WASHINGTON, DC-The government’s unprecedented rescue effort ofthe US financial system is reaping mixed rewards--at least in asnapshot captured from findings of two separate agencies.

|

First there are the GSEs, Fannie Mae and Freddie Mac, which havebeen under government conservatorship since 2008. Although there isplenty of rhetoric about their eventual future paths, for the timebeing they will remain on government life support and the eventualtab could be a stiff one for taxpayers.

|

The Federal Housing Finance Agency calculates it could be atotal of $363 billion through 2013 if the housing market doesn’trecover or gets worse. Taxpayers would be on the hook for $259billion, with the remainder returning to Treasury as dividendpayments on senior preferred stock. So far Fannie Mae and FreddieMac have borrowed $148 billion and paid $13 billion individends.

|

Then there are the eight funds created under the Public-PrivateInvestment Program, or PPIP. Treasury has reported that theydelivered net internal rates of return that average about 36%through September 30. At first glance, that is an eye-poppingnumber, especially when compared to, for example, Standard &Poor’s 500 Index for the year, which is hovering around 10%.

|

Taken as a whole, though, the funds are underperforming similarinvestments, says Linus Wilson, assistant professor of Finance atthe University of Louisiana at Lafayette, who has been trackingTARP, TALF and PPIP since their inception. “Yes, they have investedin a good time period and the returns are good compared to thegeneral equity market,” he tells GlobeSt.com. “But they are notoutperforming their peers.”

|

In fact, Wilson says, the numbers are grossly overstated becausethe US Treasury uses to different schemes to annualize the returns.“Moreover, the big numbers you saw were only the annualized returnsfor the equity investors,” he notes. “Taxpayers’ investment isone-third equity and two-thirds debt. The debt only pays just over1%.”

|

By Wilson’s calculations the fund assets’ returns, whichincludes both the debt and equity investments of taxpayers andprivate investors since inception, is about 8.1% through September30. “This is barely unchanged since the last quarter when the turnon assets was 7.9%,” he tells GlobeSt.com. “These figures are notannualized. Taxpayers’ returns are lower because most of theirreturns are meager amounts of interest paid on the massive loansthey have made to these eight funds. Through September 30,taxpayers have realized a 5.6% return on their investment of $14.5billion dollars.”

|

By contrast, Wilson says, in the past 12 and nine months,mortgage based hedge funds have returned 29.8% and 18.9%, accordingto the August 2010 report by Hedgefund.net. “Thus, it appearsthat these eight PPIP funds have underperformed similarly riskyinvestments,” he relates. “A rising tide in the mortgage market hasmade the US Treasury look good, but when the tide goes out thetaxpayers may be exposed.”

|

Another problem, Wilson says, is that the industry is verydependent on the US Treasury for modeling the returns. “These aremark-to-model returns and the Treasury has so far allowed theinvestment funds to pay $159 million in dividends based onmark-to-model profits,” he tells GlobeSt.com. “This isirresponsible when taxpayers will be lending $14.7 billion ofextremely low interest loans. Dividends should not be paid outuntil the private investors’ debt to taxpayers is paid infull.”

|

Want to continue reading?
Become a Free ALM Digital Reader.

  • Unlimited access to GlobeSt and other free ALM publications
  • Access to 15 years of GlobeSt archives
  • Your choice of GlobeSt digital newsletters and over 70 others from popular sister publications
  • 1 free article* every 30 days across the ALM subscription network
  • Exclusive discounts on ALM events and publications
NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.