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This is not meant to suggest that the Conservatorship and PSPA will be void ab initio anytime soon but rather pointing out the existing possibility as evidence comes to light.

The Conservatorship and PSPA

Tim Howard asserts Treasury directed FHFA to place Fannie and Freddie into conservatorship not in response to any imminent threat of failure, but rather for policy reasons and over the objections of Fannie’s and Freddie’s boards.

See A Quick Review of 12 U.S. Code § 4617(a)(3)(A)-(L) as it Relates to the Regulated Entities.

Once in conservatorship, the GSEs’ managements had no role in negotiating the terms on which they would be offered assistance; Treasury and FHFA set these terms unilaterally.

Between the time Fannie and Freddie were put into conservatorship and the end of 2011, well over $300 billion in non-cash accounting expenses were recorded on their income statements. These non-cash expenses, most of which were discretionary, eliminated all of the GSEs’ capital and forced them, together, to take $187 billion from Treasury.

But because accelerated or exaggerated expenses cause losses that are only temporary, Fannie’s and Freddie’s non-cash losses began to reverse themselves in 2012. Coupled with profits resulting from a rebounding housing market, the reversal of these losses enabled both GSEs to report in August 2012 sufficient second quarter income to not only pay their dividends to Treasury but also retain a total of $3.9 billion in capital.

As soon as it became apparent that a large percentage of the non-cash accounting losses booked during the previous four years were about to come back into income, Treasury and FHFA entered into the Third Amendment to the PSPA. The Third Amendment substituted for the fixed dividend payment a requirement that all future earnings—including reversals of accounting-related expenses incurred earlier—be remitted to Treasury. From the time the Third Amendment took effect through the end of 2014, Fannie and Freddie paid Treasury $170 billion, $133 billion more than they would have owed absent the Amendment.

Fannie and Freddie never were in danger of failing because of a lack of liquidity, and the mortgages they owned or guaranteed had loss rates one-third as high as the mortgages held by banks. Yet Treasury imposed far more onerous terms on Fannie and Freddie than on commercial banks that required assistance. Treasury’s effective nationalization of Fannie and Freddie was a policy decision, and the compensation Treasury granted itself upon taking over Fannie and Freddie was grossly disproportionate to the true economic risk it faced, both at the time and subsequently.

Next Chapter

The speculation, there is discovery evidence supporting Tim’s assertion, which are currently sealed but might be unsealed and released in a few months. It is believed that there is more evidence supporting Tim’s assertions but haven’t been disclosed or released because they are out of the original search scope. I am hopeful; Washington Federal will get their day in discovery once the motion to dismiss is denied and their partial stay removed.

See The Prediction: the Motion to Dismiss, DENIED

Defense Attorneys and witnesses who had knowledge of or knowingly committed perjury might resign or take a leave of absence before or after evidence is made public. Presently, most but not all of the original architects and key actors of the PSPA and 3rd Amendment have left and moved on. Only fools are left holding the bag.

Even though Defendants denied talks, it is not completely off the table. It might be in consideration as the decision of de-designation of protected information order approaches and Judge Sweeney makes her determination.

As sign of change, FHFA Director Watt is distancing himself by stating that he clearly didn’t create the PSPA, which trump the Statute. In addition, he broke rank and file by approving raises for both GSEs CEO. It appears Director Watt sees the writing on the wall.

It is still difficult to assess if defendants are willing to discuss settlement at this time. Defendants might wait until the motion to dismiss is denied before settlement discusses start. However, with most if not all of the other cases granted access to protected information, defendants might not have many alternatives but to strategize an exit plan sooner rather than later.

Media Blitz Update

In the media front, Larry Kudlow and Joshua Rosner had a rather interesting GSEs discussion. The interview started at 1:18:00. Click HERE to listen

See I see right through you! Larry Kudlow and Joshua Rosner see the truth.

Investor Unite had an informative discussion as well. Richard Epstein suggests the Saxon Iowa case could amend and include a challenge against the Conservatorship and PSPA using the newly discovered evidence. If you missed this call, you missed a lot. Listen to the teleconference Click HERE to Listen

This is old but relevant and timely, Tim Howard “The Mortgage War” chat.


Ackman at Delivering Alpha: Most interesting investment now is Fannie Mae, Freddie Mac.

Ackman said, “It offers the most upside, probably the most downside of anything we own,” He believes the downside scenario is unlikely.

“This cannot become a precedent where the U.S. government can come in and unilaterally take 100 percent of the profits of a private corporation forever,” he said. Click HERE to Listen