Fannie, Freddie & the Long Shadows of 2008. @RichardAEpstein @HooverInst.

Apr 12, 2016, 04:25 AM

04-11-2016 (Photo: ‪Fannie Mae headquarters on July 14, 2008 in Washington, DC. Shares in Fannie Mae and Freddie Mac appeared to steady Monday after a near-meltdown last week, as investors‬ ) Twitter: @BatchelorShow Fannie, Freddie & the Long Shadows of 2008. @RichardAEpstein @HooverInst via @batchelorshow

Fannie, Freddie & the Long Shadows of 2008. Richard Epstein, Hoover. “…To recap the history, both Fannie and Freddie—which are government sponsored entities, or GSEs—were under extreme stress in the fall of 2008, and in order to shore up their finances, they entered into a Senior Preferred Stock Purchase Agreement (SPSPA) with the United States Treasury. Under the SPSPA, Treasury agreed to contribute up to a combined $200 billion in cash to both companies in exchange for a senior-preferred stock that carried a 10 percent dividend. Eventually, Treasury lent about $188 billion per year, which carried a hefty $18.8 billion annual dividend payout. Under the SPSPA, both Fannie and Freddie were given the unlimited option to defer payment of the interest, which was then added to principal as an “in-kind” obligation, at a 12 percent interest rate. Unlike many private corporate bailout plans, this deferment did not call for any loss of control by Fannie and Freddie. Treasury thus held a new senior-preferred stock. The old private-preferred shareholders now held junior-preferred stock. The negotiation over SPSPA took place in a tense financial environment. In the summer of 2008, with crisis in the air, Congress passed the Housing and Economic Recovery Act (HERA), which implemented two new statutory programs. First, it authorized Treasury on a temporary basis through the end of 2009 to extend temporary assistance the GSEs to help them through this rough financial patch. HERA implicitly assumed that Treasury would be dealing at arm’s length with the directors of a private corporation, which explains why it had a statutory obligation “to protect the taxpayer” as it sought to stabilize financial markets and “to prevent disruptions to the availability of mortgage finance.”…