This program features the inaugural publication of Columbia Global Reports, Shaky Ground: The Strange Saga of the U.S. Mortgage Giants.
Introduction by:
Lee C. Bollinger
President, Columbia University in the City of New York
Moderated by:
Nicholas Lemann
Journalism Professor and Dean Emeritus;
Director, Columbia Global Reports
Discussion featuring:
William Ackman
Founder and Chief Executive Officer,
Pershing Square Capital Management LP
Bethany McLean
Author, Shaky Ground;
Investigative Journalist
Franklin Raines
Former Chairman and Chief Executive Officer,
Federal National Mortgage Association
In 2008, the U.S. Treasury put Fannie and Freddie into a life-support state known as “conservatorship” to prevent their failure — and worldwide economic chaos. The two companies, which were always controversial, have become a battleground. Today, Fannie and Freddie are profitable again but still in conservatorship. Their profits are being redirected toward reducing the federal deficit, which leaves them with no buffer should they suffer losses again. China and Japan are big owners of Fannie and Freddie securities, and they want to ensure the safety of their investments — which helps explain why the government is at an impasse about what to do. But the current state of limbo is unsustainable. Based on comprehensive reporting and dozens of interviews, Shaky Ground chronicles the story of Fannie and Freddie seven years after the meltdown and tells us why homeownership finance is now one of the biggest unresolved issues in today’s global economy.
TH717 
Oct. 26 — Hank Greenberg, chairman and chief executive officer at CV Starr & Co. and former chairman and chief executive officer at AIG, and Attorney David Boies of Boies, Schiller & Flexner, react to comments from former Federal Reserve Chair Ben Bernanke about the AIG bailout in his new book “The Courage to Act.” They speak on “Bloomberg Markets.”
https://finance.yahoo.com/video/greenberg-bernanke-geithner-way-overreached-150449727.html
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Weiss Fires Blanks at Investors
October 20, 2015
Yesterday, the Treasury Department’s “Counselor” Antonio Weiss came out guns blazing against recapitalizing Fannie and Freddie, but after reading his op-ed, we’ve concluded that Weiss is shooting intellectual blanks.
Full of intellectual dishonesty and false statements, Weiss’ piece in yesterday’s Bloomberg View began by claiming that shareholders want the government to cede control of the mortgage finance companies to private shareholders.
“Cede control?” Mr. Weiss, since when is it unusual for control of a company to rest with its shareholders? That is the way the free market operates. What is unusual is the government’s nationalization of these two companies, which it has effectively done by enacting the Third Amendment Sweep. Weiss’ comments belie a fundamental misunderstanding of free market capitalism, and continue the Treasury Department’s Orwellian disregard for the statute that governs the conservatorship of Fannie and Freddie. The Housing and Economic Recovery Act (HERA) reformed Fannie and Freddie, and it requires the government (specifically the Federal Housing Finance Agency and not Treasury) to act as a conservator of value for private shareholders.
Weiss is also wrong when he says that “recap and release” could raise the cost of mortgages for Americans, and potentially expose taxpayers to another painful bailout. Why would Fannie’s and Freddie’s funding costs go up if they retain their own capital and a government backstop after reforming their businesses? Weiss doesn’t provide any explanation for this claim. Further, it is comical for him or any Treasury official to publicly worry about a taxpayer bailout when it is the Treasury Department’s continued sweep of 100 percent of the companies’ profits that has exposed taxpayers in the first place.
Weiss also reflected on lessons learned about the unworkability of “privatizing gains while socializing losses” and insisted the Administration wants to transition to a system that “provides broad access to housing supported by a sound and robust mortgage market, without exposing taxpayers to another rescue.”
But here is another important lesson the government should have learned: Privatizing losses while socializing gains does not work very well either. Fannie and Freddie have paid taxpayers almost $50 billion MORE than they were ever loaned in the first place. That is a far greater return for taxpayers than any other rescue made by the government during the crisis. And after seven years of conservatorship, no one, including Weiss, has come up with a workable substitute for the time-honored principle that regulated entities should have sufficient capital to bear risk. By vacuuming up Fannie and Freddie’s profits every quarter, the Treasury Department seems to have forgotten this principle.
Weiss delved into some specifics about why “recap and release” wouldn’t create the new world the Administration envisions. He asserts that recapitalization would do nothing to increase access to the housing market for creditworthy borrowers. He reasons that “recap and release” would subject Fannie and Freddie to demands of greedy investors who he implied don’t care about the “duty to serve” part of the GSEs’ mission. But he offers no evidence whatsoever that “investor pressures” have ever undermined those requirements. Plus, he offers no plan of his own to fulfill the government’s “duty to serve” obligations, other than giving Fannie and Freddie’s business away to Too-Big-To-Fail banks.
Weiss disputes the undeniable fact that taxpayers have been fully repaid for the risk they took in the crisis. He accurately points out that Treasury injected $188 billion in capital in 2008 and committed to providing another $258 billion, if needed. But he omits two key facts: First, the companies have paid $239 billion against the $187 billion – for a taxpayer profit of $51 billion. Second, in addition to this profit, the taxpayers own 79% of the common stock through warrants, which, if exercised as part of a recapitalization, would yield an additional $100 billion in profit for the government. There is plenty of private capital – in the form of shareholder value that would be realized in a recapitalization – for Fannie and Freddie to operate. In contrast, it’s not clear where the capital for an alternative platform would come from.
Without providing any specifics, Weiss dreamily envisions a new housing finance market in which private capital would take most of the risk and taxpayer exposure would be limited to an “explicit, appropriately-priced guarantee to ensure against catastrophic risk.” But who will guarantee the nation’s $9 trillion mortgage market? How will affordable housing programs be protected? Weiss offers no details.
There is a way forward: GSE recapitalization, with the sale of common stock from exercising the warrants and proper regulation under HERA, would, in fact, mean that private capital would take most of the risk. Taxpayer exposure can be limited by decreasing the current arrangement to paid-for “catastrophic” levels, and Fannie and Freddie could return to their historic mission of providing affordable housing for all Americans.
To find more Investors Unite blogs click http://www.investorsunite.org
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Government-backed mortgage lenders are the definition of too big to fail. Too bad we need them more than ever.
By Bethany McLean October 15 at 1:52 PM
Bethany McLean is a contributing editor at Vanity Fair and the author of “Shaky Ground: The Strange Saga of the U.S. Mortgage Giants.”
If there’s one thing with which most of Washington has long agreed, it’s this: Fannie and Freddie must die.
That’s Fannie Mae and Freddie Mac, the mortgage giants that prop up much of the American housing market and have been operating under government control since the financial crisis seven years ago. “There’s a majority of people here that believe that they should be wound down and replaced so that the taxpayers are not backing them up as they are today,” is how Sen. Bob Corker (R-Tenn.) put it last week. In one of his few mentions of the topic, President Obama described Fannie and Freddie’s business model as “heads [they] win, tails taxpayers lose,” meaning that although their executives and shareholders profited in the good times, the implicit belief that the government stood behind them — which was the core of their business model — would force taxpayers to cover the losses in a crisis. Which we did.
The critics are right about the flaws of both institutions: Fannie and Freddie agglomerated too much political power before they went bust, and their drive for market share during the housing boom early in the past decade left taxpayers on the hook to bail them out.
But we still need Fannie and Freddie, even more now than before.
They own or guarantee the payments on more than $5 trillion in American mortgages, or about 60 percent of the total. In the years since the financial collapse, they have been the major source of credit for most people who got mortgages, and the only source of credit for less-than-pristine borrowers. Washington is paralyzed. Even Corker, when pressed, backed away from his call to eliminate them, because despite the hatred of the housing giants, collectively known as “government-supported entities,” or GSEs, no one wants to see what would happen without them, and no one can agree on how to replace them.
As a result, there’s no plan for how the United States will finance housing in the future. Without a housing finance policy, there is no housing policy. And that’s a huge problem, because another crisis — about how people will afford a place to live — is brewing.
Since 2008, while Fannie and Freddie have sat in limbo, homeownership has plunged. This summer, the Census Bureau reported that the homeownership rate had fallen to 63.4 percent, the lowest level in 48 years. (It had peaked at 69 percent, in 2004.) “Renter nation,” one blog called the United States. The decline is particularly pronounced in minority communities. At the Congressional Black Caucus Foundation’s annual legislative conference this year, housing advocates pointed out that the homeownership rate for the black population has decreased from nearly 50 percent in 2004 to about 43 percent, its lowest level in 20 years. It’s projected to continue to drop.
Pundits have argued that the homeownership rate was, and maybe still is, too high, because too many people were getting mortgages they couldn’t afford. But if people don’t own (and don’t sleep on the street), they rent — and rents have been steadily rising since 2000, while incomes have not kept pace. In the third quarter of this year, rents increased by 5.7 percent year over year, according to Morningstar, and they rose at a double-digit clip in some large cities such as San Francisco and Denver. (Rents in Washington were up just 1.44 percent year over year, according to the online real estate database Zillow, in part because of rent-control laws.) The Wall Street Journal recently noted that a pending merger of two companies that own single-family rental homes is predicated on rents continuing their rise.
Stan Humphries, the chief analytics officer at Zillow, has called what’s coming a “rental crisis.” According to Zillow’s data, while homeowners with a mortgage can expect to spend about 15.3 percent of their income on monthly housing bills, renters must plan to set aside almost double that share. As rents rise, it gets harder to save for the down payment required to buy a home. Add in the burden of student loans, and financial challenges increase. According to an analysis by Enterprise Community Partners and the Harvard Joint Center for Housing Studies, since the start of the 2000s, the number of severely cost-burdened renters in the United States — meaning those who pay more than half their income in rent — has risen substantially, from 7 million in 2000 to 11.3 million in 2013. The number is expected to keep increasing.
There’s a logical response to this, which is to use Fannie and Freddie for what they were designed to do: support homeownership for those who can afford it, and support the financing of multi-family housing that working people can afford.
In Washington policy circles, reviving the GSEs is considered something that shouldn’t be discussed in polite company. The complaints about their pre-crisis business model are accurate — but some of the other criticisms are wrong, and even contradictory.
One argument is that in their previous incarnation, Fannie and Freddie caused the financial crisis by helping unqualified people buy homes, in the name of following mandates from Congress to meet housing affordability goals. But the financial crisis wasn’t caused by putting people in homes. It was caused by people of all income levels speculating on homes as investment properties, and using their homes as credit cards, extracting money from them via cash-out refinancing. According to Jason Thomas, the director of research at the Carlyle Group, only about a third of subprime mortgages that were turned into mortgage-backed securities between 2000 and 2007 were used to buy homes. And a study published by the National Bureau of Economic Research in early 2014 found that the wealthiest 40 percent of borrowers obtained 55 percent of the new loans in 2006 — the peak year of the bubble — and that over the next three years, they were responsible for nearly 60 percent of delinquencies.
Another old criticism contradicts that one: In the 1990s, critics — from activists on the left, to American Enterprise Institute scholar Peter Wallison on the right, to the Congressional Budget Office — argued that Fannie and Freddie never did much to foster homeownership or lower mortgage rates. Maybe this was true in the golden years of the 1990s, when there was no shortage of private capital to be lent for real estate. But we certainly needed Fannie and Freddie in the wake of the crisis. And although there is a lot of analysis about what a market without government support would look like, the simple truth is that Fannie has been around for almost 80 years. Anyone projecting how the housing market would appear without it is just guessing.
Still, there is fairly widespread agreement that some things we take for granted, such as a 30-year, fixed-rate, pre-payable mortgage, wouldn’t exist without a government backstop. Investors simply don’t want that risk. That’s part of the reason Congress has done nothing with the institutions since the government took them over. Without the government support, not much would change for the very wealthy. But most analysts agree that a great swath of the middle and lower class probably would get five- to 15-year mortgages with floating rates, rates that would vary significantly depending on income and geography. Mortgage capital might be hard to come by in times of stress. Home prices probably would decrease. With an affordable-housing crisis in the works, and when even the Wall Street Journal is publishing essays about the squeeze on the middle class, it is probably not politically feasible or wise to experiment if you care about the social fabric of the country.
Most supposedly “free market” solutions assume that the big banks would take greater control of the mortgage market without Fannie and Freddie. But the big banks were bailed out in 2008, too. The Dodd-Frank financial reform legislation may have fixed the “too big to fail” issue. (That’s debatable, but give it the benefit of the doubt.) If banks control the nation’s mortgage market, does anyone think they’ll be allowed to fail in the next crisis? In which case, how are they not government-supported entities, as well?
One legitimate complaint about the old Fannie and Freddie was the way they garnered political clout through their promotion of homeownership. In their heyday, it was immense and ugly. (“Fannie has this grandmotherly image, but they will castrate you, decapitate you, tie you up, and throw you in the Potomac,” a congressional source told the International Economy in the late 1990s. “They are absolutely ruthless.” That would pale next to the political clout of a big bank that also controlled the mortgage market, and whatever evils grew out of the GSEs’ need to please politicians, there could be worse. Imagine the conversation in a back room between the politicians and the bank executives, where they agree that if the bank will loosen up credit in their states, the politicians will go easy on, say, derivatives regulation. It almost makes the old Fannie and Freddie look pure.
Fannie and Freddie have legitimate problems. As Obama said, theirs was a flawed business model in which the drive for profits ultimately led to their failure. Many economists also argue that any subsidy eventually leads to corruption. But there are ways to mitigate these issues. Regulate Fannie and Freddie like utilities, with limits on the returns they can make. Create incentives that encourage them to pull back from the market when it’s overheating, instead of chasing market share. Give them as competent a regulator as possible. Encourage Fannie and Freddie to get private capital to bear risk ahead of them, which they are trying to do, and which is how their existing multi-family businesses operate.
None of this would satisfy the Fannie and Freddie bloodlust. Nor would it be perfect. But if perfect is out there somewhere, it’s time to propose it. We need a housing policy.
Twitter: @bethanymac12
https://goo.gl/CJlk5q
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Corker Now Says Fannie and Freddie Should be Reformed
October 13, 2015
Today on CNBC’s “Squawk Box,” Senator Corker, delving once again into his favorite policy project, backpedaled away from statements he made on the same network last week. The senator, who just last week said that Congress should “wind down and replace” the GSEs, changed his tune to join others in calling for reform, rather than elimination, of the enterprises. From the video:
http://video.cnbc.com/gallery/?video=3000431791
“Obviously, over time what I hope they become is a utility. Today, I’m meeting with a group that is buying the front end risk. So, you know, what we want to do is make sure that, over time, that’s what happens. Let’s make sure their portfolios shrink…You know, what we want to see happen is, over time, them become a utility. And at some point maybe they come back out on the market. Hopefully, that’s years down the road, but what happened last week was you have people who’ve come in and bought these preferred shares…I just wanted to make sure people understood that what was being said, the rumors that were taking place were not real.”
It’s not surprising to see Senator Corker attempt to downplay “what happened last week,” when he recommended on live TV that investors short the stock of Fannie Mae and Freddie Mac. But it is striking that Senator Corker has joined the growing chorus of policy makers and industry players, notably including Mortgage Bankers Association President Dave Stevens, who have switched to calling for GSE reform rather than elimination.
But don’t be fooled into thinking this change of heart is solely motivated by a realization that the housing market cannot effectively function without Fannie and Freddie. Senator Corker still wants to take the GSEs’ business and hand it to the big banks. Corker notes that he met today with a group that is “buying front end risk,” and made clear his desire to shift to a “risk sharing” based housing finance model at last week’s Bipartisan Policy Center event with Senator Mark Warner.
As former FDIC Chairman William Isaac pointed out in an excellent American Banker column that ran ahead of the BPC event, risk sharing cannot be used as a substitute for capital at the GSEs. And handing the GSE’s business to the big banks also rips off the taxpayer. Here’s why: Through the money taxpayers invested in Fannie and Freddie before 2012 (which has been more than repaid), they now own the warrants for 80% of the GSEs’ common stock. As more GSE business is handed away, the value of those warrants decreases, sapping the remaining return on the taxpayer’s investment. Make no mistake: Senator Corker’s plan amounts to taking money from taxpayers and handing it, along with the housing market, to the country’s biggest banks.
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Corker changed tune from wind down to Public Utility Structure for the GSEs.
http://video.cnbc.com/gallery/?video=3000431791
No mention of shorting.
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Bethany McLean, Vanity Fair Contributing Editor, discusses Senator Bob Corker’s conversation about hedge funds pushing a Fannie & Freddie IPO.
http://video.cnbc.com/gallery/?video=3000430360
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Did Sen. Corker violate SEC rules, Senate ethics by telling investors to short GSEs?
Made questionable remarks on CNBC regarding stocks he regulates via committee
[Update 12:25 p.m. ET: Response from Corker’s office]
Sen. Bob Corker, R-Tenn. appeared on CNBC Wednesday discussing the issue of conservatorship for the GSEs, and in dismissing a report suggesting the White House is open to ending conservatorship he said investors should short Fannie Mae and Freddie Mac.
Corker said “hedge funds” are spreading false rumors that the White House wants to “re-IPO” Fannie and Freddie.
“People should be short it, because it’s major BS,” Corker said. “It’s just talking your own book.”
He was referring to an Oct. 5 note from the research firm Political Alpha. This note made the rounds in both Washington and Wall Street causing GSE shares to trade-up. The note states:
Multiple sources have confirmed that the White House has reached out to the housing finance community to better understand its options on what to do with the GSEs after conservatorship.
…
The Administration is in the very early stages of looking at various options to end the GSEs conservatorship. This is a major shift in thinking as it would entail ending the GSE profit sweep allowing Fannie and Freddie to begin to retain capital. While we have been told the Administration is not close to deciding how to proceed, the initial announcement of the White House’s intent would clearly be beneficial to the entire capital structure of the GSEs.
Here’s is the interview with CNBC’s Rick Santelli.
https://www.iqmediacorp.com/ClipPlayer/?ClipID=18af5935-39f2-48f8-978b-804999dec186
This raises serious questions about whether Corker, who serves on the Banking, Housing and Urban Affairs and is author of a bill, “Jumpstart the GSEs” which is currently languishing in the Senate, violated Senate ethics rules, Securities & Exchange Commission or both.
Corker is also co-author of Corker-Warner, a housing reform bill that failed in the Senate.
“As we’ve seen over the past few years, there are some entities that are doing everything they can to distort the truth and kill efforts to reform our nation’s housing finance system because they benefit from the status quo at the expense of taxpayers,” said Micah Johnson, press secretary for Corker. “It is laughable that some are clinging to a tongue and cheek comment made during an interview in making this baseless charge.”
A spokesperson for the SEC told HousingWire that the agency “declines to comment at this time.”
Senate rules and ethics regarding investments prohibit senators and senate staff from a broad range of what would be considered insider trading and information.
Here are those rules, the link directly above goes to the original source.
Existing Securities Law Prohibits Trading on Information Obtained Through Official Duties.
Securities laws prohibit anyone from misappropriating material, nonpublic information in violation of a duty of trust or confidence owed to the source of the information, such as an employer. Members and staffers could violate a federal anti-fraud regulation of the Securities and Exchange Commission, Rule 10b-5, by purchasing securities based on information obtained in the course of their official duties, or derived from their Senate position, if that information was material and nonpublic and they breached the duty of trust and confidence described above.
Existing Securities Law Prohibits Passing on Inside Information to Others Who Trade.
It is also impermissible to pass on material, nonpublic information to others who may profit themselves or help the “tipper” to profit. Members or staffers who are tippers of material, nonpublic information may be liable if they breached their duty of confidentiality by tipping another individual who then trades, and they receive some resulting direct or indirect personal benefit, be it financial, reputational, or otherwise. For example, a benefit may result when a tipper seeks to make a gift to a trading friend or relative by passing on material, nonpublic information. The Member or staffer must have expected to receive a personal benefit – and cannot have solely made an inadvertent disclosure or shared information in good faith without expecting to receive a personal benefit.
…
Senate Nondisclosure Rules.
Senate rules prohibit disclosing or misusing confidential information. Senate Rule 29.5 states:
Any Senator, officer, or employee of the Senate, who shall disclose the secret or confidential business or proceedings of the Senate, including the business and proceedings of the committees, subcommittees and offices of the Senate, shall be liable, if a Senator, to suffer expulsion from the body; and if an officer or employee, to [suffer] dismissal from the service of the Senate, and to punishment for contempt.
This rule applies to information obtained in a variety of circumstances, including information received in a closed, nonpublic hearing; information gathered during the confidential stages of a committee investigation; and classified national security information. Members’ personal offices and Senate committees may impose additional, more specific rules on the confidential treatment of certain types of information in their offices.
Deborah Mayer, chief of staff of the Senate Ethics Committee, did not return inquiries for this story by publication time.
If the research from Political Alpha is accurate, it explains why the White House exploring ways to bring the GSEs out of conservatorship, and what the implications could be.
The GSEs were taken under conservatorship in September 2008 in the midst of the housing crash and financial crisis it triggered. Since the implementation of the “third amendment sweep” in August 2012, all profits from Fannie and Freddie are taken by Treasury. To date, Fannie and Freddie have paid back $54 billion more to Treasury than it borrowed.
Some analysts have been suggesting the administration is open to this route or some form of settlement, especially given the ongoing litigation over the issue from shareholders who contend that the sweep is illegal. Corker himself admitted Tuesday that an increasing number of conservative lawmakers in the House and Senate are listening to the arguments made by shareholders that the GSEs should be re-privatized.
“Some of our (right) wingers are migrating over to this third amendment thing because it makes it easy not to do anything,” he said, speaking at the Bipartisan Policy Center.
The Political Alpha note speculates the White House is open to re-privatization in the wake of GSE reform stalling, because it is concerned with the direction a potential GOP president could take housing policy.
“With GSE reform stalled, we’ve been told that the Administration is afraid of what will happen to the affordable housing mandate should a Republican take office in 2017. Their fear is that a new Republican president could simply wind down the GSEs and kill the affordable housing mandate if the GSEs were to remain in conservatorship,” the note says. “Therefore, the White House wants to better understand its options as it looks to preserve the affordable housing mandate into the next Administration. Moreover, the Administration is also trying to front-run any resolution to the current litigation so they can better control the outcome.”
Calls to the White House press office were also not returned at publication time.
Isaac Boltansky at Compass Point Research & Trading, suggests that this is not outside the realm of possible.
“Our view remains that the policy conversation in D.C. is slowly shifting toward a consideration of reforming and releasing the GSEs from conservatorship but we do not believe administrative action in any form is imminent,” he said. “Instead, our view is that the next iteration of the GSE conversation will focus squarely on the merits of GSE capital retention which is a marker on the road to exiting conservatorship but still miles from the off ramp.”
For the time being, however, adminstrative action against Sen. Corker appears as distant as GSE reform itself.
http://www.housingwire.com/articles/35296-did-sen-corker-violate-sec-rules-senate-ethics-telling-investors-to-short-gses
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Tearing down the wall of secrecy
October 08, 2015, 11:00 am
A little discovery is a dangerous thing, as the government is learning in the latest round of litigation arising from the Treasury Department’s 2012 profit sweep of Fannie Mae and Freddie Mac.
On Wednesday, Sept. 30, Judge Margaret Sweeney of the Court of Federal Claims allowed the plaintiffs in Fairholme Funds v. United States to file any and all materials designated by the government as “Protected Information” in other lawsuits challenging the government’s conduct toward Fannie Mae and Freddie Mac. This effectively opens the floodgates for the disclosure of information that the government has long been trying to suppress.
Fairholme Funds is one of a number of private investors who are suing the government in separate lawsuits, all of which arise from the government’s response to the 2008 financial crisis. It was in response to that crisis that the federal government put Fannie Mae and Freddie Mac, two of the largest financial institutions in the United States, under what was supposed to be the temporary control of the Federal Housing and Finance Agency (FHFA). The purpose of this measure was to avoid mass foreclosures on the subprime mortgage market.
As the majority shareholder in Fannie and Freddie, the government then began moving enormous tranches of toxic debt into the two government-sponsored entities (GSEs). In exchange, the Department of Treasury opened up billions of dollars’ worth of credit to the companies.
By 2012, the GSEs were returning to profitability, notwithstanding the fact that the government had effectively turned them into warehouses for toxic debt. (Indeed, as of this April they have paid $40 billion more to the government than they borrowed during the crisis.) But as the mortgage market began to stabilize, the Treasury Department made an unprecedented move: it announced a sweep of 100 percent of Fannie and Freddie’s profits. Since August 2012, every dollar the GSEs have made has gone directly into the government’s coffers rather than into the pockets of Fannie and Freddie’s preferred shareholders.
Not surprisingly, a number of investors have brought suit against the government for its high-handed expropriation of the GSEs’ profits. The government’s response to these suits, however, has been surprising to say the least. The Justice Department has invoked executive privilege to avoid the production of documents created by officials at the FHFA and Treasury during the lead-up to the profit sweep.
Executive privilege is an extraordinary power enjoyed by the president. Through it, he can avoid the compulsory disclosure of sensitive information during litigation. The doctrine is frequently invoked in order to protect state secrets and/or to preserve the executive’s interest in confidentiality when it comes to the delicate process of policy-making. But in the current GSE litigation, the government assumed an entirely novel approach to executive privilege. The Department of Justice argued that it should not be compelled to hand over sensitive documents during discovery because financial markets might be destabilized as a result. In essence, the DOJ argued that investors simply could not handle the truth about how the government makes financial policy.
Thankfully, Judge Sweeney has been chipping away at the government’s attempts to build a wall of secrecy around its financial decisions. In late July of this year, she permitted Fairholme to use information that the government sought to keep secret as “protected information” in its shareholder lawsuit. Judge Sweeney required that the information remain under seal, thereby keeping it out of the public eye, but it was certainly a step in the right direction.
This Wednesday Judge Sweeney went one step further, granting the Fairholme plaintiffs’ request for permission to file those documents in other lawsuits against the government, as well. And since Fairholme is filing amicus briefs in a number of suits, those documents will likely send shock waves through the litigation strong enough to shake the foundations of the government’s wall of secrecy.
In the short term, Judge Sweeney’s ruling will help throw much-needed daylight on the government’s financial policies. In the long term, it will send a message to future administrations about transparency and accountability in a free market economy: our markets are a lot more resilient than politicans think.
Helfman is an associate professor at Syracuse University College of Law.
http://thehill.com/blogs/congress-blog/judicial/256277-tearing-down-the-wall-of-secrecy
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Seeking Political Alpha: Freddie Mac, Fannie Mae And The American Dream
Summary
Political risk can affect the valuation of a firm’s common and preferred securities.
Reduction of political risk can cause the valuation of a security to outperform a benchmark.
Settlement of ongoing litigation remains a possibility.
Political risk is the risk that political decisions, events, or conditions will significantly affect the forward-looking profitability and cash flows of a firm. One often thinks of political risk as a problem in the developing world, but firms in the U.S. are not immune to their earnings being affected by regulatory changes, breaches of contract, and failure to honor financial obligations, not to mention the outright expropriation of investors’ property rights.
Many investors seek investments that they expect will do well relative to a benchmark, albeit that is easier said than done. Reductions in political risk may allow a firm that benefits from that risk reduction (via improved earnings and cash flows) to outperform relative to a benchmark.
Pershing Square is the largest common shareholder in FMCC and FNMA. Hedge fund investor Bill Ackman of Pershing Square argues that the U.S. government is perpetrating “the most illegal act of scale” he has ever seen with respect to taking all of the profits from Freddie Mac (OTCQB:FMCC) and Fannie Mae (OTCQB:FNMA).
Freddie Mac and Fannie Mae are together known as the government sponsored enterprises (GSEs). This taking of the GSEs’ profits is effectuated via a “net worth sweep,” as set forth in the 3rd Amendment to the Senior Preferred Stock Purchase Agreements (SPSPAs) between the U.S. Treasury (Treasury) and the Federal Housing Finance Agency (FHFA).
Mr. Ackman vividly goes on to argue that this arrangement “will not be allowed to stand, from a legal point of view. And the reason for that is if the U.S. government can step in and take 100% of profits of a corporation forever, then we are in a Stalinist state and no private property is safe – and take your money out of every financial institution, put it into gold or Bitcoin and just get the hell out because we’re done, maybe the clothes on your back, but other than that nothing is safe.”
Is Mr. Ackman right about this? If yes, this is a problem that any investor in any American business should be concerned about.
Political Risk
The MIGA-EIU Political Risk Survey 2013 (Figure 1.9) shows that the types of political risk of most concern to investors in developing economies over the next 12 months include: (1) adverse regulatory changes, 56%; (2) breach of contract, 45%; (3) transfer and convertibility restrictions 37%, (4) civil disturbance, 30%; (5) non-honoring of financial obligations, 27%; (6) expropriation, 19%; (7) terrorism, 11%; and (8) war, 6%.
Four of these types of political risk arguably apply to the situation currently faced by GSE investors.
Adverse regulatory changes. I would characterize the FHFA’s extremely investor-unfriendly actions as safety and soundness regulator and conservator of the GSEs as regulation on steroids. The FHFA has adopted an extreme position that serves to expropriate GSE common and preferred investors and donate all of the GSEs’ earnings to Treasury. FHFA further argues that that there is no path of appeal to the FHFA’s decision to donate the GSEs earnings to Treasury.
Breach of contract. As I explained in a previous Seeking Alpha article, there are plausible allegations that Treasury/FHFA breached their contractual obligations to GSE common and preferred investors.
Non-honoring of financial obligations. Common shareholders of profitable companies ordinarily expect to get the residual after the firms’ other obligations are met. Noncumulative preferred stock is quasi-equity, with the preferred dividend limited by the terms of the prospectus. From an economic standpoint, extremely perverse incentives are created when the government can avoid the ordinary investor obligations of an investor-owned firm via what I would characterize as the abuse of the conservatorship process. After all, conservatorship is intended to allow firms to return to the control of the firms’ board of directors once they have returned to profitability and a safe and sound financial condition.
Expropriation. I have previously characterized the situation facing GSE common and preferred investors as de facto nationalization of the GSEs and direct but creeping expropriation of GSE common and preferred investors. Nationalization of a company and expropriation of a company’s investors without just compensation is exceedingly rare in the United States.
While the appeal of the Treasury/FHFA actions takes time, one can rationally expect that one of the many paths of appeal may eventually lead to a reasonable outcome that treats GSE common and preferred investors fairly.
Prospects for Settlement and Financial Restructuring
While the prospect for settlement of the ongoing litigation and financial restructuring of the GSE is highly uncertain, there remains the possibility that the current situation facing GSE investors will be resolved sooner rather than later. After all, Fannie Mae and Freddie Mac play a valuable role in supporting U.S. mortgage markets, e.g., supporting the affordability of housing via lower mortgage costs than would otherwise be the case. Homeownership may not be absolutely essential to the fulfillment of the “American dream,” but it is hard to deny that homeowners are less exposed to the vagaries of the rental housing market (i.e., they are less exposed to the risk that housing demand will cause rents to rise faster than the renters’ income).
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
http://seekingalpha.com/article/3558006-seeking-political-alpha-freddie-mac-fannie-mae-and-the-american-dream
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A White House flip-flop on Fannie and Freddie? Investors think so
Investors in Fannie Mae and Freddie Mac are pumped over a controversial new report that claims the Obama administration has changed its stance and now wants to revive the beleaguered mortgage-financing giants.
Such a move would be a boon to shareholders, who have bid the stocks up by almost 9 percent since the report’s release Tuesday. On the other hand, investors stand to lose their investment should the pair be wound down — the path previously endorsed by the White House.
Big money investors — including Bruce Berkowitz’s Fairholme Funds, Richard Perry’s Perry Capital, and Bill Ackman’s Pershing Square — have billions of dollars on the line and are suing the Treasury over its decision to take all Fannie and Freddie’s profits in 2012, around the time they turned profitable following a bailout during the housing crisis.
The report, by a 10-year-old secretive Washington political risk intelligence firm called Political Alpha, raised hopes for an end to the standoff, citing a “major shift of thinking” at the White House.
Fearing a Republican administration might kill the mortgage giants’ affordable housing mandate, the White House is considering ending the sweep of all their profits to Treasury, “allowing Fannie and Freddie to begin to retain capital” and end the conservatorship, according to Political Alpha.
The report sent shares up about 7 percent Tuesday. Ackman also mentioned it at a Bloomberg conference Tuesday after the market close.
But the next day, Sen. Bob Corker (R-Tenn.), who is the main Congressional proponent of killing Fannie and Freddie, appeared on business news network CNBC to debunk the report, calling it “major B.S.”
In an unusual move by a US senator that riled shareholders, Corker also called on investors to short the stock. Corker has crafted several bills to shut down Fannie and Freddie. So far, the bills have gone nowhere.
Political Alpha — formed by former research analysts for political risk guru and ex-George Soros partner Richard Medley— declined to comment beyond its report.
Both companies, which were up less than 1 percent Thursday morning, have gained about 17 percent this year but still trade below $3.
Fannie and Freddie, which have long benefited from the implicit backing of the government, became official wards of the state in 2008, when Treasury forced a drastic writedown of their assets, necessitating a $187 billion bailout.
In 2012, just as they turned profitable again and the writedowns disappeared, the government decided to “sweep” all their earnings to the Treasury — more than $230 billion to date.
The sweep sparked a legal battle, which presents a potential hurdle heading into an election year. The White House wants to “front run” the litigation to “better control the outcome,” according to Political Alpha.
As The Post previously reported, shareholders suing the government over the Treasury’s profit sweep have suggested in largely-redacted court papers that a Federal Housing Finance Agency official misled the court when he said did not know it was likely that Fannie and Freddie would return to profitability.
http://nypost.com/2015/10/08/a-white-house-flip-flop-on-fannie-and-freddie-investors-think-so/
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Watch Bob Corker Tell Americans to “Short” Shares of Fannie and Freddie
October 10, 2015
In an interview with Rick Santelli on CNBC today, Senator Bob Corker (R-TN) told viewers to “short” shares of Fannie and Freddie. We’ve never seen a U.S. Senator comment on securities prices or give advice on securities trading before, and we’re guessing that you haven’t either. Here’s the clip from CNBC:
https://www.iqmediacorp.com/ClipPlayer/?ClipID=18af5935-39f2-48f8-978b-804999dec186
Corker’s bias against shareholders and shareholder rights has been consistent in recent years, even as he has championed his own agenda for GSE reform that entails giving Fannie and Freddie’s business away to the big banks. In his interview today with CNBC, the Senator continues this bias by accusing shareholders of wanting to “fleece the American people.” This outrageous statement ignores the fact that shareholders are the ones who have been fleeced by the Treasury Department, their rights trampled by the Third Amendment Sweep, which is a violation of the law governing the conservatorship of Fannie and Freddie.
Furthermore, we find it quite interesting that Senator Corker would go on CNBC to tell a financial audience to short a stock, or to make predictions on a stock’s performance, especially given his active and longstanding legislative activity on the companies involved. Our readers may recall that former Corker staffer Michael Bright, who was a primary author of the Corker-Warner legislation, took a job at Blackrock last year. According to public sources, Blackrock was heavily involved in lobbying for the bill’s passage and would have been a major beneficiary. Read more about this here.
Some questions need to be answered:
1) Who else benefits from Bob Corker’s GSE Reform agenda, and is he fully disclosing his ties to these interests?
2) Why would he go on CNBC to comment on stock prices, even going so far as to recommend that viewers short a stock?
3) Isn’t it unprecedented for a Senator to do something like this?
More to come…
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http://www.bloomberg.com/news/videos/2015-10-06/influencer-interview-bill-ackman
Ackman discussion on GSEs starting at 22:00
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Risk-Sharing Is No Substitute for Capital at Fannie and Freddie
By William M. Isaac
October 5, 2015
In recent weeks, the debate over what to do about the mortgage giants Fannie Mae and Freddie Mac has shifted from wholesale replacement to genuine reform.
Fannie and Freddie, now in the eighth year of a conservatorship that began in the depths of the financial crisis, remain in in limbo even after paying back nearly $238 billion to taxpayers — that’s $50 billion more than they were ever loaned in the first place.
But that’s not to say that we’re any closer to Congress actually acting on GSE reform. Politics has something to do with the government’s inaction, but so does the complexity of redesigning the entire housing finance market. Replacing Fannie and Freddie with an untested model would be impractical, if not destabilizing, for our housing economy. According to Federal Reserve data these two companies support $4.5 trillion of the $9.9 trillion U.S. mortgage market for one-to-four family residences. There simply isn’t enough private capital to fulfill the role they play without raising mortgage rates substantially.
Given this, it’s not surprising that even critics of Fannie and Freddie who previously had called for getting rid of them have recently come to appreciate that reform, not replacement, is the answer. In this context, it’s worth noting that some of these same critics are now advocating more so-called “risk sharing” by Fannie and Freddie. This week, the Bipartisan Policy Center in Washington will host a forum on the concept, declaring on the invitation that “Focusing on risk sharing, specifically ‘front end,’ makes housing finance more sustainable.”
Greater risk sharing by Fannie and Freddie would entail the GSEs continuing to buy mortgages and, rather than holding all the credit risk themselves, sharing some or all of that risk with others who would be compensated for bearing the risk. The compensation could come in the form of lower guarantee fees (for mortgage originators) or higher yields on mortgage-backed securities (for investors).
Risk-sharing transactions by themselves aren’t a bad thing. But in this particular context, and given their current conservatorship limbo, risk-sharing could be a dangerous substitute for capital at Fannie and Freddie. That’s because there simply isn’t enough risk-bearing capital away from Fannie and Freddie to substitute for the liquidity that they provide the market. And remember, even though Fannie and Freddie earn billions of dollars per quarter, they have been unable to build capital since 2012, when the government decided to unilaterally change the terms of the conservatorships to sweep 100 % of their profits into Treasury’s general fund.
In evaluating risk sharing, policymakers should ask this critical question: “From where will the capital come?” Let’s examine the possibilities. First, it’s not likely to come from the banking sector. Bank regulators don’t want banks overly concentrated in mortgage risk, and the government seems unlikely to encourage the “too big to fail” banks to become materially larger.
Nor is the capital likely to come from mortgage insurers. The sector is tiny, with only $8 billion in equity capital today (compared with $11 billion before the financial crisis). Even if the mortgage insurance industry were able to double or triple its collective size, it would still be a drop in the bucket of the $5 trillion in mortgages held by Fannie and Freddie.
And private investors aren’t going to fill the gap either. In fact, to date, after years of trying to push mortgage risk into the market, Fannie and Freddie have only offloaded $21 billion of credit risk to investors. Again, that’s a small drop in the $5 trillion bucket.
So here’s the key question for policymakers as they debate this concept of risk sharing by Fannie and Freddie. If we can’t identify adequate capital to bear mortgage credit losses when they are incurred, then aren’t we setting ourselves up for another series of government bailouts in the next housing downturn? Adequate capital levels at Fannie and Freddie, or any other party who accepts the risk, is the only defense against more bailouts. And while we contemplate this, we should also consider that as long as Fannie and Freddie remain in conservatorship limbo, with the Treasury stripping 100% of their profits each quarter, they’re posing a major risk to taxpayers because they are grossly undercapitalized.
The discussion about what to do with Fannie and Freddie, or what role they ought to have in U.S. housing finance always comes back to capital. Fannie and Freddie were designed to play a countercyclical role in the mortgage market — to provide credit at times, and to people, when others won’t or can’t. If we’re going to replace them, then we must also replace the capital they provide. That’s proving to be a bigger challenge that some might like to admit.
William Isaac, a former chairman of the Federal Deposit Insurance Corp., is senior managing director and global head of financial institutions at FTI Consulting. He and his firm provide services to many clients, including some who may have an interest in the subject matter of this article. The views expressed are his own.
http://www.americanbanker.com/bankthink/risk-sharing-is-no-substitute-for-capital-at-fannie-and-freddie-1077082-1.html
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Investors Unite Launches an Interactive Timeline on the Conservatorship
October 5, 2015
So much has happened in the 18 months since Investors Unite was founded in response to the flawed conservatorships of Fannie Mae and Freddie Mac. Recent events have shed light on the fact that the rule of law and the interests of taxpayers and investors were subverted and government officials have shown great determination to conceal how the Third Amendment Sweep of Fannie Mae and Freddie Mac’s profits came about.
To help you navigate the many political, legal, and regulatory actions and events that have influenced the ongoing conservatorship and the discussion around the future of our housing finance system, Investors Unite is launching an interactive timeline of events. The timeline can be found under the tab titled “The Issues” on our homepage.
http://investorsunite.org/timeline/
The timeline tracks the saga of Fannie and Freddie from before the passage of Housing and Economic Recovery Act (HERA) until the present day. The timeline is an attempt to shed light on the various actors and competing interests involved in the conservatorship and the implementation of the Third Amendment Sweep. Importantly, we want this timeline to be a “sunshine” project – one that illustrates the many questions to which we still lack answers.
On boxes in which the various actors and competing interests appear, users can hover over red “plus” signs for more information. Users can also hover over each of the years following the implementation of the Third Amendment Sweep (2013, 2014, and 2015) for a graphic depicting the amount of money paid back to the Treasury by each GSE.
Most importantly, Investors Unite would like you, our members to help us keep this timeline up to date, and help us continue to build it out. Please send us what you think we’ve missed and send us any updates to this case you think are relevant. As events progress, we will continue to update this timeline with help from our members.
About Investors Unite: Formed by Tennessee activist investor and CapWealth Advisors Chairman and CEO, Tim Pagliara, Investors Unite (www.investorsunite.org) is a coalition of private investors from all walks of life, committed to the preservation of shareholder rights for all invested in Fannie Mae and Freddie Mac. The coalition works to educate shareholders and lawmakers on the importance of adopting GSE reform that fully respects the legal rights of Fannie Mae and Freddie Mac shareholders and offers full restitution on investments.
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Fairholme Continues to Uncover Evidence in Discovery
Posted by Todd Sullivan on September 29th, 2015
Fairholme continues to unearth documents via discovery that bolster its case vs our government. They have request that Sweeney allow them to share the docs with the other courts and rather have to make the same request every time (discovery is ongoing) they find something, they’ve request Sweeney just allow them to submit the evidence.
I have no idea how she will rule. I can see an argument for both sides. On the one hand it is a waste of time to keep going back to the court so it can rubber stamp the request. On the other hand, the defence wants to avoid Fairholme just flooding the courts with documents. I think Sweeney will find some middle of the road solution.
They key point here is that discovery continues to reveal documents that help shareholders.
From the filing (emphasis mine):
PLAINTIFFS’ MOTION FOR GENERAL LEAVE TO FILE DISCOVERY MATERIALS UNDER SEAL IN OTHER LITIGATION CHALLENGING THE NET WORTH SWEEP
On September 4, 2015, this Court granted Plaintiffs leave to file certain Protected Information under seal in other litigation challenging the Net Worth Sweep. Doc. 240, at 2. Specifically, the Court authorized Plaintiffs to file under seal the materials identified in Plaintiffs’ motions to remove the “Protected Information” designations from various materials produced in discovery. See Docs. 148, 162, 165, 166, 169, 170, 171. In the weeks since Plaintiffs filed those motions, they have identified additional materials that they believe other courts considering challenges to the Net Worth Sweep would find useful. Rather than identifying those materials here and filing additional such motions as Plaintiffs continue to review discovery materials, Plaintiffs move for general leave to file any and all Protected Information under seal in other litigation challenging the Net Worth Sweep. The Court previously granted Plaintiffs general authority to file Protected Information in Plaintiffs’ suit in the D.C. Circuit and D.D.C. Doc. 212 (July 21, 2015). For the same reasons, the Court should also grant Plaintiffs general authority to file Protected Information under seal in other cases that concern challenges to the Net Worth Sweep.
http://www.valueplays.net/2015/09/29/fairholme-continues-to-uncover-evidence-in-discovery/
Click to access 13-465-0245.pdf
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ORDER
Plaintiffs in the above-captioned case have filed a motion seeking general leave to file any and all protected information from this case under seal in other litigation challenging the Net Worth Sweep in which plaintiffs appear as parties or amici. Plaintiffs represent that defendant opposes the motion. However, the court need not await a response from defendant; plaintiffs’ motion is meritorious and therefore GRANTED.
s/ Margaret M. Sweeney
MARGARET M. SWEENEY
Judge
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Secrecy II: Treasury/FHFA Administrative Records And The U.S. Court Of Appeals, D.C. Circuit
Government secrecy makes it difficult for investors to evaluate the future prospects of Fannie Mae and Freddie Mae common and preferred stocks.
President Obama made a commitment to transparency-yet Treasury/FHFA is claiming presidential privilege to keep its actions in deciding on the 3rd Amendment secret.
These issues are squarely before the U.S. Court of Appeals and a decision on supplementation of the administrative records can plausibly be expected by the end of this year.
The culture of secrecy is frustratingly hard to eradicate. Nevertheless, South Africa is an example of a country that has made giant strides in increasing the transparency of their electric utility regulation over the last ten years, so progress is possible. One can only hope that the transparency of FHFA/Treasury regulation of the GSEs will begin to improve as well.
Unfortunately, the U.S. Treasury (Treasury) and the Federal Housing Finance Agency (FHFA) appear to believe that they are not required to follow basic administrative procedures that provide “due process.” This puts the courts in the difficult position of needing to sift through evidence that should already be in the agencies’ administrative records. It appears that Treasury/FHFA were not diligent in including all relevant factual information that the agency considered in their administrative records. While I have covered the problem of secrecyin FHFA/Treasury oversight of the GSEs in a previous Seeking Alpha article, I will briefly update and expand my discussion here.
Freddie Mac (OTCQB:FMCC) and Fannie Mae (OTCQB:FNMA), together known as the government sponsored entities (GSEs), are regulated essentially as public utilities. A public utility regulator must comply with laws that require regulatory transparency, administrative justice, and freedom of information. While FHFA and Treasury should be expected to do the same, it is open to debate whether the executive branch’s performance on transparency is good, bad, or ugly. So far, Gretchen Morgenson of the New York Times has been one of the few journalists (or politicians) to call out FHFA/Treasury behavior on the question of secrecy in the “2012 profit grab.”
Supplementation of the Administrative Records at the U.S. Court of Appeals
It appears that FHFA did not maintain an administrative record when deciding to accept Treasury’s proposed 3rd Amendment to the Senior Preferred Stock Purchase Agreements (SPSPAs), which led them to submit a substitute to the administrative record along with adeclaration by Mario Ugoletti (filed December 17, 2013). It appears that Treasury did keep an administrative record.
At the U.S. Court of Appeals D.C. Circuit, Cooper & Kirk on behalf of Fairholme argue in a reply brief in support of its motion for judicial note and supplementation that they have “identified evidence that calls into question the integrity of the proceedings before the district court.” U.S. public utility regulators scrupulously keep an administrative record in public utility ratemaking and other adjudicatory regulatory proceedings. While Treasury/FHFA should be expected to do the same, Cooper & Kirk make the provocative argument that FHFA/Treasury “attempt to defend their actions with misleading-and in key respects false-submissions to the district court.”
Much depends on exactly which judge will be assigned to deal with the issues related to the supplementation of the administrative record, but given the magnitude of Cooper & Kirk’s invective about the defendant’s conduct-albeit the factual allegations are redacted-something has got to give.
If this was a typical U.S. public utility regulatory proceeding, I am quite confident that a court would remand the administrative record back to the regulator for supplementation of the record and that the regulator would carefully, diligently, and reasonably assess the need for supplementation of the record.
In this case, the remand would be to the U.S. District Court (D.C. Circuit) and it is my understanding that the district court would have a duty to supplement the administrative record, if appropriate. While I have no way of judging how Judge Lamberth would decide if there was a remand for supplementation of the record, I am aware that Judge Lamberth was, in the context of Cobell v. Salazar, frustrated with the federal government’s litigation strategy and lashed out at the government’s conduct of the case.
While life is full of surprises and it is impossible for me to predict the future of the GSE litigation, it seems possible that a remand to Judge Lamberth to supplement the record would materially change the nature of the case before the U.S. Court of Appeals. Cooper & Kirk tease the reader of the redacted reply brief by dangling two redacted statements on the last page of their filing-much depends on how a judge reacts to these statements when reading the unredacted reply brief.
It is possible that this could eventually lead the Court of Appeals to have a markedly different opinion about FHFA/Treasury conduct with respect to the August 17, 2012 decision to agree to the net worth sweep and reverse Judge Lamberth’s September 30, 2014 decision.
I do not object to the temporary secrecy related to the redaction of documents, although I would hope that GSE investors will eventually know the true facts related to the decision to agree to the 3rd Amendment. As an investor in Freddie Mac and Fannie Mae preferred stocks, What I do object to is the apparent failure of FHFA/Treasury to provide a complete, accurate, and timely administrative record to Judge Lamberth.
Conclusion
The ways and means that FHFA/Treasury has used to administer the regulation and conservatorship of the GSEs reminds me of South African public utility regulation in the old days. As recently as ten years ago, the electric utility regulator would announce Eskom rate case decisions via press release. Since then, the transparency of public utility regulation in South Africa has improved markedly. The National Energy Regulator of South Africa now does a good job of documenting, explaining, and publicizing its rate case decisions.
U.S. regulation of Freddie Mac and Fannie Mae should be held to a similarly high standard. For investors in GSE common and preferred stocks, this is a crucial issue. At this point, it is up to the courts to decide whether Treasury/FHFA has been sufficiently open about the evidentiary basis for the 3rd Amendment.
http://seekingalpha.com/instablog/28167803-wayne-olson-cfa/4406316-secrecy-ii-treasury-fhfa-administrative-records-and-the-u-s-court-of-appeals-d-c-circuit
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More research questions why Treasury snatched Fannie Mae
Plus interest rates, mortgage markets, appraisal volumes
September 24, 2015
By: Trey Garrison
http://www.housingwire.com/blogs/1-rewired/post/35143-trending-thursday-more-research-questions-why-treasury-snatched-fannie-mae
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Seeking some assistance here, but first want to praise the brilliance of Ackman’s comment in the interview – that in essence, every SIFI had an implicit guarantee (since every one was bailed out, after the “experiment in capitalism” with Lehman and Bear Stearns failed miserably).
ASSISTANCE (this may need a “the” Tim Howard or Bill Maloni answer)
I am engaged in gentleman’s argument on the conservatorship. (I am a “commoner” shareholder – well read on the subject here at TH717, and pretty much everywhere else. He is more toward the conventional view expressed in the government narrative and with Wall Street Banker background and knowledge.
I’ve put up the Forensic Accounting info as an indication that the GSEs may never have needed a bailout, and that the 2008 write down of the DTAs seems to have “nefarious roots”.
He has countered that, whether true or not, the financials covered in the Forensic Analysis prove nothing – that just like the SIFI banks in 2008, any sort of pending margin call could have wiped out GSE liquid assets in a heartbeat – that one must look at these other surrounding conditions before postulating that the crisis might have been survivable sans bailout.
I know that the GSEs engaged in various risky behaviors which have since been legislated out of existence – but…
–> Were those risky GSE behaviors “alive and well” during 2008, in a way that their impact (which seems not visible in the forensic analysis) “would have” taken the GSEs down, absent conservatorship/bailout?
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The Big Short. A true story.
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BNA INSIGHTS: The Lawless Limbo of the Fannie and Freddie Conservatorships
By Ike Brannon and Mark Calabria
Ike Brannon is a senior fellow at the George W. Bush Institute and president of Capital Policy Analytics, a consulting firm in Washington DC.
Mark Calabria is director of financial regulation studies at the Cato Institute.
The Housing and Economic Recovery Act of 2008 (HERA) spelled out the terms of the conservatorship of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Both entities were effectively bankrupt not long after the law’s passage, victims of poor management, imprudent investment, dubious home loans, and a collapsing housing market.
The purpose of HERA was to create a path that would return Fannie and Freddie to a “sound and solvent” condition, or — if that proved to be impossible — a route toward their liquidation or reorganization. The legislation, combined with the economic recovery, government support and the concomitant rebound in the housing market, returned them both to profitability: By 2012, the GSEs were on their way to repaying the government’s investment.
However, the Obama administration’s Third Amendment to HERA, in which Treasury set aside the 10 percent dividend and instead laid claim to the entire net wealth of Fannie Mae and Freddie Mac, essentially forged a new outcome for the GSEs and is the reason for their current awkward limbo.
The problems with the current arrangement under the Third Amendment are many: By sweeping the net wealth into Treasury’s coffers each quarter, it has prevented the GSEs from accumulating sufficient capital, leaving the taxpayer potentially on the hook should another decline in the housing market develop.
What’s more, it essentially ignores the statutes contained in HERA—as well as precedent—by creating the federal government’s continued claim on the net wealth of Fannie and Freddie, transforming the purpose of the conservatorship from a process that would heal the companies and reconstitute them as instruments for housing policy into one that instead makes them little more than a revenue source for the federal government.
Finally, it has effectively set aside HERA’s requirement to maintain Fannie Mae and Freddie Mac as a private shareholder-owned company.
The status quo for the GSEs is a recipe for disaster: the Third Amendment is inconsistent with the very notion of a conservator and has done little to advance the explicit goals of HERA. Congress intended the GSEs’ regulator, the Federal Housing Finance Agency (FHFA), to follow the precedents of the Federal Deposit Insurance Corporation (FDIC) when dealing with a troubled GSE.
The FHFA, however, has implemented the conservatorship in a manner drastically different than that historically used for commercial banks. The administration should resolve the status of the GSE’s posthaste, and should it hesitate to do so, then it is incumbent upon Congress to prod them on the matter.
What HERA Wrought
After five years of continued effort, Congress finally enacted reform of the regulatory structure of Fannie Mae and Freddie Mac in 2008, shortly before the full force and fury of the financial crisis hit the markets.
The primary goal was to create a framework for the GSEs that closely mirrored the one for banks. While such a mechanism was not fully achieved, HERA did create a resolution regime based upon the pre-existing and well-understood authorities of the FDIC. Were a GSE to become insolvent or simply financially distressed, HERA dictated a path. This path was not a mystery, as it was the same regulatory approach used for troubled banks.
HERA offered the new GSE regulator, the FHFA, two paths. If a GSE had just “hit a bump in the road” but was fundamentally sound, FHFA could place the GSE into conservatorship, or something akin to a regulatory “timeout.” Once the GSE addressed its issues, it would be expected to be released from conservatorship. However, if a GSE was not fundamentally sound and not likely to become such in a short amount of time, FHFA would invoke a receivership, allowing FHFA to address issues of insolvency directly and without cost to the taxpayer.
Conservatorship was never meant to be permanent or even long lasting: The longest commercial bank conservatorship was 18 months, and it was well understood by the drafters of HERA that a conservatorship would be temporary.
Conservatorship was never meant to be permanent or even long lasting: The longest commercial bank conservatorship was 18 months, and it was well understood by the drafters of HERA that a conservatorship would be temporary. It was also meant to be rare. HERA’s authors intended to build upon the bank reforms of the early 1990’s, which had attempted to limit the FDIC’s ability to engage in open-ended failed bank assistance. The purpose of a conservatorship is, in essence, just like it sounds: conserve the assets of the company and nurse it back to health.
If a GSE could not be expediently nursed back to health then FHFA was intended to, and under some circumstances required to, place a GSE into receivership. This would allow the basic operations of the GSE to continue, providing support to the mortgage market while also directing addressing any insolvency. Receivership would function basically as a “bridge bank” — a structure well understood by bank regulators. Of course, receivership would have exposed GSE creditors to potential losses, but then that’s somewhat the point: Imposing any necessary hair-cuts and moving any equity-holders to the “bad GSE” while creating a “good GSE” would enable a clean end to receivership.
The Third Amendment
Despite the clear intentions of Congress, the Treasury Department and FHFA made a different decision — or rather a nondecision. As noted above, HERA allows for conservatorship, with an eventual exit, or receivership with a resolution. Apparently Treasury Secretaries Henry Paulson and Timothy Geithner did not share the preferences of Congress and decided to pursue a third path despite lacking any statutory authority to do so.
Secretary Paulson made a number of decisions to keep the GSEs out of receivership and FHFA essentially ignored the law and complied with Paulson’s wishes, the most egregious of which was ignoring that the law required a receivership in the event of insolvency.
With the election of President Obama came a new Treasury secretary, who saw no reason to change Treasury’s approach to the GSEs. Just prior to departing Treasury, Geithner chose to “lock in” his policy preferences with an amendment to the preferred share agreements that Paulson had struck with the GSEs.
This “third” amendment replaced the previous arrangement from one of a regulator setting dividend payments to one where the Treasury expropriated the net wealth of the entities via a full profit sweep. While this change meant that the GSEs would not be digging themselves any deeper of a hole, since they would no longer have to borrow from Treasury to cover any required dividends, it also meant the GSEs would never build any capital. With one maneuver, Geithner managed to take both an end to conservatorship and the possibility of receivership off the table.
This is not the case of Congress failing to give regulators sufficient and needed authorities: HERA provides FHFA all the tools it needed to resolve a troubled GSE — conservatorship or receivership, depending upon the circumstances, with both being well-tested by the FDIC. However, Treasury wanted the powers of a receiver without the responsibilities, and chose a path not provided for by any legislation.
Going Forward
The Third Amendment has left the GSEs with very little capital and scarcely any maneuverability should another housing downturn occur, and everyone in America is painfully aware that housing prices can and do fall. Should we see a future decline in housing prices, Fannie Mae and Freddie Mac will almost certainly not have enough capital to deal with their losses, necessitating that it receive another infusion of capital from the Treasury Department.
An announcement by Treasury that it must spend more money propping up the GSEs will set off a political firestorm, and one that won’t be assuaged by claims that the government has already made a tidy profit off its previous bailout and can well afford to help them out once again. The ostensible purpose of the reform was to make sure they wouldn’t need the government again, which the Third Amendment effectively obviated.
The time to resolve Fannie Mae and Freddie Mac’s limbo is today. A good place to start would be for the Senate Banking and House Financial Services Committees to hold hearings that examine the status of the GSEs and their relationship with Treasury. The department conducts regular “stress tests” of the major U.S. banks and loudly announces the results as proof positive that its reforms are working. Why the same is not being done for Fannie and Freddie is a question worth asking.
It would also be worthwhile to ask about the administration’s long-term plan for the GSEs. The quarterly sweep of their net worth leaves them with increasingly little capital each quarter, and by 2017 they will be left with nothing, according to the terms of the Third Amendment. What will occur then? No one is saying. Perhaps Congress should press them to say what their plans are — the fact that they are dumping this on their successor is not an excuse for not having an explicit goal.
It would also be worth Congress’ time to ask Treasury in a public venue about its reluctance to provide various documents relevant to Treasury’s decision to implement the Third Amendment. The Administration has rebuffed various entreaties for the document, citing various claims of executive privilege that make a mockery of the very notion. If the department and FHFA refuse to release such documents, Congress would be wise to subpoena them: These are critical public policy issues which merit a full public airing.
Were Congress to conclude that the GSE model can be fixed, we would propose a few modifications that would reduce the chances of a future GSE failure and rescue:
• eliminate the loan limits and make mortgage eligibility based on income, similar to the U.S. Department of Agriculture’s Rural Housing Service loans, in order to make sure these entities actually serve middle-class America, rather than merely be a subsidy to the well-off;
• break up the GSEs. This might be the most controversial, but simply allowing other institutions to enter the market is unlikely to guarantee sufficient competition. The two companies should be broken into at least six separate, distinct entities and barred from merging. Existing shareholders would get shares in the offspring companies;
• require more mortgage insurance. To protect the taxpayer, mortgage insurance companies should take the first 35 percent of loss, instead of the customary 20 percent; and
• limit the GSEs’ portfolios to be used for an inventory function only. A minimum of 90 percent of debt issued should be required to be mortgage-backed securities (MBS).
Fannie Mae and Freddie Mac were (and remain) the poster children for Too-Big-To-Fail. The Dodd-Frank Act created a mechanism for resolving failing “systemically important” entities without cost to the taxpayer. HERA created a similar mechanism for Fannie and Freddie, and we saw how that worked out — any resemblance of its administration to the statutes of HERA are purely coincidental.
If we are to avoid an indefinite limbo for the next AIG, then we must put an end to the current limbo for Fannie Mae and Freddie Mac. HERA provides a path for such: It only needs to be followed.
http://www.bna.com/bna-insights-lawless-n57982058496/
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Fannie, Freddie And The Difference Between Power And Authority (Part II)
Summary
My earlier companion Seeking Alpha article discussed Perry and Jacobs/Hindes plaintiffs’ argument that the FHFA’s and the Treasury’s net worth sweep preferred stock is void under Delaware corporate law.
This article anticipates the FHFA’s and the Treasury’s legal responses to this claim.
I expect plaintiffs to prevail with respect to this claim, which should have an important positive effect upon FNMA’s and FMCC’s share prices.
http://seekingalpha.com/article/3522006-fannie-freddie-and-the-difference-between-power-and-authority-part-ii
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Charlie Rose, Air Date 9/15/2015
A discussion about Fannie Mae and Freddie Mac with Bethany McLean, author of “Shaky Ground: The Strange Saga of the U.S. Mortgage Giants,” and Bill Ackman of Pershing Square Capital.
http://www.charlierose.com/watch/60618709
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FNMA, FMCC And The Difference Between Power And Authority
Summary
The argument that the Net Worth Sweep (NWS) is void under Delaware General Corporation Law (DGCL) is a game changer.
When the NWS is invalidated, either upon appeal in Perry or in a new Delaware federal case (Jacobs/Hindes), approximately $150 billion will be added to FNMA’s and FMCC’s capitalization.
This $150 billion recoupment will occur because the federal officials at Treasury, FHFA and the office of POTUS simply did not understand the difference between power and authority.
http://seekingalpha.com/article/3517626-fnma-fmcc-and-the-difference-between-power-and-authority
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Gary Hindes who is the plaintiff of the Delaware Lawsuit against the government, made a statement at Columbia Global Reports.
Must listen.
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we should pass the following questions to the GOP 3rd debate or to Carly Fiorina:
When Treasury of Obama Administration has taken all the revenue from GSE’s, FNMA and FMCC, and book them as US government revue, while left GSE’s with no capital in facing next economic crisis, do you think is this a fraud?
Do you think is that legitimate that Obama Administration as 80% or less majority shareholder of GSE’s, FNMA and FMCC, can take 100% revenue away from these two companies by ignoring 20% of minority shareholders interest, who are taxpayers?
Do you believe in private ownership is the foundation of our freedom of this great country and will you want to protect personal properties of investors?
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ACKMAN: The US government is perpetrating ‘the most illegal act of scale’ with Fannie and Freddie
Ackman called it “the most illegal act of scale” he has ever seen the US government do.
Ackman spoke Tuesday evening during a panel at Columbia University for the launch of Bethany McLean’s new book “Shaky Ground.” McLean and former Fannie Mae CEO Frank Raines were also panelists. Ackman, however, did most of the talking.
During the financial crisis, Fannie and Freddie needed massive bailouts and were taken over by the government. It has been seven years since the financial crisis and the companies are still in a state of conservatorship. Today, the government-sponsored enterprises make billions in profits, all of which goes directly to the Treasury.
Ackman, the largest shareholder of Fannie and Freddie, and other investors are suing the US government for taking property for public use without just compensation.
He said: “And there is no way they will not be allowed to stand, from a legal point of view. And the reason for that is if the US government can step in and take 100% of profits of a corporation forever, then we are in a Stalinist state and no private property is safe — and take your money out of every financial institution, put it into gold or Bitcoin and just get the hell out because we’re done, maybe the clothes on your back, but other than that nothing is safe.”
In Ackman’s view, Fannie and Freddie are vital to the US economy. Right now, he said, the biggest threat to the US middle class is rising rental rates.
“If you don’t own a home, and you’re a member of the middle class, you have a problem,” he said. “This is the biggest threat to the middle-class livelihood is that your cost of living, the roof over your head is not fixed, it’s floating.”
Ackman said Fannie and Freddie were set up to make middle-class housing more accessible. Together, they have enabled widespread availability and affordability with the 30-year, fixed-rate, prepayable mortgage — a system that has been in place for 45 years.
Ackman said he’s optimistic about the future of Fannie and Freddie. He has said before that with the right reforms they could be worth a lot more. He has given the GSEs a price target ranging between $23 and $47, well above the current $2 range.
http://www.businessinsider.com/bill-ackman-on-fannie-mae-and-freddie-mac-2015-9
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