Bankin’ Bits

On December 24, 2009, the United States Department of the Treasury announced it had amended its funding commitment with Fannie Mae and Freddie Mac, removing the limit to funding guarantees between Treasury and the mortgage giants (both of which entered conservatorship in September 2008).  According to the release , Treasury removed the prior cap of $200 billion at each firm to “leave no uncertainty about the Treasury’s commitment to support these firms as they continue to play a vital role in the housing market during this current crisis.”

The move is somewhat surprising, considering Treasury’s statement that “[n]either firm is near the $200 billion per institution limit established under the [conservatorship preferred stock agreement].  Total funding provided under these agreements through the third quarter has been $51 billion to Freddie Mac and $60 billion to Fannie Mae.” 

Here are some other tidbits included in Treasury’s release:

• The short-term liquidity facility established by Treasury for Freddie and Fannie was never used.  
• Treasury also amended the conservatorship arrangement to give Freddie and Fannie more time to reduce the size of their retained mortgage portfolios.
• Treasury concluded by noting that it is reviewing issues raised the federal government’s role in the housing market and hopes to report to the President by the time the President releases his fiscal 2011 budget in February 2010. 
• Fannie Mae and Freddie Mac also revealed new compensation arrangement with Fannie CEO Michael Williams and Freddie CEO Charles Haldeman Jr.—packages packages that will pay as much as $6 million a year, including bonuses.  The packages are all cash, not surprising considering that each company’s common shares are currently trading at less than $2 apiece.

Treasury’s willingness to provide the unlimited guarantee will probably reassure investors about both firm’s financial futures, at least over the near term.  However, the cash bonuses are likely to draw intense scrutiny, especially in light of Congressional and public outrage over private sector bonuses.