Investors in Puerto Rico municipal debt just scored a windfall gain as Puerto Rican muni prices soared on more funds being available to pay creditors. Media attention was sometimes skewed in the “poor Puerto Rico versus large, hedge funds that were muni investors” narrative.
A similar skewed narrative happened with regard to the placing of Fannie Mae and Freddie Mac into conservatorship on September 6, 2008. While the media usually paints investors in Fannie and Freddie as large institutional investors that would benefit from the return of profits to investors, there was some victims of “the taking” that were not large institutional investors.
Currently, Treasury owns around 99% of both of the government-sponsored enterprises with the remaining 1% split among Capital Group, Pershing Square, Macquarie, State of California and Parkwood (for Fannie) and Capital Group, Macquarie, State of California, Nemesis and Universal Investment (for Freddie).
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But there are smaller victims of the Federal government’s “Vampire Kiss” such as Jamestown State Bank in Kansas that were terribly hurt.
Should Fannie and Freddie have been put into conservatorship in the first place? There is little doubt that both Fannie and Freddie suffered from earnings deterioration before the financial crisis as private label MBS (with the now infamous “subprime” and ALT-A loans) grabbed greater market share. Then came the loan losses.
Once 2012 rolled around, home prices were rising again and loan losses were shrinking. The private-label MBS market was no where in sight and both Fannie and Freddie were highly “profitable.” Profitable for the US Treasury, that is.
Yes, both Fannie and Freddie took a whack from the change in the Federal Tax code and had to receive a “draw” from Treasury.
Notice that both Fannie and Freddie survived the 2001 recession, but the loss of market share prior to The Great Recession and forecast loan losses led to Fannie and Freddie’s denouement at the hands of the Federal government where they remain.
Since Treasury strips Fannie and Freddie of all profits, it is difficult for Fannie and Freddie to be privatized with zero capital buffer.
So, where does Congress go from here? Stay tuned!
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