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Millstein's plan for Fannie and Freddie


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One of the key guys behind the AIG restructuring throws his hat into the GSE ring. If he includes the deferred tax allowance people might say it is almost the same as AIG's.


Could Fannie and Freddie Pay Back Taxpayers Someday?



The idea is for Fannie and Freddie to be spun off from the government as private companies again. This time, however, they would have solid protection against potential losses rather than the thin capital cushions that contributed to their near-failure. And a new government agency would provide a further backstop.


How would Fannie and Freddie effectively reboot their operations? Mr. Millstein proposes that the mortgage giants stop paying the 10% annual dividend they currently must pay to the Treasury at a cumulative cost of $41 billion to date. They would also pour their earnings into the creation of an “enormous” capital cushion of around $120 billion to $140 billion to absorb losses. That would be about four times the size of the cushion before Fannie and Freddie’s takeover.


The government would convert the preferred stock holdings in Fannie and Freddie into common shares and gradually sell off those holdings, hypothetically starting to repay taxpayers by 2016. Fannie and Freddie’s mortgage holdings and debt, meanwhile would be spun off into a “bad bank” structure.


“We can re-engineer Fannie and Freddie’s (finances)…so as to put them on path so they can actually pay the taxpayers back,” Mr. Millstein said in a presentation at the Woodrow Wilson International Center for Scholars in the nation’s capital. “Not a small consideration in a town looking for money.”


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Full presentation including his 9 points. The best plan I've seen not only to handle this mess but also to inject capital to support housing … and as he says:


* FHFA projects that Fannie and Freddie will out-earn the Treasury dividend through 2014

* Recent earnings reports are proving these projections accurate and highlighting the ability to build capital




1. Immediately raise the guarantee fees (g-fees) that they charge on MBS to increase reserves and build capital

2. Refocus on core guarantee businesses and wind down “retained portfolios” of mortgages and related securities

3. Eliminate the dividend on the outstanding Treasury Preferred Stock so the reformed guarantee businesses can use revenues from the increased g-fees to rebuild their capital base and pave the way for taxpayers to recover their entire investment

4. Contribute infrastructure to establish a utility for issuing conforming MBS

5. Build reserves at the FMIC to protect taxpayers from future losses

6. Terminate the FHFA conservatorships once the reformed guarantee businesses at Fannie and Freddie have sufficient capital

7. Install ordinary, non-politicized corporate governance by re-chartering the reformed guarantee businesses of Fannie and Freddie as Delaware corporations

8. Treasury can convert its preferred stock to common stock and divest its stake over time into the public equity markets

9. the Financial Stability Oversight Council should designate them “covered financial companies,” subject to enhanced supervision by the Federal Reserve


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