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The trouble with Fannie and Freddie

Editor's note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day's biggest stories. Act on the news with POLITICO Pro. Quick Fix President Donald Trump wants to sell shares in Fannie Mae and Freddie Mac. And if you believe his Truth Social account, he wants to get a deal done before the end of the year. The structure of a Trump-led initial public offering of the housing-finance giants would be enormously consequential to a $9 trillion market for mortgage-backed securities that helps limit costs for American home buyers. And while an IPO could represent a major step toward ending Fannie and Freddie's 17-year-old federal conservatorship, pulling it off will force the White House to figure out how to make the companies attractive assets for Wall Street without jeopardizing arrangements that are critical to the mortgage market. 'It's a tricky, tricky balancing act,' said Karen Petrou, the managing partner of Federal Financial Analytics. Backing up for a second: Fannie and Freddie do not issue mortgages. Instead, they purchase home loans, package them as securities, sell them to investors and guarantee their payments. The presence of a massive, liquid market for low-risk mortgage-backed securities frees up resources for lenders to issue new mortgages and helps push down rates for home buyers. After Fannie and Freddie collapsed during the height of the global financial crisis, Treasury took ownership of the companies, and the Federal Housing Finance Agency assumed control of their operations. The government's direct role in assuring Fannie and Freddie's guarantees is a major source of confidence for investors in mortgage-backed securities. But that's also a big reason why pulling off an IPO will be challenging. The 2008 bailout of Fannie and Freddie and the accompanying federal conservatorship might provide assurances to the MBS market, but the government's control over the GSEs — and the fact that they're still collectively $195 billion short of hitting the capital thresholds they need to be released from conservatorship — could diminish their appeal to would-be investors. As former Freddie Mac CEO Donald Layton wrote earlier this year, 'raising equity during conservatorship is basically a non-starter.' 'Potential investors would reject becoming shareholders of F&F knowing that they would be totally disenfranchised,' he wrote, adding that would-be buyers could be turned off if they're unable to receive dividends or vote for board members. Of course, the government's guarantee of Fannie and Freddie's businesses might imply lower risk. But, lest we forget, the terms of their 2008 bailout both diluted the holdings of existing shareholders and assured that any 'existing preferred shareholders will bear any losses ahead of the government.' The administration's plans for the offering are still hazy, but The WSJ's initial reporting suggests it would value the two mortgage giants at about $500 billion and involve selling 5 percent to 15 percent of their stock. But if Trump is able to make that happen, it could open the door to future offerings that would simultaneously unwind the government's ownership stake in the GSEs — which may help deficits — and boost the GSEs' capital. But whether that results in changes to the MBS market is anyone's guess. 'They've got a ways to go,' Petrou said. 'But the more stock they sell, the more capital they raise.' It's MONDAY — For econ policy thoughts, Wall Street tips, personnel moves or general insights, email Sam at ssutton@ Driving the Week Monday … Tuesday … The NFIB's Small Business Optimism Index will be released at 6 a.m. … The Labor Department will release the Consumer Price Index for July at 8:30 a.m. … Richmond Federal Reserve Bank President Thomas Barkin speaks at 10 a.m. … Kansas City Fed President Jeffrey Schmid speaks on monetary policy and the economic outlook at 10:30 a.m. … Wednesday … The House Financial Services National Security, Illicit Finance, and International Financial Institutions Subcommittee holds a field hearing on 'Securing the Supply Chain: The Defense Production Act in Focus' in Dayton, Ohio, at 10 a.m. … Chicago Fed President Austan Goolsbee speaks at 1 p.m. … Atlanta Fed President Raphael Bostic speaks at 1:30 p.m. … Thursday … Labor will release the Producer Price Index for July at 8:30 a.m. … The Securities and Exchange Commission has a closed meeting at 1 p.m. … Friday … Labor will release import and export price data for July at 8:30 a.m … Retail sales data for July will be released at 8:30 a.m. … Industrial production data for July is out at 9:15 p.m. … University of Michigan's consumer sentiment survey will be released at 10 a.m. … Trade The way forward — Council on Foreign Relations President Michael Froman, who served as U.S. Trade Representative under President Barack Obama, published an essay in Foreign Affairs calling for 'a network of open plurilateral relationships—smaller and more flexible than the multilateral trading system.' 'From a purely economic point of view, this system would be suboptimal and less efficient than the global trading system was. But it might well be the most politically sustainable outcome that could—crucially—prevent unilateralism from spinning out of control.' Money gone — Foreign governments hired lobbyists from Trump world in order to avoid the president's punishing tariff rates. For the most part, that strategy hasn't paid off, Caitlin Oprysko, Daniel Desrochers and Ari Hawkins report. Confusing calculus — Trump's threat to impose 100 percent tariffs on foreign chips and semiconductors came with an important caveat: Firms that commit to producing more in the U.S. would be exempt. As The WSJ's Asa Fitch and Dan Gallagher report, that will create an incentive for companies 'to make just enough U.S. investment to appease politicians, then import whatever else is needed, especially considering the substantially higher cost of manufacturing in the U.S.' Slowdown — The World Trade Organization has reduced its forecast for global trade to reflect the Trump administration's tariff regime, Doug Palmer reports. What's more, the average U.S. tariff rate is now 17.4 percent, from just 2.8 percent before he took office. On The Hill First in MM: Dems press Trump regulators on bank capital — Sen. Elizabeth Warren and all 10 of her Democratic colleagues on the Senate Banking Committee are criticizing the Trump administration's proposal to scale back capital requirements for the largest banks, urging regulators to provide more robust analysis of its potential effects, Michael Stratford reports. In a letter to Fed Vice Chair for Supervision Michelle Bowman, Comptroller of the Currency Jonathan Gould and Acting FDIC Chair Travis Hill, the Democrats say the agencies' economic analysis so far was inadequate and should better detail the proposal's implications. (Banking regulators in June unveiled the plan to ease the 'supplementary leverage ratio' for the biggest banks, a top priority for Treasury Secretary Scott Bessent.) The lawmakers want more detailed information, including estimates of how the changes could affect the risk of a big bank failure, lending patterns and Treasury purchases. They also urged extending the 60-day comment period — set to end Aug. 26 — by 90 days after publishing their requested data. 'The economic costs of rushing through this type of proposal, and potentially getting it wrong, could be severe, and would be borne by American taxpayers, small businesses, and low- and middle-income households,' they wrote. The FDIC and OCC declined to comment. The Fed said it had received the letter and planned to respond. The Economy How Bowman sees it — The Fed's Bowman on Saturday said the central bank should start lowering rates closer to a neutral level. Bowman, who cast a dissenting vote for a quarter-point cut at last month's policy-setting meeting, told members of the Kansas Bankers Association that 'a delay in taking action could result in a deterioration in labor market conditions and a further slowing in economic growth.' The trouble with the data — After former Argentinian President Néstor Kirchner fired the government statistician tasked with compiling the country's consumer price index, official inflation data suggested price growth was slowing down. The opposite occurred. As The WSJ's Paul Kiernan writes, Argentina's experience is 'a useful lesson in what awaits the U.S. if new leadership politicizes economic data.' At the regulators So long — Trump removed Internal Revenue Service Commissioner Billy Long and named Bessent as the agency's acting chief, Nicole Markus and Brian Faler report. Big deal — Commerce Secretary Howard Lutnick is threatening to revoke lucrative patents held by Harvard University that were derived from projects that received federal funds, Juan Perez Jr. reports. Jobs report Big change — Bo Hines, the leader of Trump's crypto council, is stepping down to return to the private sector, he announced on X over the weekend.