What’s up with this Blog!?

March 18, 2017

I started this blog in November 2014 as a result of writing my first blog post — “You Can’t Handle the Truth!”  I actually wrote that piece without the desire to start a blog. I had been reading and participating on the timhoward717 blog up until that point, but the piece I wrote was too big to post there (admittedly it is a bit long).

I started this blog mainly to post that piece, but one thing led to another and now have exceeded 200 posts. Granted, some of those posts are frivolous (music videos, song lyrics, etc.). However, some posts required intense research and took several hours to write…many consumed an entire weekend…

About the Blog

Why did you write so many blog posts?  At the time, the truth needed to be told.

Why have you slowed down on the postings?  The truth is out. It’s clear there are people on both sides of the truth, but for the most part, the top line elements of the Bush and Obama Administration actions – along with the assistance of their external contributors (journalists, congressmen, lobbyists, etc. etc.) – have been publicized.

How much money do you make from the ads on this blog?  Nothing! Hopefully, the ads are just a slight annoyance to readers. I operate a free site, so WordPress makes money on posting ads on bloggers’ free accounts like mine.

Why are you anonymous?  Because I don’t want people to know my identity! Seriously though, I felt I could go further with my accusations, speculations and commentary if I didn’t have to worry about it affecting my personal and business relationships. One may have assumed because I work to expose government malfeasance that I don’t want Big Bro to know who I am. I have no delusion of being able to hide my identity from the US government… (my wife frequently asks why there is a red laser dot in the middle of my forehead — I tell her to just ignore it…ha!)

That’s it for the Q&A

As you can see, I am not in this to make money on the blog. However, with full disclosure, I am a shareholder of both Fan and Fred; both common and preferred.  I don’t try compete with anyone else. In fact, I have posted work by others on this blog — journalists, other bloggers, etc. I have no affiliation to any group or person…a completely independent, average joe…

My background is irrelevant. If you like what you read – keep reading. If not, that’s cool, too!

I’m motivated by the truth…  I’ve fought — and won — wrongdoing on many other occasions, but obviously Fanniegate has been the biggest nut to crack!  …we’re getting closer by the day!

Even though it is time consuming to keep a blog current, I will try to get back into posting more pieces. There is interest in Fanniegate and all that remotely goes into it. The story has many, many angles… And there is recent, new interest in Fanniegate.  After Donald Trump was elected and after Steven Mnuchin made references to Fan/Fred immediately after his nomination, there have been many new people attracted to the story…trying to figure it all out for themselves.

By no means do I have it all figured out…there are people much smarter than me that can be consulted to learn more about specific details on Fanniegate. But I do appreciate the interest in my blog. I’ve had readers from over half the countries in the world — 110 out of 196. Besides the US, the top five countries are Canada, Germany, Singapore, Switzerland and Argentina.

One request I’ve received a few times is to update my post FANNIEGATE FOR BEGINNERS. I wrote that one in September 2015, so much has happened since. I will work on that update this weekend. It’s also been recommended to condense that piece into a one-page, bullet point summary…which I’ll try to get that one done, too.

Again, thanks for your interest in the blog.  If interested, below is a screenshot of the top blog hits by views (I personally don’t think those represent the best posts, they just receive the most views for whatever reason – timing of post, Google searches, etc.).

The blog has a search function that is easily seen on the right side of the page if viewed on a computer. On a tablet, you need to view in landscape (sideways) vs. portrait (up & down) mode. I can’t get the search bar to pop up when viewing this blog on my phone (there’s probably a way, but I can’t figure it out…).

Reach me on twitter @fanofred_ or email fnffight@gmail.com if you want to chat.

Enjoy!

Top Blog Views:

top blog hits

What to look for: Budget 2018

Accompanying every administration’s budget each year is a supplement titled, “Analytical Perspectives” which provides additional detail to support the overall budget.

The Obama 2017 Analytical Perspectives can be found here.

There are numerous references to Fannie Mae and Freddie Mac in the 2017 document including the following passage:

Future of the GSEs To finish addressing the weaknesses exposed by the financial crisis, the housing finance system must be reformed, and Fannie Mae and Freddie Mac should be wound down. The bipartisan progress in the Senate in the previous session was a meaningful step towards securing a system that aligns with many of the Administration’s principles for reform, including ensuring that private capital is at the center of the housing finance system so that taxpayer assistance is never again required, and that the new system supports broad access to credit and affordable rental housing through programs like the Housing Trust and Capital Magnet Funds.

Further, the Consolidated Appropriations Act, 2016, included a provision that prohibits Treasury from selling or otherwise disposing of the preferred stock it holds in Fannie Mae or Freddie Mac until January 1, 2018, unless legislation instructing Treasury on how to do so is enacted into law. Further, this provision recommends that legislation regarding the future of Fannie Mae and Freddie Mac be enacted and, notwithstanding the previous limitation, suggests that Treasury should not sell or dispose of its stock until such legislation is enacted.

The Administration will continue to work with Congress to pass comprehensive reform, centered on several core principles: require more private capital in the system; end the Fannie Mae/Freddie Mac duopoly business model in order to improve system stability and better protect taxpayers; ensure broad access for all creditworthy families to sustainable products like the 30-year fixed rate mortgage in good times and bad; and help ensure sustainable rental options are widely available.

The above language was repeated for years throughout the Obama Administration. However, the Trump Administration has indicated many times that it will take a different approach to Fannie and Freddie vs. the previous administration.

The 2018 Analytical Perspectives is likely being drafted as we speak and is due out in May. In President Obama’s first term, the Fiscal 2010 Analytical Perspectives was published May 11, 2009. In subsequent administrative years the documents are published in February due to the team already in place.

Therefore, we should look forward to receiving Trump’s 2018 Analytical Perspectives this May. That document should provide the Administration’s intentions regarding how they plan to deal with Fannie and Freddie, if they have not already provided detail ahead of this publication.

 

 

The Time is Now

It was clear the Obama’s administration never wanted to deal directly with Fannie and Freddie, instead deferring to Congress. Obama happily received and spent Fan/Fred’s profits while “waiting for Congress.”

Even when it was clear Congress was unable or unwilling to pass legislation dealing with Fan/Fred, Obama’s team was comfortable “kicking the can” to the next Administration despite knowing that Fan/Fred’s capital reserves would go to $0 by the end of their first calendar year in office – 2017.

There have been a number of indicators from the Trump Administration stating they will deal with the situation sooner than later. Both Steven Mnuchin and Gary Cohn have publicly stated the need to address Fan and Fred as one of the Administration’s important agenda items.

Yesterday, an Executive Summary for Trump’s 2018 Budget was released. It was more or less a top line summary of a more detailed budget due out in May. In the detailed budget, we will look for items involving the Net Worth Sweep. But, in the mean time we can consider what Mick Mulvaney wrote in the Exec Summary regarding Fan/Fred.

There is one passage that seems to directly or indirectly reference Fannie and Freddie:

“Empowers the Treasury Secretary, as Chairperson of the Financial Stability Oversight Council to end taxpayer bailouts and foster economic growth by advancing regulatory reforms that promote market discipline and ensure the accountability of financial regulators.”

Ending Taxpayer Bailouts: for a  fiscal 2018 budget, the only “bailout” still on the Administration’s books is Fannie and Freddie (after a record 8 years and 6 months in conservatorship).

Foster Economic Growth: ending the uncertainty of Fannie/Freddie will inject life into the housing industry – roughly 20% of our economy.

Promote Market Disciplineput to rest the notion of private gain/public loss. Recapitalize Fan/Fred and allow them to compete in the free market without an explicit or implicit government backing.

Ensure Accountability of Financial Regulators: FHFA, under Obama-appointee Mel Watt, has refused to deal (at least publicly) with the Net Worth Sweep – after 4 years and 7 months! Again, this reference is in a fiscal 2018 budget…which other financial regulator needs to be held accountable more than Fan/Fred’s regulator — who has been doing the opposite of what is required by law from a conservator. This summary was written by Mulvaney, who as a Congressman, challenged Watt during a Banking Committee hearing asking why FHFA was ignoring the law regarding the conservatorship and the net worth sweep. He famously asked, “How can an agreement between two agencies trump the law!?”

Video clip of that exchange can be seen here: https://youtu.be/t7dqiiG0l4s

So, again, we’ll need to wait until May for the details of the budget to realize what this means for Fannie and Freddie in 2017.

However, in addition to the budget details, it will certainly be instructive to see if the quarterly dividends on the senior preferred stock are paid at the end of the month… a short two weeks away.

Another indicator of timing may be in the recent executive order on the financial system. President Trump stated he wanted action within 120 days (from February 3) on items that might involve Fan/Fred… or by the beginning of June.

We’ve waited long enough… now is the time for action…!!

Here is the Executive Order:

Presidential Executive Order on Core Principles for Regulating the United States Financial System

EXECUTIVE ORDER

– – – – – – –

CORE PRINCIPLES FOR REGULATING
THE UNITED STATES FINANCIAL SYSTEM

By the power vested in me as President by the Constitution and the laws of the United States of America, it is hereby ordered as follows:

Section 1. Policy. It shall be the policy of my Administration to regulate the United States financial system in a manner consistent with the following principles of regulation, which shall be known as the Core Principles:

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

(b) prevent taxpayer-funded bailouts;

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;

(e) advance American interests in international financial regulatory negotiations and meetings;

(f) make regulation efficient, effective, and appropriately tailored; and

(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

Sec. 2. Directive to the Secretary of the Treasury. The Secretary of the Treasury shall consult with the heads of the member agencies of the Financial Stability Oversight Council and shall report to the President within 120 days of the date of this order (and periodically thereafter) on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles. That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.

Sec. 3. General Provisions. (a) Nothing in this order shall be construed to impair or otherwise affect:

(i) the authority granted by law to an executive department or agency, or the head thereof; or

(ii) the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b) This order shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c) This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.

DONALD J. TRUMP

THE WHITE HOUSE,
February 3, 2017.

Guns N’ Roses – Sweet Child O’ Mine

She’s got a smile it seems to me

Reminds me of childhood memories
Where everything
Was as fresh as the bright blue sky
Now and then when I see her face
She takes me away to that special place
And if I’d stare too long
I’d probably break down and cry

Oh, oh, oh
Sweet child o’ mine
Oh, oh, oh, oh
Sweet love of mine

She’s got eyes of the bluest skies
As if they thought of rain
I hate to look into those eyes
And see an ounce of pain
Her hair reminds me of a warm safe place
Where as a child I’d hide
And pray for the thunder
And the rain
To quietly pass me by

Oh, oh, oh
Sweet child o’ mine
Oh, oh, oh, oh
Sweet love of mine

Oh, oh, oh, oh
Sweet child o’ mine
Oh, oh, oh, oh
Sweet love of mine

Oh, oh, oh, oh
Sweet child o’ mine
Oh,
Sweet love of mine

Where do we go?
Where do we go now?
Where do we go?
Oh, oh
Where do we go?
Oh,
Where do we go now?
Where do we go?
Oh, (sweet child)
Where do we go now?
Oh,
Where do we go now?
Oh,
Where do we go?
Oh,
Where do we go now?
Oh,
Where do we go?
Where do we go now?
Where do we go?
Oh,
Where do we go now?
No, no, no, no, no, no
Sweet child,
Sweet child of mine

Steve Mnuchin

As most of us know by now, Steve Mnuchin announced the Trump Administration’s intention to end the conservatorship of Fannie and Freddie during an interview on Fox News on November 30 seen here: https://youtu.be/WAFLne-LRxw

The results were likely predictable – stock prices rose and Mnuchin was attacked by the opposition. Many articles ran in the big bank-influenced media soon after, including one in the WSJ titled, Mnuchin Has Stake in Fund That Would Gain From Fannie Mae Revival.

The attack against Mnuchin was simple – the only reason he stated the eight year long conservatorships must end was his desire to enrich his friends and himself.

During his confirmation, in response to the attacks, Mnuchin preemptively stated his opinion on Fan/Fred was based on his decades-long experience in the mortgage industry (and not motivated by potential personal gain) as seen here: https://youtu.be/KySH-n7TbKE?t=3m34s

The Senate Finance Committee is set to hold an Executive Session tomorrow at 6:00 PM EST to consider endorsing Mnuchin’s nomination. Orrin Hatch, committee chairman, stated:

“Committee members and the American people heard a strong case from Steven Mnuchin on why he should be Treasury Secretary,” Hatch said. “His seasoned career as a financial leader equip him with the ability to steer the American economy in the right direction. And his commitment to work with Congress to reform our outdated tax code and explore ways to improve our nation’s broken infrastructure system should garner the support of my colleagues on both sides of the aisle. I look forward to the Committee voting on his nomination.”

The long-awaited beginning of the end of Fanniegate is finally here…

WILY WILLIAM I$AAC

Seems like “expert opinion” can be swayed by the highest bidder.

Yesterday, William Isaac, former chairman of the Federal Deposit Insurance Corporation, teamed with Richard Kovacevich, a retired chairman and CEO of Wells Fargo & Co.

The two penned an OpEd that ran in the Wall Street Journal: Winding Down Fannie and Freddie Is Easier Than It Seems.

In the piece, the former bank regulator and former banker state:

“No other country has the equivalent of the private-public model of Fannie Mae and Freddie Mac—crony capitalism at its best.

The solution is straightforward: The public-private hybrid of Fannie and Freddie—“government-sponsored entities”—should be abolished, their existing business sold or liquidated, and the mortgage market privatized. This can be done in a few easy steps.

The current $686,000 cap on new mortgages guaranteed by Fannie and Freddie should be reduced by $100,000 a year. This would put the companies out of originating new mortgages within seven years.”

Messrs. Isaac and Kovacevich are evidently calling for the elimination of Fannie Mae and Freddie Mac. This recommendation from Mr. K is not at all surprising because the TBTF banks have been circling Fan/Fred like crazed vultures ever since the US Government seized the two companies.

However, Mr. Isaac seems to have a new — and completely different — outlook on Fannie and Freddie. Perhaps, FTI Consulting (Isaac’s employer) has a new client that wants to see the demise of Fan/Fred.

What’s odd is the 180 degree, about-face…

In April 2015, Mr. Isaac co-wrote with former senator Bob Kerrey, How The Fannie Mae, Freddie Mac Conservatorship Has Undermined The Resolution Process.

In this article they state:

“By diverting all profits away from the GSEs, FHFA effectively precluded any ability of the companies to boost their capital levels and over time “earn” their way out of conservatorship. Moreover, the profit sweep contradicts FHFA’s mandate to “preserve and protect” enterprise assets and property.

Such public-private partnerships at times of crisis require consistency in the federal government’s respect for, and protection of, private property rights. No private party will put capital at risk if they think the government can take it away from them in conservatorship or bankruptcy, however noble the underlying policy goals or inspiring the associated political rhetoric.

But the conservatorships have left the enterprises in a state of suspended animation; neither private nor public entity and yet their business must continue. The government’s decision to violate HERA in 2012 by invoking the so-called “profit sweep” has deprived the GSEs of their ability to rebuild capital and has put taxpayers at greater risk. It also undermines the government’s role in times of future crisis. If private capital can’t count on the rule of law, it won’t participate in the future and taxpayers will have to pick up the pieces of what’s left of the financial system.”

Earlier this year in February, Mr. Isaac wrote, U.S. Government Must Make a Decision on Freddie, Fannie.

Comments include:

“This action by the Administration created the worst of all worlds. Instead of trying to restore the companies to health, as HERA requires, the government’s actions stripped Fannie and Freddie of all their capital. The result: They again pose a substantial risk to taxpayers.

When faced with litigation and demands from the public to know why it took this action, the government initially told the courts that the profit giveaway was intended to save the companies and avoid an upcoming “death spiral.” But documents released in litigation have proven that assertion to be false. The truth, it seems, is that the profit giveaway was intended to facilitate the companies’ demise while providing windfall profits for the Treasury. As former Treasury Secretary Geithner colorfully testified, the government actually wanted to dismember the companies.

Even to a layperson, dismemberment does not heed the mandate of a conservator to restore the companies to sound condition and preserve their assets.

By the FHFA’s own admission and the government’s newly concocted litigation rationale, the government’s goal in stripping the companies of future profits was to fill the government’s coffers while ushering in the demise of Fannie and Freddie. But despite its supposed intent to wind the companies down, the government is keeping them alive and stripping them of all of their capital. This is incompatible with both current law and millennia of conservatorship history.

While taxpayer protection may sound good, it does not relieve the FHFA of its legal obligations to place the companies in sound condition, preserve their assets, and restore them to normal operations.”

$omething must have happened between February and December that Mr. I$aac would go from saying, “restore them to normal operations” to “should be abolished.”

One wonder$ what motivate$ $omeone to change their “expert opinion” so dra$tically, so $wiftly…

“If you don’t read the newspaper…

…you’re uninformed. If you read the newspaper, you’re misinformed.” Mark Twain

If you’ve followed Fanniegate for some time, you’re well aware that any time anything positive happens relating to Fannie and Freddie there will invariably be a negative article or response by a) a “journalist,” b) an “industry expert” or c) by a paid-for politician.

All of these folks have one thing in common; they do not want to see Fannie and Freddie succeed.

The “journalists” either work for a company that has taken a political/financial position (advocacy journalism) or some of these reporters are motivated by their ability to gain access to high government officials to interview for their articles… providing the reporters write the news (spin) in the officials’ favor (access journalism).

Oftentimes the “industry experts” are merely promoting the position for their clients…plain and simple.

Bought politicians are even easier to understand…

For those of you that are relatively new to Fanniegate, it is important to know that there are credible, respected people on the other side of the discussion.

One of these people is Gretchen Morgenson, Pulitzer Prize-winning financial reporter from the New York Times. Gretchen was the first mainstream media reporter to write an unbiased article on Fanniegate.

In February 2014, Gretchen wrote “The Untouchable Profits of Fannie Mae and Freddie Mac” which effectively broke the silence with major media. In this article, she highlighted the discovery of a secret government memorandum that outlined their plan to undermine shareholders:

“Furthermore, nationalization would have required the government to provide compensation to shareholders for what it took. Now the government gets the benefits of the companies’ profits while avoiding any compensation payments.”

Gretchen even made news when she addressed the issue of access journalism in a presentation at the 2015 Page One Awards:

“My second issue is closer to home — and it concerns the state of journalism today. That is, the rise of access journalists — those whose stories help their hidden sources promote themselves and their views — and the decline in accountability journalists. These are the folks who seek to hold powerful people responsible for their actions. Who, as the saying goes, seek to afflict the comfortable and comfort the afflicted.”

Gretchen’s presentation at this awards ceremony even addressed Fanniegate with her acknowledgement of unusual circumstances of the government secrecy:

“In response to the lawsuit, the government has demanded an extreme level of secrecy surrounding documents the judge has ordered it to produce. Those documents would shed light on how the decision to divert the profits was made, an important question given that the 2008 law written by Congress to handle the company’s problems was supposed to stabilize them and let them build up capital after the crisis receded.”

Gretchen is the lead, major journalist that has written the most articles regarding the saga involving Fannie Mae and Freddie Mac. Highlights of Gretchen’s articles are as follows:

December 2015: “Fannie and Freddie’s Government Rescue Has Come With Claws:”

“The August 2012 profit sweep surprised investors, but documents show that it came long after Treasury officials had indicated privately that they wanted to ensure Fannie and Freddie shareholders would receive none of the companies’ future profits.”

April 2016, “Documents Undercut U.S. Case for Taking Mortgage Giant Fannie Mae’s Profits:”

“Further testimony unsealed on Monday came from Mario Ugoletti, a former Treasury official who was a former special adviser to the director of the Federal Housing Finance Agency, the conservator overseeing Fannie and Freddie.

In December 2013, Mr. Ugoletti signed an affidavit for the case stating unequivocally that neither the Treasury nor the Federal Housing Finance Agency envisioned that the companies’ deferred tax assets were about to be reversed in the months leading up to the profit sweep, generating huge profits. He also said that the move was not intended to “increase compensation to Treasury.”

 But in the deposition in May, Mr. Ugoletti said he did not know whether the Treasury or the Federal Housing Finance Agency officials knew about the potential for the profits at Fannie and Freddie at the time of the sweep.

Mr. Ugoletti, who left government in the fall could not be reached for comment”.

May 2016, “Fannie, Freddie and the Secrets of a Bailout With No Exit:”

“An email from Jim Parrott, then a top White House official on housing finance, was sent the day the so-called profit sweep was announced. It said the change was structured to ensure that the companies couldn’t “repay their debt and escape as it were.”

The documents also show the Treasury moving to modify the terms of the mortgage finance giants’ $187.5 billion bailout shortly after a July 2012 meeting when the Federal Housing Finance Agency, Fannie’s and Freddie’s regulator, learned that they were about to enter “the golden years” of profitability.

October 2016, “Fannie and Freddie Investors Win Round in Suit Against U.S.:”

“The government initially argued that it acted to protect taxpayers from future losses because the companies were in a death spiral, but the decision to funnel the profits into the Treasury’s general fund came just before Fannie and Freddie returned to profitability.”

December 2016, “Trump Treasury May Mean Independence for Fannie and Freddie:”

“When the government changed the terms of their bailouts in the summer of 2012 and began expropriating all of Fannie’s and Freddie’s profits every quarter, it seemed as if that unsatisfactory setup would go on forever. After all, it is hard for the government to give up a honey pot that has returned over $60 billion more to the Treasury than the companies received from taxpayers during their troubles.” 

If Judge Sweeney were to order the release of more documents, the current administration would probably appeal. It is not as clear that a Trump administration would do so, however. This opens the possibility that all those materials that the Obama administration has fought so hard to keep secret might just emerge.

That would be a huge service for anyone interested in holding government officials accountable for their actions.”

The following articles and highlights were also written by credible journalists:

Matt Taibbi, Rolling Stone magazine, “Why Is the Obama Administration Trying to Keep 11,000 Documents Sealed?”

“Are the gory details of that plan what the government is working so hard to keep under seal?

We may never know. Judge Sweeney has yet to rule on the vast majority of the documents, and there’s no guarantee that she will ultimately unseal the remainder of the material. We may never find out what the government was so keen on keeping secret.

The only thing that is clear is that there’s something odd going on, with the Obama administration asserting privilege over a volume of papers so large, it would make Nixon blush.”

Roger Parloff, Fortune Magazine: “How Uncle Sam Nationalized Two Fortune 50 Companies:”

“Yet on Aug. 17, 2012—about 10 days after the terrific second-quarter results were announced—something singular happened. For reasons that remain shrouded in secrecy to this day, the Treasury Department and the companies’ conservator, the Federal Housing Finance Agency (FHFA)—two arms of the same government—agreed to radically change the terms of what the GSEs would owe in exchange for the moneys they had already received.

If this strikes you as, well, un-American, you’re not alone.”

Bethany McLean, “Mend, Don’t End, Fannie and Freddie:”

“Rhetoric aside, conservatorship is supposed to be governed by the law, which in essence says that the conservator must either “preserve and conserve” the GSEs and release them back, or throw them into receivership, in which case their assets would be distributed to shareholders. The investors argue that even a few years after the crisis, there were sufficient assets that the preferred stockholders would have gotten all the money they were owed.

But then on August 17, 2012, a sleepy summer Friday, Treasury and the FHFA changed the rules of the game. Going forward, instead of paying a 10 percent dividend, Fannie and Freddie would be required to send every penny they made to Treasury. If everything went to the government, then there was no value left for investors. Both the common and the preferred shares plunged in price.

The official explanation for this change is that the administration had no idea that the GSEs were about to become so wildly profitable, and so they executed the sweep of profits to prevent the GSEs from owing money they couldn’t pay. The sheer amount of money the GSEs started making immediately following the sweep makes it hard to believe this.”

Attorneys that specialize in these issues have also commented:

Richard Epstein, NYU School of Law, has written several articles on the subject including:

“Untangling the GSE Foolishness: The D.C. Circuit Should Upend Treasury’s Net Worth:”

“But no matter which route the transaction takes, the private shareholders are entitled to have a hearing to determine the size of their residual interest under the most elementary principles that insist that no property can be taken without the hearing required as a basic matter of procedural due process.

So the deal is really simple. Treasury took all residual shares for a zero price, and now pleads its own poverty as a defense.”

In a previous blog post here, I highlighted the many articles by Tara Helfman, Yale Law School graduate and Associate Professor at Syracuse University College of Law.

Logan Beirne, Fulbright Scholar and Yale Law School graduate: “Have FHFA and the Treasury Exceeded Their Limited Authority under HERA?”

“However, rather than work as conservator to benefit Fannie Mae and Freddie Mac’s shareholders, as is its obligation under traditional conservatorship law, the FHFA acted for the benefit of the U.S. government – and to the detriment of those private shareholders. In a surprise deal, the FHFA effectively wiped out the private shareholders and essentially turned the proceeds of Freddie and Fannie to the U.S. Treasury.”

Additional industry specialists wrote several articles including the following by Glen Corso and Josh Rosner:  “Why it’s Time for True GSE Reform:”

“A growing chorus of small lenders, affordable housing advocates, civil rights groups and capital market participants have asked that the GSEs’ regulator and conservator exercise the authorities provided him under HERA, and permit the GSEs to build adequate levels of capital so that they do not pose a risk to the public. 

These same groups have also asked that once the conservator is satisfied the GSEs are adequately capitalized, the GSEs regulator then begin the process of releasing the GSEs – as required by HERA — from direct government control.”

Lastly, David Fiderer, “How the $187 Billion GSE ‘Bailout’ Went Awry:”

“None of it seems to make any sense. Under federal statute, the FHFA, as conservator, must, “take such action as may be necessary to put the regulated entity in a sound and solvent condition.” No one has ever given a cogent explanation as to how the original cash drawdowns, and the subsequent cash distributions, including a 100% dividend sweep, serves that goal.”

Again, if your goal is to understand all of the issues related to Fanniegate, you should read as much as possible. Fortunately, there is recent, increased interest and debate over Fannie and Freddie, predominately since the presidential election. Read much and form your own, independent opinion!

Keefe Bruyette & Woods

Which Keefe Bruyette & Woods (KBW) analysis are you going to believe?

Months before the Government seized Fannie Mae and Freddie Mac, KBW upgraded their analysis to “Outperform” with a price target of $48 for Fan and $46 for Fred.  KBW did not just keep their analysis to “Market Perform” they upgraded their analysis — right before the Government placed the companies into conservatorship.

Seems like they were off on their analysis in 2008!

KBW has had mixed analysis since the conservatorship.

In October 2009 KBW stated the shares of Fannie and Freddie was worthless. At the time, Bose George, KBW real estate analyst, said “in this scenario, both the common and preferred equity of the GSEs should be worthless.”

Seems like KBW was off on this analysis in 2009, too. The preferred and common shares are currently trading far from a $0 valuation.

On Friday, Mr. George said:

“Shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) have rallied sharply over the past two days following comments from Steven Mnuchin, the incoming Treasury Secretary, stating that the new administration wants to get the GSEs out of government hands. He also noted that resolving the GSE issue was a top 10 priority for the new administration. While it remains unclear how any privatization would work, we believe that even in the best case scenario, where the shares are privatized with a 2.5% capital requirement, the capital need will meaningfully dilute the value of the common shares, suggesting little upside from current levels. We continue to believe that the most likely scenario is one in which the common shares have no value. We reiterate our Underperform ratings and $1 price targets for both companies.”

Apparently now the preferred shares are a safe bet according to KBW, while the common shares are worth $1. If you are going to trade on this analysis you need to convince yourself that KBW is right this time. If you followed their advice in the past you likely would have lost a lot of money. Good luck to you this time if you believe them now.

Here’s what KBW said in 2014:

“Inertia is a powerful ally of Fannie Mae and Freddie Mac. The longer Congress avoids acting on mortgage-finance legislation, the greater the chances the two companies survive.”

Reminds me of the old saying, “even a broken clock is right twice a day.”

KBW’s thesis for the common stock only being worth $1.00 is centered around the companies’ lack of capital. The terms of the conservatorship reduces the companies’ capital to $0 by the end of next year. These terms were established and followed by the Federal Housing Finance Agency (FHFA) whose mission was supposed to be to preserve and conserve the assets of Fan/Fred as their conservator.

Steven Mnuchin has made it clear that he wants to move quickly in removing Fannie and Freddie from conservatorship stating:

“It makes no sense that these are owned by the government and have been controlled by the government for as long as they have. In many cases this displaces private lending in the mortgage markets and we need these entities that will be safe. So let me just be clear— we’ll make sure that when they’re restructured they’re absolutely safe and they don’t get taken over again. But we gotta get them out of government control.We’ll get it done reasonably fast.”

The new Administration believes that the conservatorship is a farce and plans to resolve the issues as quickly as possible. The quickest way to solve the issue is to unwind the conservatorship and return the capital that the current Administration robbed from the companies.

End the conservatorship, end the net worth sweep, cancel the senior preferred stock, cancel the warrants and return Fannie and Freddie’s capital…

If these things happen then the common stock is worth more than the $1.00 target placed by KBW. I’ve seen people speculate that the stock could be worth $100 – 150 if the senior preferred and warrants are cancelled. I’ve seen other projections that the common stock is worth $10 – 30 even if the warrants are exercised.

Anyone interested in investing in the common stock of Fannie and Freddie should certainly conduct thorough due diligence and arrive at their own conclusion. Your research will likely discover there are just as many folks claiming doom and gloom for the common stocks as there are people claiming an astronomical return potential.

Just realize that KBW is just one analyst — one whose analysis has been all over the board.

 

Disclaimer: I own common and preferred shares in both Fannie Mae and Freddie Mac.

Non-Severability

The following section is a part of the SENIOR PREFERRED STOCK PURCHASE AGREEMENT (SPSPA) between the US Treasury and Fannie Mae/Freddie Mac.

The clause states that if any part of the agreement is determined to be illegal or unenforceable, then the whole agreement should be rescinded. In other words, if the Third Amendment (which is obviously a integral part of the whole) is determined to be illegal, then the Warrants are also illegal.

6.12. Non-Severability. Each of the provisions of this Agreement is integrated with and integral to the whole and shall not be severable from the remainder of the Agreement. In the event that any provision of this Agreement, the Senior Preferred Stock or the Warrant is determined to be illegal or unenforceable, then Purchaser may, in its sole discretion, by written notice to Conservator and Seller, declare this Agreement null and void, whereupon all transfers hereunder (including the issuance of the Senior Preferred Stock and the Warrant and any funding of the Commitment) shall be rescinded and unwound and all obligations of the parties (other than to effectuate such rescission and unwind) shall immediately and automatically terminate.

The following section is also contained in the SPSPA:

6.7. Effect of Order; Injunction; Decree. If any order, injunction or decree is issued by any court of competent jurisdiction that vacates, modifies, amends, conditions, enjoins, stays or otherwise affects the appointment of Conservator as conservator of Seller or otherwise curtails Conservator’s powers as such conservator (except in each case any order converting the conservatorship to a receivership under Section 1367(a) of the FHE Act), Purchaser may by written notice to Conservator and Seller declare this Agreement null and void, whereupon all transfers hereunder (including the issuance of the Senior Preferred Stock and the Warrant and any funding of the Commitment) shall be rescinded and unwound and all obligations of the parties (other than to effectuate such rescission and unwind) shall immediately and automatically terminate.

If a court rules that the Third Amendment is illegal, it will effectively be submitting an order that “curtails the Conservator’s powers.” This court order could lead to “declaring the entire Agreement null and void.”

Another section in the SPSPA describes its foundational authority:

4.3. Authorization and Enforceability. All corporate or other action on the part of Seller or Conservator necessary for the authorization, execution, delivery and performance of this Agreement by Seller and for the authorization, issuance and delivery of the Senior Preferred Stock and the Warrant being purchased under this Agreement, has been taken…The Agency is acting as conservator for Seller under Section 1367 of the FHE Act. The Board of Directors of Seller, by valid action at a duly called meeting of the Board of Directors on September 6, 2008, consented to the appointment of the Agency as conservator for purposes of Section 1367(a)(3)(I) of the FHE Act, and the Director of the Agency has appointed the Agency as Conservator for Seller pursuant to Section 1367(a)(1) of the FHE Act, and each such action has not been rescinded, revoked or modified in any respect.

I proved in an earlier post that Hank Paulson’s version of events on September 5 and 6, 2008 as described in his book On the Brink contradicts the official record of events as chronicled by the official Treasury calendar record. If anyone is ever allowed to review the corporate records of Fannie and Freddie it will either substantiate or refute my claim that the boards of both companies did not hold an official board of directors meeting. If there was no meeting, there was no board consent thus invalidating the entire conservatorship.

Also, if the Third Amendment is found to be illegal, there is a provision in the stock certificate that would reclassify the money returned to the Treasury as repayment of the money the Government injected into the companies:

Prior to termination of the Commitment, and subject to any limitations which may be imposed by law and the provisions below, the Company may pay down the Liquidation Preference of all outstanding shares of the Senior Preferred Stock pro rata, at any time, out of funds legalJy available… 

Further, the Government’s action with Fannie/Freddie has been compared to its action with AIG. In 2008, the Treasury and Federal Reserve committed $182B to bailout AIG. In return, the Government received $205B from AIG — netting the Government $23B. The Government received and exercised 79.9% warrants in AIG, similar to Fan/Fred. The point is that the warrants were used to pay down the money AIG borrowed from the Government.

Details of the payback can be found here and here.

According the the ProPublica Bailout Tracker, Fannie and Freddie received $182B (similar to AIG) and have returned $250B netting the Government $68B — approximately three times the amount returned by AIG.

It is clear the purpose of the warrants in both cases (both equalling $182B) was to recapture the money injected into the companies. Therefore, there is no need for the Government to exercise the Fan/Fred warrants.

The Financial Times had a recent article that stated if the Government exercised the Fan/Fred warrants it could realize up to $200B from the sale. Think about that for a moment… The Government injected $182B into Fan/Fred; received $250B (to date) in return and would make an additional $200B if they exercised the warrants — a combined return of $450B…!

It is simply ludicrous to suggest the Government is owed $450B on a $182B injection (which many believe was unnecessary in the first place).

If the Government thought they needed to exercise the Fan/Fred warrants to recoup their investment, they would have already done so. With AIG, the bailout occurred in 2008 and the Treasury concluded all of their warrant transactions by 2013.

In summary, the Government acted outside its legal authority when enacting the conservatorship and the original SPSPA. It then acted greedy and reckless when it enacted the Third Amendment. Therefore, the Government should pay the consequence by having the entire senior preferred stock purchase agreement rescinded and unwound as clearly stated in their own Non-Severability clause in the SPSPA.

Repayment and Warrants

There has been much debate on whether Fannie and Freddie ever had the ability to repay the money that the Treasury forced upon them. Many in the government — and even in the media — claim that Fannie and Freddie lack the option to repay the money received from Fan/Fred by Treasury by stating that it is merely a return on investment.

However, reviewing this attached Treasury report published in 2012 it clearly states that Treasury believed then that Fan/Fred had not only the ability to repay, but also states repayment was likely.

Further, Treasury makes it clear that the warrants were merely a vehicle to recoup the investment into the entities. So, if all the money is returned to the Treasury, the warrants are pointless. This Treasury document claims nothing about “punitive terms” or “risk/reward return.” No, it clearly describes the purpose of the warrants — to recoup the original investment.

The following passage appears on page 8 of the Treasury report:

“Probability of the Enterprises and the FHLBs fulfilling the terms of their obligations – The structure of the PSPAs, with their liquidation preference over all other equity, including preferred equity, combined with the PSPAs’ restrictions on debt issuance, enhance the probability of both Fannie Mae and Freddie Mac ultimately repaying amounts owed.

Need to maintain the Enterprises’ and the FHLBs’ status as private shareholder-owned companies – Fannie Mae and Freddie Mac may emerge from conservatorship to resume independent operations, or they may emerge in some other form reflecting legislative changes to their congressional charters. Conservatorship preserves the status and claims of the preferred and common shareholders. The value of the warrants issued to the government under the terms of the PSPAs could potentially increase, thereby providing enhanced value to the taxpayers. Upon the government’s exercise of the warrants, the GSEs would be required under the terms of the PSPAs to apply the net cash proceeds to pay-down the liquidation preference of the senior preferred stock.”

 

The Treasury report can be found here: https://www.treasury.gov/about/budget-performance/Documents/CJ_FY2012_GSE_508.pdf