While it will come as a surprise to exactly nobody, certainly nobody who understand that the US financial system is no better financial shape than just before the Lehman crash as nothing has been fixed and everything that is broken has been merely swept under the rug (for details see Paul Singer's explanation posted last night) of epic-er leverage, the news that when (not if) the US economy succumbs to a severe economic downturn Fannie and Freddie would require another taxpayer funded bailout, one of $190 billion or even more than the first $187.5 billion-funded nationalization of the GSEs, can only bring a smile to one's face.
A smile because according to some idiots, the GSEs are viable, standalone enterprises whose "net income" should be given on a silver platter to institutional investors who will then make a killing courtesy of what were years and years of government liquidity injections. Sure, do that. Just answer this: will those same investors who demand full ownership rights also put up the hundreds of billions of capital that will be needed when the next bailout bill comes due, as the alternative is the complete collapse of US housing. We didn't think so.
The "hypothetical" downturn that would crush the GSEs:
The two mortgage-finance giants, which have already taken $187.5 billion in taxpayer aid since 2008, would need more funds to stay afloat if home prices plummeted in a severe downturn, the Federal Housing Finance Agency said in a report today. The stress tests, mandated by the Dodd-Frank Act, use the same assumptions that the Federal Reserve does in gauging the ability of the nation’s largest banks to withstand a recession.
The results reflect the terms of the companies’ bailout, which require them to send to the Treasury all of their quarterly profits above a minimum net worth threshold. That money, counted as a return on the U.S. investment, prevents them from rebuilding capital or paying down debt to taxpayers.
“These results of the severely adverse scenario are not surprising given the company’s limited capital,” Fannie Mae (FNMA) Senior Vice President Kelli Parsons said in a statement. “Under the terms of the senior preferred stock purchase agreement, Fannie Mae is not permitted to retain capital to withstand a sudden, unexpected economic shock of the magnitude required by the stress test.”
The companies would need $84 billion to $190 billion by the end of 2015 in the worst circumstances, depending on accounting assumptions, the tests showed.
The stress test results come as congressional momentum for winding down Fannie Mae and Freddie Mac appears to be stalling and shareholders push to keep the companies alive.
Of course, since this is a stress test that uses "the same assumptions that the Federal Reserve does" it means it is i) wrong (see Bank of America) and ii) woefully optimistic (as usual). But more importantly, all it confirms is that the GSEs are still nothing more than a massively levered bet on the general direction of housing. Yes, Fannie and Freddie have returned billions to the Treasury, but that is only because of the trillions monetized by the Fed. Trillions, incidentally, which have been insufficient to stimulate a self-sustaining housing rebound now that the fourth dead cat bounce in housing is over and home prices are once again rapidly rolling over.
Which means that any decision about the future of the GSEs will be determined not by Congress, by Obama, by Fairholme or by Ackman, and will be purely in the hands of the market once again - a market which increasingly appears ready to roll over, and take everything down with it. Among the things to be taken down? Another at least $190 billion in taxpayer funds.