U.S. promises unlimited financial assistance to Fannie Mae, Freddie Mac
Friday, December 25, 2009
The Obama administration pledged Thursday to provide unlimited financial assistance to mortgage giants Fannie Mae and Freddie Mac, an eleventh-hour move that allows the government to exceed the current $400 billion cap on emergency aid without seeking permission from a bailout-weary Congress.
The Christmas Eve announcement by the Treasury Department means that it can continue to run the companies, which were seized last year, as arms of the government for the rest of President Obama's current term.
But even as the administration was making this open-ended financial commitment, Fannie Mae and Freddie Mac disclosed that they had received approval from their federal regulator to pay $42 million in Wall Street-style compensation packages to 12 top executives for 2009.
The compensation packages, including up to $6 million each to Fannie Mae and Freddie Mac's chief executives, come amid an ongoing public debate about lavish payments to executives at banks and other financial firms that have received taxpayer aid. But while many firms on Wall Street have repaid the assistance, there is no prospect that Fannie Mae and Freddie Mac will do so.
The administration faced a congressionally mandated deadline of Dec. 31 to increase the amount of aid it could provide to Fannie Mae and Freddie Mac, which together have already received $111 billion in assistance.
Treasury said Thursday that its decision did not mean the firms would need $200 billion or more apiece, but that it instead was seeking to assure markets that the government would stand behind the companies. In a statement, Treasury said the move "should leave no uncertainty about the Treasury's commitment to support these firms as they continue to play a vital role in the housing market during this current crisis."
By promising to keep the companies solvent, the government can maintain its sweeping power over the housing market. Fannie Mae and Freddie Mac have played a central role in Obama administration policies to keep mortgage interest rates low, restructure unaffordable mortgages, stop foreclosures and funnel money to housing programs around the country.
The Bush administration took over the firms in September 2008 as the financial crisis entered its most severe phase and promised $200 billion to keep the companies solvent. The Obama administration later doubled that figure.
While the ultimate cost of the bailouts is unknown, the administration estimated earlier this year it would cost $171 billion, and some officials said they expect it could rise further. Analysts have said it could be much higher. The cost will depend in part on how aggressively the administration continues to use the firms to stimulate the housing market because these steps could curtail profitability.
Under the terms of the latest decision, the administration's open-ended commitment will expire in 2012. Then, the firms will only be allowed to receive the balance of the $400 billion remaining today -- about $290 billion.
The administration is set to release broad principles in February for reforming the companies. Many experts predict that the government will have no choice but to hold on indefinitely to many of the companies' most troubled assets -- mortgage investments made during the housing bubble to less-than-worthy borrowers.
But an administration official said it could take several years to resolve the future of the companies, especially if Congress isn't keen to take up the politically charged issue during the 2010 midterm election year, and if the government wants to preserve the ability to influence the housing market. The companies together own or insure the majority of home loans, and no viable private system exists that could replace them.