Indeed, Fannie Mae, which is set to report its fourth-quarter earnings this week, had to delay the report due to unexpectedly strong results which may allow it to recapture at least a portion of a more than $60 billion deferred tax benefit. Several hedge funds have been betting on a rebound in Fannie and Freddie shares ever since shortly after the GSEs were put into conservatorship by then-Treasury Secretary Hank Paulson in 2008 at the height of the subprime mortgage crisis. The question of whether it makes sense to invest in beaten-down preferred or common shares in Fannie and Freddie is not merely financial, however. Politics is likely to play an important role. That's because politics will help determine what profits Fannie and Freddie report, where those profits go and whether the GSEs will be privatized once the government has been paid back. Indeed, the profits of Fannie and Freddie are continually at risk of being used as a "piggy bank." In May, Senator Dianne Feinstein (D-Calif.) proposed using increases in the insurance fee charged by Fannie and Freddie to help "underwater" home owners refinance their mortgages. In December, the House of Representatives voted to use fee increases to pay for a student visa program. Proposed bipartisan legislation called the "Jumpstart GSE Reform Act," offered last month by Senators Mark Warner, (D-Va.,) David Vitter, (R-La.), Elizabeth Warren (D., Mass.) and Bob Corker (R., Tenn.) intends to address the "piggy bank" issue. It would prevent the use of revenue from increased guarantee fees from being used to offset other government spending.
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
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.