The bailout of Freddie Mac is certainly paying dividends. U.S. taxpayers extracted a handsome $4.1 billion payout last year in exchange for their $51.7 billion of support since the 2008 rescue of the housing finance giant. And they’re set to receive an even richer dividend from Freddie this year. But these pounds of flesh make little sense right now.
Sure, Freddie managed to get by without any extra public funds in the fourth quarter. A more hospitable market for mortgage-backed securities helped. But Freddie is far from done tapping government coffers. The U.S. Treasury’s equity line initially was supposed to be capped at $100 billion. Yet the government was worried enough about the mounting losses late last year that it decided to give Freddie, and onetime rival Fannie Mae, unlimited access for three years.
The support comes in the form of senior preferred stock with a 10 percent dividend. It’s similar to the terms Warren Buffett struck with Goldman Sachs, but that life-line helped Goldman move on to generate huge profit. Freddie is still losing money — and taxpayers’ money at that. Freddie gushed $25.7 billion of red ink last year.
The dividend isn’t linked to results. If Freddie can navigate the worst housing market in generations without taking another dime from Uncle Sam, it’ll still be on the hook for $5.2 billion in 2010. But that’s an optimistic scenario. The delinquency rate on Freddie’s $2.25 trillion portfolio is still rising, to 3.87 percent in the fourth quarter.
Freddie should pay an onerous price for failure — just not while the government still needs it to help turn the housing market around. In that context, the current arrangement is illogical. Every time Freddie draws on taxpayer funds, it needs to use a portion of them to pay taxpayers their dividend.
The bigger questions on Freddie — privatize, nationalize or run it down — remain unanswered. Those will probably wait until a recovery is considerably further along. It doesn’t mean, however, that the smaller issues don’t deserve attention. The dividend that is only making a bad situation worse is one of them.