New Aid For Fannie And Freddie
When you have bad news to announce in Washington, do it just before a holiday. Christmas Eve, the Treasury Department announced it would lift the present law $200 b. limits on the “Preferred Stock Purchase Agreements” for Fannie Mae and Freddie Mac to make sure they will have positive net worth over the next three years. Through the third quarter of 2009, Treasury had purchased $60 b. of Fannie preferred stock and $51 b. of Freddie’s, but, as the holidays approached, market participants were concerned that $200 b. might not be sufficient to keep each afloat. Since Fannie and Freddie are the primary suppliers of mortgage market liquidity, they are a crucial support for economic recovery. Treasury was also faced with the expiration of its authority to lift the PSPA limits at the end of 2009, so it acted to reassure the markets.
The New York Times also pointed out that Treasury allowed Fannie Mae and Freddie Mac executives to receive cash bonuses, which was a reversal of the stock only bonuses allowed banks receiving TARP. Experts on both sides of that issue are cited in this article.
In my opinion, Treasury didn’t have much choice on lifting the PSPA caps, and I wouldn’t quibble with the bonuses. My concern is for the future of Fannie Mae and Freddie Mac. There’s a good chance that they will revert to their former status as quasi-governmental agencies at the beck and call of Congress, taking on risks that could again haunt taxpayers in the distant future. Treasury says it’s working on a plan and that it will issue a preliminary report around the time President Obama’s budget is released in early February.
