This is why I was not surprised when Congress decided to bailout Fannie and Freddie. Of course, this act of kindness was performed with an exorbitant dividend clause. Whenever Fannie Mae and Freddie Mac start to recover, they are required to pay a 10% dividend on their preferred stocks. As of October 2010, The U.S. government received about $150 billion in preferred stocks to save the two firms. This means that the dividend payout to the U.S. government is $15 billion a year.
However, here is where the ludicrousness lies. As a result, Fannie Mae and Freddie Mac are caught in a vicious cycle on dividends:
"In the last two quarters, the firms (Fannie Mae and Freddie Mac) have paid $7.5 billion in total dividend payments, while receiving injections of $5.7 billion to help keep them in business. The dividends could force Fannie Mae and Freddie Mac to keep asking the Treasury Department for more money even after the companies get back into the black..."
Even though there has been protests over the bailout's current structure, the current Obama administration refuses to loosen up on its "cash cow" anytime soon, even if it's for the greater good. Go figure.
Treasury's preferred share dividends have reduced the capital reserves of Fannie Mae and Freddie Mac, which increases their reliance on the government. However, the Treasury along with the Obama Administration is looking to phasing out these two financial firms in the next five years while keeping them solvent in the short term to prevent another recession. Fannie Mae and Freddie Mac play critical roles in creating liquidity for the primary and secondary markets of residential mortgages. If Treasury does not prop up these companies in the short term as the country looks to rebuild from the recent economic crisis, then banks will stop lending as the costs to underwrite and insure loans go up especially during this low interest rate environment. It makes a lot of sense for the Treasury to reduce Fannie and Freddie's long-term capital reserves and pay back the taxpayers for this costly bailout rather than funding an increase in their loan portfolios.
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