Why did the chicken cross the road?

Author:Sichelman, Lew

LET'S START OFF THIS MONTH'S INSTALLMENT WITH A RIDDLE: When is an apparent loan not a loan? [paragraph] When it comes from Uncle Sam, of course. [paragraph] Which means that the "loan" given Fannie Mae and Freddie Mac to stay afloat during the housing crisis wasn't a loan at all, according to the Treasury Department's Acting Assistant Secretary for Legislative Affairs RANDALL DeVALK. It was an investment.

In response to questions from Sen. CHARLES GRASSLEY (R-Iowa), DeValk wrote in a letter in mid-April that the good ole' U S of A "did not make an ordinary loan" to the government-sponsored enterprises (GSEs). Rather, it "took on an enormous risk when rescuing the enterprises in the middle of a financial crisis--a risk for which any private investor would have demanded substantial compensation," DeValk stated.

So far--and those two words are important, at least as the Treasury sees it-- Fannie Mae and Freddie Mac have taken $187.4 billion in bailout dollars from the government. But as of June, the two companies will have paid back $230.8 billion in dividends.

That works out to a profit of more than $43.4 billion.

Not a bad day's work. Actually, not a bad--what, seven years'?--work. But taxpayers could be on the hook for as much as $157.3 billion more in bailout money if Fannie and Freddie were to experience another severe collapse in a big-time economic downturn such as the one that started in 2008, according to the latest stress test released in late April by the Federal Housing Finance Agency (FHFA), the GSEs' overseer.

Assuming such an unlikely catastrophe, the Treasury Department would be in the hole again to the tune of nearly $117 billion. And because taxpayers continue to bear risks from the enterprises, according to DeValk's letter, Treasury continues to sweep away most of the GSEs' profits.

There, that explains everything. But of course it's not the last word.

In early April, WILLIAM ISAAC, former chairman of the Federal Deposit Insurance Corporation (FDIC), jumped into the fray when he said in an Investors Unite (IU) conference call in early April that Fannie and Freddie "are not toys for the government to play with." (IU is a coalition of private investors committed to the preservation of GSE-shareholder rights.)

Speaking of the GSEs, Sen. RICHARD SHELBY (R-Alabama), chairman of the Senate Banking Committee, said in late March that he'd rather leave them in conservatorship than see legislation passed that includes explicit...

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