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Another Fannie Freddie bailout? No way

In the past few weeks, there have been a series of articles in the press suggesting that Fannie Mae and Freddie Mac may need an additional bailout from the government. The fear is that the companies are losing money; that their capital is being depleted; and that they will be forced to draw down more funds from the taxpayer. These articles are the result of what appears to be coordinated press leaks by the government itself apparently focused on creating more populist anger at the two institutions.

It is working in one area: Investors in the stocks panicked and the shares of these companies are down approximately 20 percent since the articles appeared.


Dick Bove
Jin Lee | Bloomberg | Getty Images
Dick Bove

It is working in one area: Investors in the stocks panicked and the shares of these companies are down approximately 20 percent since the articles appeared.

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To be honest, I am having a great deal of difficulty in determining what is going on. Here's why: In 2012, the government put in place a program that would wipe out Fannie Mae and Freddie Mac by depleting the capital of both companies by 2018 – i.e., taking capital down to zero. And the government is doing just that. I would like everyone to repeat this 100 times. The government is putting Fannie and Freddie out of business because it wants to do this. More specifically, the Treasury and the FHFA are executing the program, unfailingly -- not even deviating from it in the fourth quarter of 2014, when the companies recorded unrealized losses on derivatives. As a result, the equity of both companies has plummeted.

Why, then, are there complaints that the program is working? Why would the government bail out companies that it has systematically been driving out of business? Why would it stir up a pack of sycophant reporters to create angst on the possible bailout of these companies? What is going on here?

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Here's one possible conclusion: It is being increasingly recognized that the elimination of Fannie and Freddie means the following: a) the elimination of 30-year fixed rate mortgages; b) a significant reduction in home buying by first-time and low-income families; and c) the likelihood that all home prices immediately decline across the nation. No politician wants to be tagged with that burden. This is why the administration has offered no Fannie/Freddie legislation this year and the Senate Banking Committee has indicated that it will not deal with the issue either.

The only ones panicking over the bailout issue are the press and shareholders in these companies. Possibly they should stop and think before they act.

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Commentary by Richard X. Bove, an equity research analyst at Rafferty Capital Markets and the author of "Guardians of Prosperity: Why America Needs Big Banks" (2013).