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They were surprised expecting to receive a government

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Unformatted text preview: They were surprised, expecting to receive a government capital injection on their own terms instead. The GSEs suffered another year of massive losses in 2009: $94 billion. Delinquency rates more than doubled from 2.42% in 2008 to 5.38% in 2009 at Fannie and from 1.72% in 2008 to 3.87% in 2009 at Freddie. Losses continued in the first quarter of 2010: $11.5 billion at Fannie and $6.7 billion at Freddie, and another $20 billion was tapped from the government lifeline. The second quarter of 2010 was the twelfth consecutive quarter of losses at Fannie Mae. Its $1.5 billion loss will be made up by the taxpayer once again. Likewise, Freddie Mac will draw $1.8 billion from its Treasury lifeline to fill its second quarter hole. As of the writing of this book, Fannie has drawn $85.1 billion while Freddie has drawn $63.1 billion. That is $148.2 billion out 69 of the original $200 billion limit. In return for these draw downs, the GSEs have paid $12.8 billion in dividends to the U.S. Treasury to date. In response to the massive losses, the Treasury first increased its commitment to $200 billion per company in May 2009. It then quietly removed the ceiling on the bailout altogether on Christmas Eve 2009, promising to make up any further negative net worth in 2010, 2011, and 2012. This effectively amounts to writing a blank check to the GSEs. In May 2009, two other modifications were made to the conservatorship agreements: The $850 billion asset limit was raised for each GSE to $900 billion, and the debt limit was raised to 120% of the asset limit. It was clarified that the 10% annual reductions in the asset portfolio had to be calculated based on the asset limit and not the actual asset position. For example, the December 31, 2010, limit on the portfolio of each GSE is $810 billion. In a January 2010 report, the Congressional Budget Office estimates that the GSEs’ bailout realistically added $291 billion to the federal deficit in 2009 and that it will add another $99 billion in 2010-2019. The total bailout cost will very likely exceed the initial $200 billion commitment. 5.2.4 Additional Programs Several additional programs were introduced as part of the GSE bailout. First, the Treasury can directly purchase Freddie and Fannie MBS. As of December 2009, it had purchased $221 billion worth (having made no purchases since). Second, the Federal Reserve embarked on a massive GSE MBS purchase program in January of 2009. It made its last purchase on March 31, 2010, having fully exhausted its $1,250 billion target capacity. Third, the Federal Reserve purchased $172 billion in Agency debt, the debt issued by Freddie and Fannie, between December 2008 and March 2010. It has nearly exhausted its target capacity of $175 billion. The latter two programs are responsible for a doubling of the Federal Reserve’s balance sheet. The next chapter provides more detail....
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