Calabria Says Let Fannie/Freddie Make More Profit

If you stuffed the old certificates in your sock drawer ten years ago, it may be time to dig them out.  Mark Calabria, the new director of the Federal Housing Finance Agency (FHFA) says Fannie Mae and Freddie Mac common stock might be worth something after all.

Bloomberg reports that Calabria told an audience in New York on Monday that the two government sponsored enterprises (GSEs), which have paid billions of dollars in dividends to the U.S. Treasury in return for massive loans at the start of the housing crisis, may be allowed to hold some capital instead of sweeping it each quarter into the government coffers.  At present (and only a recent change) the GSEs, which were placed in federal conservatorship in 2008, have been allowed to retain a buffer to protect against a business downturn but not allowed to build significant capital.

Calabria, who heads the agency that regulates the GSEs and serves as conservator, went even further, in a discussion with CNBC's Diana Olick.  He said he is working with Treasury to find ways the two companies might raise additional money beyond their retained earnings.  He calculates that the two companies would need up to $200 billion in capital to reconstitute their businesses and it would take a very long time to build that amount.  They made about $25 billion last year.

One of the options on the table is a public offering.  Holders of the pre-conservatorship common shares "were never wiped out," he said and that may complicate such a move.  Whether the existing stock is converted, bought back at par, or some other arrangement is too early to determine he said.   Regardless of the form of an offering, existing shares, which currently trade in the $2-$3 range would not just disappear.  

The Treasury Department owns billions in preferred senior stock which it took in return for "bailing out" the GSEs and several hedge and private equity funds speculated heavily in preferred stock in both companies after they were placed in conservatorship.  They have repeatedly sued to stop the Treasury sweep and share in the companies' profits.

Calabria stressed that not all of the decisions about the GSEs' future are up to him.  In response to a question from Olick about whether investors would continue to buy securities issued by the GSEs without a government backstop he said he would recommend the government provide a well-structured, specific, and detailed explicit guarantee.  However, he stressed that his job as a regulator is to ensure the safety and soundness of the loans obtained by Freddie and Fannie, the form of any loan guarantees would be up to Congress.