A separate question is whether the profits are being reported accurately. As is the case with all financial companies, how assets such as mortgages are valued on the balance sheet may bear little resemblance to what they would fetch on the open market. In his report of the GSEs, CRT's Kim estimates "$140 billion of hidden value may benefit the bottom line over the next few years."
Still another issue is whether Fannie and Freddie will ultimately be returned to the private market. Former U.S. Treasury Dept. officials Jim Millstein and Phillip Swagel proposed doing so in an
Oct. 12 essay in The Washington Post.
Under such a scenario, holders of GSE junior preferred shares (i.e., preferred shares not owned by the Treasury) could be the "[natural] source of future capital," according to the report from CRT's Kim.
The Jumpstart GSE Reform Act, however, would prohibit the Treasury from selling its stake in the GSEs without the passage of legislation specifically instructing it to do so.
Currently, Fannie and Freddie's profits are being swept into the Treasury. Until that changes, private shareholders will not see a cent, no matter how profitable the GSEs become.
John Hempton, who manages a hedge fund called Bronte Capital, argues Treasury has trampled on the fifth amendment rights of private shareholders, which prohibit the taking of private property for public use without just compensation.
I asked Frank if he believed the government takeover of the GSEs violated the fifth amendment. He started out by claiming responsibility for the takeover.
"Let me, um -- confess -- involvement there," he said. "It's my bill under which that happened. I know there was this myth that we protected Fannie and Freddie. In fact it was under the Republicans until 2006 that Fannie and Freddie were left alone. One of the first things we did when we became the majority in 2007 was to put them into -- to give Paulson the power to do that and if you read the Paulson book [<i>On The Brink: Inside the Race to Stop the Collapse of the Global Financial System</i>] he begins by saying, 'I realize I had to put them into conservatorship and I thought they would fight me.' So he called me, and I said 'Do what you have to do.'"
Frank then expressed regret over losses suffered by community banks that had purchased preferred shares in Fannie and Freddie shortly before they were put into conservatorship, though he noted they were given tax relief and added that the GSEs were in such dire financial condition the preferred shares would soon have been worthless.