Big bank bailout? Or shareholders got rolled by Fannie Mae?
Bank of America has $2.2 trillion in assets and $900 billion in net loans. They sold $73 billion in mortgage loans to the Federal government (better known as Fannie Mae) for a paltry $500 million. The loan loss ratio on this portfolio of loans is 13% - about double the national average. This makes no sense for investors of Bank of America (disclosure - I own a few shares) but... Representative Issa of California is investigating this as a "bailout".
Let me say it a different way...Fannie Mae bought $73 billion in assets for less than 1 cent on the dollar and this is being challenged as bailout...even with a loss of 13% or $9.49B it's still less than 1 cent on the dollar.
This isn't a bailout this is a crying shame for shareholders who, from my view just got rolled by Fannie Mae.
By the way, $73B is less than 10% of Bank of America's net loan portfolio... and at $500 million, it's not going to make much difference in their capital requirements. It's a drop in the bucket...
So here's the principles this ignores for me:
1) Bank of America is a private company - yes, there are millions of shareholders trading their ownership in a public market - but from the perspective of property ownership - it is private - or at least it should be.
2) The Federal government should not be in the business of servicing loans -or guaranteeing them for that matter. Home ownership may be the American dream but it is not guaranteed for every citizen. Property ownership is something we aspire to - it shouldn't be guaranteed by a government agency.
Instead of increasing its holdings in mortgage loans, Fannie should be decreasing its position. This is the time when private enterprise with capital to invest can step forward and take a risk with their own money. This is what the free market is all about - risk and reward - and in this instance the rewards of originating these loans has been disconnected from the risk. Overall the long-haul this is the wrong precedent for the mortgage industry, the Federal government and the American home owner.