Out Shareholders If Needed

Elizabeth Dexheimer

(Bloomberg) -- Fannie Mae and Freddie Mac’s regulator, facing scrutiny from Democrats about whether freeing the companies from U.S. control might enrich hedge funds, said he would be willing to wipe out shareholders of the mortgage giants if circumstances called for it.

“I work for the taxpayers,” Federal Housing Finance Agency Director Mark Calabria said Tuesday at a House Financial Services Committee hearing on the Trump administration’s proposal for releasing the companies.

Calabria was responding to heated questions from Representative Bill Foster, an Illinois Democrat, about whether hedge funds including Paulson & Co. stood to reap windfalls under the plan released by the Treasury Department last month. Calabria said that while it isn’t his objective to wipe out or enrich shareholders, he will do what’s needed to ensure taxpayers don’t have to bail out the companies again.

Billionaire John Paulson’s firm is among a group of hedge funds that have been fighting for years to end the net-worth sweep that sends Fannie and Freddie profits to the Treasury. Shares have rallied this past year on optimism that the Trump administration will move to end that policy.

Fannie fell 3.1% to $3.39 as of 1:54 pm in New York Trading Tuesday, while Freddie dipped 2.9% to $3.18.

Read More: Fannie and Freddie Died But Were Reborn Profitably

Fannie and Freddie have been under U.S. conservatorship since 2008, when they were seized as the mortgage market imploded. Treasury’s proposal suggests dozens of reforms to protect against another housing crash, shrinking their dominant market shares and creating new competitors to the two companies, which backstop about $5 trillion of home loans.

Foster said that he would like to see shareholders of Fannie and Freddie wiped out, though as a politician he doesn’t have that power. Calabria noted that it was his view when he worked on Capitol Hill in the wake of the 2008 financial crisis that the companies’ investors should lose everything.

Democratic lawmakers such as Foster have insinuated that Treasury’s blueprint for overhauling Fannie and Freddie could be a boon for hedge funds that undermines access to affordable housing for lower-income buyers.

Democrats are concerned because Treasury and FHFA could theoretically bypass Congress to let Fannie and Freddie build up their capital buffers and then release the companies from federal control. Such a process, known as recap and release, would likely enrich preferred shareholders including Paulson.

Read More: Trump Fannie-Freddie Plan Urges Ending Decade of U.S. Control

Treasury Secretary Steven Mnuchin reiterated Tuesday that it’s “by far” his preference to work with Congress on an overhaul of Fannie and Freddie. Mnuchin and Calabria both said during the hearing that no decision has been made on how exactly Fannie and Freddie might be released.

Mnuchin said that all options, including putting Fannie and Freddie through a process called receivership that is akin to bankruptcy, is still on the table. Receivership is potentially a bad outcome for shareholders because it could wipe them out.

Calabria wouldn’t commit to supporting recap and release, adding that he opposes releasing Fannie and Freddie if they end up operating in the same way as they did before the 2008 crisis. As part of the administration’s blueprint, Treasury and the FHFA are required to come up with a plan for how the mortgage giants will raise outside capital, and whether that will entail a new share sale, for example.

Democrats are increasingly raising questions about whether Fannie and Freddie investors have undue influence on the Trump administration. Representative Alexandria Ocasio-Cortez, a progressive who’s a vocal critic of the financial industry, asked whether Mnuchin stands to make money if the companies are freed from federal control. Mnuchin, who was once an investor in Paulson’s hedge fund, said he would not profit because he’s divested assets since joining the government.

Paulson has been a fundraiser for President Donald Trump and has a long history with Mnuchin. In 2008, Paulson and Mnuchin joined forces to invest in troubled mortgage lender OneWest, a deal that proved lucrative for both of them.

(Adds comment from Acasio-Cortez in 13th paragraph.)

--With assistance from Kasia Klimasinska.

To contact the reporter on this story: Elizabeth Dexheimer in Washington at edexheimer@bloomberg.net

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott

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