Yesterday, when I pointed to the signs that the Troubled Asset Relief Program could actually turn out to be a money-maker, I left Fannie Mae and Freddie Mac out of the discussion. Their rescue wasn’t part of TARP, for one thing, and for another I had no idea whether they had a shot of earning their way out of trouble. They’ve certainly dug themselves a big hole: In the budget projections it released last week, the Congressional Budget Office tagged the Fannie/Freddie rescue as the single biggest cost item to come out of the financial crisis so far (at $291 billion in fiscal 2009, compared to $133 billion for TARP and $115 billion for the stimulus bill).
Well, it turns out that my favorite Antipodean financial regulator turned surfer/blogger/hedge fund manager, John Hempton, has been hard at work on an exhaustive analysis of Fannie’s and Freddie’s prospects. He’s had to interrupt it after breaking his collarbone in a biking accident, but he summed up his preliminary conclusions a couple of weeks ago:
Pre-tax, pre-provision operating profits of Freddie Mac are running at over $15 billion. If the government were not demanding 10 percent on its preference shares the companies would be sufficiently well capitalised to repay their interest in 4 years. With the drag of having to pay the government $5 billion per annum it will take a bit over five years. Either way the operating profits of Freddie Mac are big enough to ensure the government gets its money back. If you do the same analysis for Fannie Mae its is even better. … The consensus view that the GSEs are forever toast – and forever a drain on the US Government is very likely wrong.
Hempton sees one giant risk to his rosy scenario—that Congress will take punitive action against Fannie and Freddie that makes it impossible for them to repay their debts. Congressional Republicans would love to shut Fannie and Freddie down or at least shrink them dramatically, and some people in the Obama Administration have in the past at least been similarly disposed. They’re not necessarily wrong to think this way—the facts don’t support the argument that Fannie and Freddie caused the financial crisis, but they are problematic organizations that probably shouldn’t be allowed to continue to exist in their pre-2008 form. And reforming them will be much harder once they’ve paid back all the money taxpayers have advanced them. But reforming them before they’ve paid back all the money may make it impossible for them to pay back all the money.