Plan for Fannie, Freddie pits taxpayers against investors
By Dina ElBoghdady
The newest Senate plan to dismantle Fannie Mae and Freddie Mac promises to address many details about the future of the mortgage finance giants, except one: Will the investor groups that scooped up shares ever be able to pocket any of the stellar profits that the companies have churned out recently? The newest Senate plan to dismantle Fannie Mae and Freddie Mac omits at least one major detail: What happens to the private investors who scooped up the mortgage companies’ shares in hopes of getting a portion of their recently stellar profits? “The answer is going to come in court rather than in Congress,” Sen. Mike Crapo (R-Idaho) told Bloomberg Television on Thursday. Crapo joined with Sen. Tim Johnson (D-S.D.) this week to unveil the broad outlines of a proposal that would wind down Fannie and Freddie, replace them with a new agency, and shift some of the risk of mortgage losses to the private sector. The lawmakers have declined to publicly discuss the details until they offer their legislation, which could possibly occur Friday. But whether the companies are shut down or kept alive, the outcome of several investor lawsuits making their way through the courts will ultimately determine how much of the companies’ profit will go to investor groups. When Johnson, the Senate banking committee chairman, and Crapo unveiled their plan this week, Fannie’s and Freddie’s share prices plunged, though the preferred shares fell less than the common shares. “There was a lot of speculation that the bill would reprivatize some or all of Fannie and Freddie, not just liquidate them,” said Karen Petrou, managing partner at Federal Financial Analytics. “But the message was there was going to be no bailout for these speculative shareholders.”