In 2012, the government changed the terms of the bailout for Fannie Mae and Freddie Mac, sweeping all the profits from the GSEs to the U.S. Treasury, citing a need to protect taxpayers from the fallout of any future losses from the GSEs. This rationale was repeated by the Justice Department when shareholders sued the government over the sweep.
But recently unsealed documents show that protecting taxpayers was not the real reason the government took this action. In fact, the documents show that Treasury officials knew back in 2011 that Fannie and Freddie would soon become profitable again, according to an article by Gretchen Morgenson for The New York Times.
What’s more, the documents show that high-level Treasury officials involved in the decision to sweep the GSEs’ profits predicted the sweep would generate greater profits than the original terms, which required Fannie and Freddie to pay 10% annually of the bailout assistance they received, the article states.
From the article:
A December 2011 information memo to Timothy F. Geithner, the former Treasury secretary, is among the newly released documents. The 17-page memo from Mary John Miller, assistant secretary for financial markets, shows that the idea to extract all of Fannie’s and Freddie’s profits coincided with their anticipated turnaround.
Ms. Miller outlined “restructuring and transition options” for Fannie and Freddie in the memo, saying the No. 1 option was changing the terms of the bailout to “replace the current 10 percent fixed dividend with a permanent ‘net worth sweep.’” The memo noted that Freddie Mac was “expected to be net income positive by the end of 2012 and Fannie by the end of 2013.”
To view those documents, click here.
Another unsealed document states that this new method “will likely exceed the amount that would have been paid if the 10% was still in effect.”
