By Juliet Chung and Ben Eisen
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 24, 2019).
The Trump administration wants to put Fannie Mae and Freddie Mac
back into private hands after more than a decade in government
control. The path to doing so will likely lead through Wall
Street.
Before the two mortgage giants can be privatized, they will
potentially have to raise billions of dollars from investors, a
move that will require big banks to move further into a sticky
political issue. Financial firms are already laying the early
groundwork.
Executives at Bank of America Corp., Citigroup Inc., Goldman
Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley in
recent months have talked with the Treasury Department and Fannie
and Freddie's regulator about how a capital raise could work, said
people familiar with the matter.
There are no indications the government has begun a formal
process for hiring banks on a capital raise, and it could be a hard
sell to investors. Still, several, including Bank of America,
Citigroup and Goldman, have begun preparing internally to win a
role in what could be a landmark event, these people said.
What to do with the mortgage giants has divided lawmakers for
years. The two firms were bailed out with taxpayer money in the
financial crisis. If they are privatized, shareholders and bankers
could reap big financial rewards -- without eliminating the risk
that taxpayers could end up footing the bill for another downturn,
skeptics say.
The Trump administration still needs to answer important
questions to clear the way for a capital raise.
For example, the government still has a large ownership interest
in the two firms from bailing them out, which could make potential
investors reluctant to get involved.
The government must also decide how much capital Fannie and
Freddie need to stand on their own. The Federal Housing Finance
Agency, which regulates the companies, said last year they would
need to have as much as roughly $180 billion combined, but the
regulator is currently deciding whether to propose new capital
rules.
The FHFA and Treasury in September began allowing Fannie and
Freddie to retain as much as $45 billion of their earnings
combined. Fannie currently holds $6.4 billion in capital and
Freddie holds $4.8 billion, according to FHFA. Still, they would
need substantially more capital, and would likely need to turn to
the public markets for it, to stand on their own.
The IPO market has also slowed recently even on more typical
companies, which could make it harder to raise money. It is not
clear what forms a capital raise for Fannie and Freddie would take.
The biggest IPO in the U.S. so far this year was Uber Technologies
Inc., which raised $8.1 billion, according to Dealogic. U.S.-listed
IPOs raised less than $332 million each on average so far this
year.
Treasury Secretary Steven Mnuchin, who once ran Goldman's
mortgage trading desk, has long said privatizing Fannie and Freddie
is a priority.
The FHFA put out a notice this month that it is hiring a
contractor to advise it on capital markets. That role could
potentially include helping select underwriters and advising on
what capital structures could look like.
During a Congressional hearing Tuesday, FHFA head Mark Calabria
was asked about the potential for hedge funds and other money
managers that hold shares currently to reap a windfall from these
efforts. Mr. Calabria said: "If... we have to wipe out the
shareholders, we will." Shares of both Fannie and Freddie, which
have risen sharply this year, fell Tuesday and were down again as
of mid-morning on Wednesday.
The preliminary discussions between the banks and the government
also covered topics such as how the mortgage market would be
affected by releasing Fannie and Freddie from government control,
the people said. Some of the meetings took place as the Treasury
prepared to release a September report about its support for
privatizing the two companies.
The biggest U.S. banks already have a large presence in the
mortgage market, potentially complicating any capital raise. Many
banks not only make mortgages to consumers, they also sell those
loans to Fannie and Freddie. Some banks package and trade mortgage
bonds, a business that would be upended if Fannie and Freddie
return to private hands.
Fannie and Freddie are essentially the plumbing behind the U.S.
mortgage market, buying home loans from lenders and packaging them
into securities that are sold to investors. The government
effectively nationalized them in 2008 as defaults mounted. They
have remained in conservatorship ever since as lawmakers have tried
and failed to overhaul them. Some pushed to privatize them and
others tried to do away with them altogether.
The government injected about $190 billion into the companies in
the crisis bailout. Since 2012, the companies have been required to
return profits to the government. They have now returned more than
$300 billion.
James Dimon, the chief executive of JPMorgan, has said in
private meetings in recent months that housing finance regulators
in the Trump administration have been more effective than in the
Obama administration, according to people familiar with the
matter.
Mr. Dimon has long criticized the government's oversight of
housing finance after the financial crisis. But recently he has
taken a more conciliatory tone, lauding the latest efforts to
overhaul Fannie and Freddie.
"I think they're kind of going in the right direction," Mr.
Dimon said at a conference last month.
Write to Juliet Chung at juliet.chung@wsj.com and Ben Eisen at
ben.eisen@wsj.com
(END) Dow Jones Newswires
October 24, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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