Treasury Department Shoots Down Fannie and Freddie Obamacare Conspiracy Theory

The Associated Press
The Associated Press

Treasury Secretary Steven Mnuchin has not endorsed far-fetched claims that profits from Fannie Mae and Freddie Mac were diverted to fund Obamacare, a spokesman said.

Mnuchin also supports the ongoing sweep of the profits of the mortgage-finance giants into the U.S. Treasury, the spokesman said.

Special interest groups have been falsely claiming for several months that the Obama administration was diverting the profits of the mortgage-finance giants to provide funding for portions of Obamacare for which Congress has declined to appropriate funds. These efforts have been aimed at manipulating conservative opponents of Obamacare into supporting efforts by hedge funds and other investors to suspend the quarterly dividends the companies pay to Treasury.

In reality, the funds collected by Fannie and Freddie count as revenue to the U.S. Treasury, much like tax receipts, and are used to fund general government operations. There is no particular connection to Obamacare.

Following an interview with Maria Bartiromo at a Milken Institute conference in Los Angeles Monday, self-styled advocates of Fannie and Freddie’s shareholders claimed Mnuchin had endorsed their position. “Mnuchin Confirms GSE Sweep May Have Funded Obamacare,” declared a pressure group called Investor’s Unite.

What Mnuchin actually confirmed is much more mundane and widely known: the profits of Fannie and Freddie that get turned over each quarter to the U.S. Treasury as compensation for their bailout and Treasury’s ongoing support are used to fund the operations of the U.S. government.

“Secretary Mnuchin believes the dividend from the GSEs should be paid per the agreement as compensation for the government.  The Secretary clearly stated that the dividends were used to fund other parts of the government more broadly,” a Treasury spokesman said.

Mnuchin’s ongoing support for the payments to the U.S. Treasury was first reported by Bloomberg News.

The confusion appears to have arisen because of the way Bartiromo worded her question. “There’s a conversation going on on Twitter and it has been for a long time about how President Obama needed money for ObamaCare and would take from all of the agencies and he took from Fannie and Freddie. Is that true?” Bartiromo asked Mnuchin.

“It is true. They used the profits of Fannie and Freddie to pay for other parts of the government while they kept taxpayers at risk,” the Treasury Secretary replied.

Treasury’s statement Wednesday, however, makes it clear that Mnuchin’s answer was not meant to confirm any particular connection between Obamacare and the profits of Fannie and Freddie. Because money is fungible, Treasury’s receipts of those profits fund everything the federal government does from border patrols and military operations to the National Endowment for the Arts and public television.

In the interview with Bartiromo, Mnuchin also shot down the idea that the administration has plans to privatize Fannie and Freddie or return them to shareholder control, specifically rejecting the word “privatized.”

Let me ask you about Fannie and Freddie, because you’ve talked a lot about the need for these two housing giants to be privatized. Where is that in your priority list?” Bartiromo asked.

“Again, I haven’t said they would be privatized. What I’ve said is I’m committed to housing reform, and that we’re committed not to leave them as is for the next four years,” Mnuchin said.

Fannie and Freddie provide liquidity to the housing market by buying mortgages from lenders, packaging them into securities whose principal and interest payments they guarantee. Prior to their 2008 collapse, Fannie and Freddie were widely viewed as enjoying an “implicit guarantee” from the U.S. government, enabling them to earn enormous profits because investors viewed their bonds as being safe–or nearly so–as U.S. Treasury bonds

The companies were taken over by the U.S. government in 2008 when officials feared their collapse could further destabilize the housing and financial markets. Treasury provided hundreds of billions of funding while the Federal Housing Finance Agency became their conservator.  

Under their original agreement with the U.S. Treasury, both companies were supposed to pay a dividend equal to 10% of their taxpayer funding as well as a fee on the hundreds of billions more Treasury had pledged to support them. For years, however, neither company earned enough to pay the dividend, which forced them to draw even more from their bailout funds just to send the money back to Treasury as the dividend. This circular draw, as it came to be called, threatened to put the companies into a death spiral, slowly eating away at the remainder of the Treasury backstop.

In mid-2012, Treasury and the FHFA agreed to change the terms of the bailout so that Fannie and Freddie would no longer have a fixed dividend–ending the need for circular draws. Instead, each company would have a flexible dividend obligation that would rise and fall with their profits. Because the new dividend is equal to the positive net worth of each company, less a small capital cushion set to decline each year, it is known as the “net worth sweep.”

At the time the net worth sweep was implemented, Treasury Department officials noted that in addition to ending the circular draws and death spiral, the arrangement would facilitate the eventual wind down of the companies by preventing them from using profits to recapitalize as policy-makers designed a safe, more stable mortgage finance system.

Because every attempt at bipartisan mortgage finance reform legislation stalled out on Capitol Hill, neither company has been wound-down. Instead, they have remained in conservatorship and supported by taxpayer backing for more than eight years–a situation that nearly everyone involved in mortgage finance reform regards as undesirable.

Hedge funds and other big investors who have purchased shares of Fannie and Freddie, including Perry Capital LLC and the Fairholme Funds, have been attempting to undo the net worth sweep for years. These attempts have included marshaling support of civil rights groups and filing lawsuits in several federal courts. The litigation tactic, however, has largely failed. The cases have been met by dismissal in four federal district courts and a federal appeals court in March largely rejected the bid by investors to reverse one of those decisions.

As Breitbart news reported last month, opponents of the net worth sweep have recently turned to the Obamacare conspiracy theory, which appears tailor-made to lure in conservatives.  to bankroll portions of the Affordable Care Act. Specifically, the funds were allegedly used to provide a substitute funding source after a federal court ruled that some subsidies that had been provided to insurers were improper.

The trouble is that the changes to Fannie and Freddie’s bailout that net worth sweep in place were made in 2012, while the judge’s ruling on the Obamacare subsidies didn’t come until 2016. What’s more, the judge in the case has allowed the payments to continue pending appeal, which means there still isn’t a budget gap to fill. So this theory lacks even a patina of plausibility. 

Treasury’s statement rejecting this conspiracy theory is likely to be another source of disappointment for those who hoped they had found an anti-net worth sweep ally in Mnuchin.


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