Despite the bill’s passage out of committee, hedge fund managers and political activists can probably relax.
Kevin Lamarque / Reuters / Reuters
The Senate Banking Committee advanced its bill to wind down Fannie Mae and Freddie Mac to the full Senate 13-9, where it is unlikely to pass despite its bipartisan drafting and Democratic and Republican support.
The bipartisan bill, sponsored by Banking Committee chairman Tim Johnson and the Republican ranking member Mike Crapo, would wind down Fannie Mae and Freddie Mac and replace it with a federal mortgage insurer, which would guarantee pools of mortgage loans as long as private investors would take the first 10% of the losses.
"This bill represents our effort to draft the final chapter of financial reform by addressing the most significant unresolved issue from the financial crisis – the housing finance system," Johnson said in a statement Thursday. "This legislation will create greater competition in the housing finance system, reducing risk to the taxpayer while ensuring affordable, fair access to all creditworthy borrowers."
The bill's opposition from both the left and the right reflect a fundamental difference on the government's role in the housing market that is likely to scotch any efforts at reform and leave Fannie and Freddie in their current zombie-like, effectively nationalized state.
Some conservatives oppose it because it still maintains a large role for the government in the housing market and could still put taxpayers on the hook to support the housing market in a downturn. Alabama Republican Richard Shelby said today that his no-vote is a "vote against a government run framework that I believe overexposes the taxpayer."
On the other hand, some liberals oppose the bill because they think it would reduce housing availability for lower income and minority borrowers. Massachusetts senator Elizabeth Warren, who voted against the bill, said today that she was "concerned that this bill in its currents form does not do enough to create housing market that works for middle class america" and would cut the number of eligible borrowers by a fifth.
Isaac Boltanksy, an analyst at Compass Point, said in a note earlier this week that "there is less than a 5% chance the GSE reform becomes law in this Congress." Last week he said that a "floor vote on the measure is highly unlikely," pointing to the opposition of several influential liberal Democrats on the Banking Committee, including Charles Schumer, Warren, and Ohio Democrat Sherrod Brown.
Mark Warner, the Virgina Democrat who helped draft a predecessor bill, said that the status quo was untenable, and that Fannie and Freddie could become dependent on taxpayers again should they stop receiving a stream of legal settlements from banks. "You realize there's no profit except based on one-time settlement fees," he said, adding that "this is a time to take this bill, improve it, and send it to the floor."
Besides the congressional representatives who oppose the bill a motley coalition of hedge fund managers who have taken large stakes in Fannie and Freddie's cheap stock along with Ralph Nader and some community banks object to any wind-down of Fannie and Freddie that does not address what they see as a confiscation of the money due to them as shareholders.
From 2008 to to August 2012, the Fannie and Freddie paid 10% of their earnings to the government as an annual dividend, then, as the companies were returning to massive profitability, the government amended the terms to institute a "net worth sweep" where the companies would send nearly all their profits to the Treasury and not be able to rebuild their capital bases, which would be a necessary first step to operating as independent companies.
Bill Ackman's Pershing Square Capital Management is one of several hedge funds who own considerable stakes in Fannie Mae or Freddie Mac.
Brian Snyder / Reuters / Reuters
Last summer, Richard Perry's Perry's Capital sued the U.S. Treasury, saying that the government's sweep of Fannie and Freddie's profits was a "blatant overreach by the federal government to seize all of the companies' profits at the expense of the companies and all of their private investors is unlawful and must be stopped."
Investors Bill Ackman, Bruce Berkowitz, John Paulson, and Richard Perry have all taken large stakes in either the common or preferred stock of the two enterprises and are bettering on either legislative or legal action to be able to get some money out of Fannie or Freddie. In the first quarter of this year, Freddie Mac had profits of $4 billion, while Fannie Mae brought in $5.3 billion.
The New York Times reported last month that Berkowitz's fund Fairholme Capital Management, helped fund an advocacy group called United for American Homeownership which ran newspaper and television ads opposing the winding down of Fannie and Freddie.
The group said today on Twitter that the Committee vote "threatens to knock the housing market off track" and "Americans will find some reassurance that today's lackluster vote is further proof that Johnson-Crapo is losing momentum, and quickly."
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