You can call it a bailout, a rakeover – I mean, takeover – or socialism for cash. It's all that and more.
But, whatever you call it, it's not going to last.
The $187.5 billion bailout of Fannie Mae and Freddie Mac back in 2008 was absolutely necessary.
Before you tell me I'm crazy, let me tell you why…
There are no ifs, ands, or buts about it. Forget that Fannie Mae and Freddie Mac caused their own demise – that's another discussion. Once they imploded, they had to be saved for the sake of every American bank, more than a few giant global banks, the U.S. economy, and probably the global economy.
To live and die another day, Fannie and Freddie had to issue senior preferred securities to the U.S. Treasury for bailing them out. The preferreds paid a 10% dividend to the Treasury.
(Remember that Fannie and Freddie don't make mortgages. They buy mortgages from lenders, package them to sell to investors, and guarantee the securities they issue. This all makes them a pretty good investment, so they buy their own stuff by the fistful.)
Of course, there was a problem. Neither could make the payments. So, our government being the generous sort it is, lent Fannie Mae and Freddie Mac money to pay the government. How's that for good business sense?
Well, wouldn't you know it, by 2012, this pair of government-sponsored enterprises were again enterprising and making tons of money.
That's when the Obama administration, never one to miss an opportunity to extract or extort cold hard cash from any wounded-warrior veterans of the economic drain game, changed the rules for being paid back. In August 2012, the Treasury made the dynamic duopolies deliver all their profits to the saviors who bailed them out.
There would be no more piddling 10% dividends – Uncle Sam wanted all their profits. And he got them. To date, Fannie and Freddie have paid the Treasury more than $200 billion. By June, that amount will have risen to an estimated $213 billion.
OK, so they got paid back. We, the taxpayers, got paid back. That's good, that's very good.
So here's what's not very good. We might even call it…. oh, I don't know, bad.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.