A Senate plan to wind down Fannie Mae and Freddie Mac faces its first major hurdle this week.
The bill, written by Senate Banking Committee Chairman Tim Johnson (D-S.D.) and Ranking Member Mike Crapo (R-Idaho), would replace the companies with a new federal mortgage insurer and move more of the risk to private capital. The Banking Committee will vote on whether to send the bill forward as early as today, according to a Bloomberg report.
Fannie and Freddie were put into government conservancy in 2008 after teetering on the brink of insolvency. A $197.5 billion cash infusion from the Treasury saved the mortgage finance giants. Under the terms of the bailout, Fannie and Freddie had to send all their profits back to the Treasury as dividends.
The mortgage finance giants recently returned to profitability, and their dividend payments have already surpassed the amount the government gave them. The companies’ newfound profitability has many large investors clamoring for their preservation. When Fannie and Freddie melted down, many hedge funds purchased stock in the companies for a song; were the companies to be phased out, that stock would be worthless.
Those investors are now pushing for a return to private ownership for Fannie and Freddie. Some hedge funds have filed suit against the government to challenge the current arrangement, in which the Treasury gets 100% of the companies’ profits. Theoretically the government should have been paying down the principle of the bailout… instead they are routing all the profits towards the general fund. The government always has a hard time eliminating a taxable cash cow (like tobacco).
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