Two Government Rescues, Two Different Results?

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

First there are the GSEs, Fannie Mae and Freddie Mac, which have been under government conservatorship since 2008. Although there is plenty of rhetoric about their eventual future paths, for the time being they will remain on government life support and the eventual tab could be a stiff one for taxpayers.

The Federal Housing Finance Agency calculates it could be a total of $363 billion through 2013 if the housing market doesn’t recover or gets worse. Taxpayers would be on the hook for $259 billion, with the remainder returning to Treasury as dividend payments on senior preferred stock. So far Fannie Mae and Freddie Mac have borrowed $148 billion and paid $13 billion in dividends.

Then there are the eight funds created under the Public-Private Investment Program, or PPIP. Treasury has reported that they delivered net internal rates of return that average about 36% through September 30. At first glance, that is an eye-popping number, 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 similar investments, says Linus Wilson, assistant professor of Finance at the University of Louisiana at Lafayette, who has been tracking TARP, TALF and PPIP since their inception. “Yes, they have invested in a good time period and the returns are good compared to the general equity market,” he tells GlobeSt.com. “But they are not outperforming their peers.”

In fact, Wilson says, the numbers are grossly overstated because the US Treasury uses to different schemes to annualize the returns. “Moreover, the big numbers you saw were only the annualized returns for the equity investors,” he notes. “Taxpayers’ investment is one-third equity and two-thirds debt. The debt only pays just over 1%.”

By Wilson’s calculations the fund assets’ returns, which includes both the debt and equity investments of taxpayers and private investors since inception, is about 8.1% through September 30. “This is barely unchanged since the last quarter when the turn on assets was 7.9%,” he tells GlobeSt.com. “These figures are not annualized. Taxpayers’ returns are lower because most of their returns are meager amounts of interest paid on the massive loans they have made to these eight funds. Through September 30, taxpayers have realized a 5.6% return on their investment of $14.5 billion dollars.”

By contrast, Wilson says, in the past 12 and nine months, mortgage based hedge funds have returned 29.8% and 18.9%, according to the August 2010 report by Hedgefund.net.  “Thus, it appears that these eight PPIP funds have underperformed similarly risky investments,” he relates. “A rising tide in the mortgage market has made the US Treasury look good, but when the tide goes out the taxpayers may be exposed.”

Another problem, Wilson says, is that the industry is very dependent on the US Treasury for modeling the returns. “These are mark-to-model returns and the Treasury has so far allowed the investment funds to pay $159 million in dividends based on mark-to-model profits,” he tells GlobeSt.com. “This is irresponsible when taxpayers will be lending $14.7 billion of extremely low interest loans. Dividends should not be paid out until the private investors’ debt to taxpayers is paid in full.”