Bombshell: Treasury now claims Fannie, Freddie bailout wasn’t loan

Calls sweep recovery for “investment”; Dodges questions on privilege

In a letter that’s going to raise more questions than it answers, the Treasury Department replied to an interrogatory from a U.S. Senator on its “third amendment sweep” of profits from Fannie Mae and Freddie Mac.

Joe Light has the story:

In its response to Mr. Grassley on Tuesday, the Treasury Department for the first time clearly laid out its response. In a nutshell, according to the department: The bailout wasn’t a loan, but an investment on which taxpayers are now being compensated.

After getting taken over by the U.S. government, mortgage-finance companies Fannie Mae and Freddie Mac took a bailout of about $187.5 billion. In return for that money, the government acquired a class of “senior preferred” stock that initially paid a 10% dividend.

To date, the companies have paid the government more than $228 billion, $40 billion more than they took in the bailout.

That’s led some of the companies’ shareholders, and some politicians, to argue that the companies should be allowed to retain earnings, having repaid the “loan” Treasury extended them during the crisis.

In the letter to Mr. Grassley, Acting Assistant Secretary for Legislative Affairs Randall DeValk wrote that the government “did not make an ordinary loan” to Fannie and Freddie, but rather that it “took on an enormous risk when rescuing the enterprises in the middle of a financial crisis – a risk for which any private investor would have demanded substantial compensation.” He wrote that taxpayers continue to bear risks from Fannie and Freddie which in part explains why the companies’ profits continue to be swept.

Read the full story here.

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