On the Hook?

Tim Pagliara had a Letter to the Editor publish in Barron’s over the weekend responding to a recent article by Jonathan Laing, “Why Uncle Sam Won’t Free Fannie and Freddie.”


On the Hook?


August 10, 2014

To the Editor:

No investor would argue with Jonathan Laing that the public, which took risk on government-sponsored enterprises, ought to have upside (“Why Uncle Sam Won’t Free Fannie and Freddie Yet,” July 28). But his contention that the government is entitled to a commitment fee based on Fannie and Freddie’s capital structure of $4.5 trillion is unfounded.

A commitment fee is based on the amount of capital that can be drawn by a beneficiary, not the entire capital structure that may benefit from that commitment. In the case of Fannie Mae and Freddie Mac, according to the Federal Housing Finance Agency’s stress tests, the government’s remaining funding commitment was $173.7 billion. That’s what it should be based on. Applying a proposed commitment fee rate of 40 basis points to this figure gives a fee of less than $1 billion per year, putting Laing off by a factor of 25.

The government isn’t on the hook for the $4.5 trillion guarantee portfolio, which isn’t, and shouldn’t be backed by the full faith and credit of the U.S. The GSEs have already paid back $213 billion to the Treasury. By paying 100% of their profits to Washington, they’ve been unable to rebuild capital or deliver returns to shareholders, who also have borne risk.

The conservatorship agreement that the federal government has violated and is the basis for investor lawsuits has enormous built-in upside for the government: Besides repayment, plus the annual 10% dividend, Washington could make more than a 100% return for taxpayers by exercising its warrants to acquire 79.9% of the common stock alone.

Ironically, the illegal Treasury sweep and the government’s plan to liquidate Fannie and Freddie will reap the taxpayers far less and seriously damage the government’s credibility in financial matters—while squandering the assets, expertise, and institutional memory of two entities that reformed could serve American homeowners well for many more years.


Tim Pagliara

Executive Director, Investors Unite

Franklin, Tenn.