Steven Mnuchin’s Legacy For Fannie Mae And Freddie Mac

Raising capital

As Fannie and Freddie stand now, they won't be able to raise capital until officials declare the senior preferreds paid because no one is going to give them capital while they're dealing with a loan that can never be repaid. Pagliara said some of the GSEs' biggest shareholders right now are the same ones who will invest new capital.

While many have argued that the capital rule is too high, Pagliara said some of the people he has spoken to who would be a source of new capital in Fannie's and Freddie's public offerings are not concerned about the capital requirement. He said the GSEs have the ability to reach the 4% threshold through retained earnings alone.

"The unique characteristics of Fannie and Freddie compared to other banks make it attainable and acceptable for a big swath of investors that can generate a 9.5% return on equity, and there's a bigger demand for that than Beyond Meat," Pagliara said.

He noted that large institutional shareholders like pension funds, BlackRock, and Vanguard need investments that will move the needle despite their massive size. He described their demand for companies like Fannie Mae and Freddie Mac with such sizable pretax profits as "somewhat insatiable."

Declaring the senior preferred shares paid

Pagliara believes Mnuchin will declare that the senior preferred shares are paid, which he said is the right thing to do. He also believes that if Mnuchin doesn't do that, the Supreme Court will.

He explained that if you take the stream of payments the government has received since June 2013, including the $60 billion payment that was large enough to delay the shutdown of the government under the budget control act of 2011, and amortize the payments, then the money has been paid back, and then some.

"It's an Alexander Hamilton-type moment in his legacy because if he does nothing, then he's going to be aligned in history with Jack Lew and Tim Geitner and the Fed that preceded him and all the other things that happened in the Federal Housing Finance Agency," Pagliara said. "That can be his legacy or he can have as his legacy the individual who stood up ahead of the court case and effectively put a plan in place for strengthening Fannie and Freddie for the next generation, solving the mortgage finance problem."

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