How Trump Fannie Policy Proposal Could Benefit Adviser
December 02 2016 - 8:42PM
Dow Jones News
By Nick Timiraos
Hours after being announced as President-elect Donald Trump's
nominee for Treasury secretary on Wednesday, Steven Mnuchin sent
shares of Fannie Mae and Freddie Mac way up after he said
government control of the companies should end.
One beneficiary of the rally: John Paulson, who has been a Trump
donor and adviser, as well as a business partner of Mr. Mnuchin.
His hedge-fund firm, Paulson & Co., is invested in the two
mortgage firms' preferred shares, according to a person familiar
with Mr. Paulson's firm.
Fannie and Freddie don't make mortgages but insure them against
default. The government took over the companies through a process
known as conservatorship in 2008 amid concerns the companies might
fail and spark a broader financial panic.
For years, the Paulson firm has lobbied for the government to
end the arrangement by which the Treasury Department collects the
companies' profits as dividends to compensate the U.S. for its 2008
backstop of the companies, which Mr. Paulson says tramples on
investors' rights.
The president-elect himself may benefit if the firms' stocks
move. According to a financial disclosure form filed in May, Mr.
Trump has invested between $3 million and $15 million in three
funds run by Mr. Paulson.
Various classes of preferred shares of Fannie Mae and Freddie
Mac have posted gains of more than 33% since Mr. Mnuchin said
Wednesday he would seek to end government control of the mortgage
companies, a reversal of policy from the Obama administration,
which has opposed returning the companies to private control. The
companies' common stock rose as high as 60% in trading Wednesday
before paring those gains, ending the week up around 20%.
Mr. Paulson was an investor in OneWest Bank alongside Mr.
Mnuchin, a banker who served as Mr. Trump's campaign finance
chairman. Mr. Paulson co-hosted a fundraiser for Mr. Trump in
Manhattan in June and interviewed him in a "fireside chat" on
economic policy after Mr. Trump spoke at the Economic Club of New
York in September.
"I have not, nor has anyone at my firm, had discussions with
Donald Trump or Steven Mnuchin on Fannie and Freddie," Mr. Paulson
said in a statement issued in response to questions for this
article about his investment.
"Aside from restoring investor rights, we have not taken a
position on the future role of Fannie or Freddie."
A Trump transition official, asked for comment, issued a
statement about housing finance policy, but didn't address the
question of how a Trump policy might benefit advisers like Mr.
Paulson.
"Government ownership of these entities creates a systemic risk
by encouraging and subsidizing risky behavior on Wall Street and
distorting market forces," the official said in a statement. The
Trump administration will work "with both parties on reforms that
protect taxpayers."
Shares of Fannie and Freddie have nearly doubled since Mr.
Trump's election, a sign that investors believe Mr. Trump's
administration will be more sympathetic to the shareholders than
has President Barack Obama.
"We've got to get Fannie and Freddie out of government
ownership. It makes no sense that these are owned by the government
and have been controlled by the government for as long as they
have," said Mr. Mnuchin in an interview Wednesday with Fox Business
Network.
Mr. Mnuchin downplayed skepticism over the challenges involved
in returning two companies with around $5 trillion in liabilities
back to private ownership. For the Obama administration, "it hasn't
been a priority," he said. "Our administration, it's right up there
in the top 10 list of things we're going to get done."
Since 2008, the U.S. has injected $188 billion into the
companies, receiving a special class of stock in exchange that pays
quarterly dividends. The companies' regulator barred them from
paying dividends to shareholders.
In 2012, the Obama administration revamped the bailout
arrangement with the companies, replacing a fixed 10% dividend on
that stock with one that requires most of the firms' profits to go
to the Treasury. Several investors, including Fairholme, have sued
to reverse that arrangement.
The U.S. has collected $256 billion in dividends since 2009 and
has warrants to acquire up to 79.9% of the firms' common shares,
worth billions more. Under the existing arrangement, the companies
can draw on up to $258 billion in additional capital from the
Treasury if needed.
While several lawsuits are still working their way through the
courts, the Treasury has significant latitude to revisit the terms
of the 2008 conservatorship, including revising the controversial
2012 amendments. The Mnuchin comments suggesting the next Treasury
might use that latitude to help shareholders have helped lift the
firms' shares.
Allowing the companies to retain more of their earnings could
pave the way for striking a deal where the government sells its
stakes in the companies, creating a windfall for investors who
wagered that the Obama administration and Congress wouldn't ever
follow through on the administration's calls to refashion the
companies.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
December 02, 2016 20:27 ET (01:27 GMT)
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