Group of Thirty: The 2008 Financial Crisis and Its Aftermath

I took the opportunity to read the Group of Thirty’s Opinion Paper on the 2008 Financial Crisis and discovered some interesting points:

  • Even as late as 2011, when this piece was written, many experts were still mistaken on their assessment regarding the GSEs profitability (or at least so stated)
  • The piece states several times that Fannie and Freddie were “nationalized” and that was even before the 3rd Amendment / Sweep Agreement enacted in August 2012
  • The Federal Reserve was culpable for keeping rates too low for too long and for not regulating financial institutions properly
  • At stake is the 30 year home loan/mortgage that would see higher interest rates paid to banks and less home ownership (less opportunity for lower socioeconomic individuals to build wealth, thus perpetuating continued reliance on government assistance)

And perhaps the most interesting passage in the paper states:

  • “Moreover …the identities of its largest investors mean that the implications of addressing Fannie and Freddie are not simply limited to its effect on U.S. housing finance. …“a mishandling of the problem…could face scarcer financing, but also investors the world over, including the Chinese, Japanese and other governments and central banks, because foreign investors own about one-third of Fannie’s and Freddie’s noncallable notes.” In fact, some market observers believe this dynamic explains the unconventional 2008 “conservatorship” of Fannie and Freddie, in which existing creditors were made whole regardless of the GSEs’ insolvency: “The political importance of these institutions created a new world, one in which a bond’s performance is determined by the reputation of its holders.… Russia and China were among the largest holders of Fannie and Freddie bonds [in 2008.] …the U.S. was utterly dependent on China to purchase its debt. So, unusually, the identity of the holders, not the condition of the issuer, determined the bond’s fate.”

The conclusion I reach after reading this analysis is that the GSEs were not the cause of the financial crisis, serious miscalculations were made regarding the GSEs’ solvency/profitability and that the main rational for their “nationalization” could likely have been a misguided effort to appease Chinese debt holders.

Further, as the debate regarding the fate of the two private companies, Fannie and Freddie, is a political one, we should consider which political party would benefit most by doing away with the 30 year home loan/mortgage.  Both sides perhaps point to the other.  Is it possible to put politics aside?  If we help more individuals build financial security and perhaps wealth, we increase the tax base.  And, isn’t that what we’ve been told the Conservatorship was meant to do — “protect American taxpayers?”

Perhaps the sealed documents in Judge Sweeney’s court further expose this confusion, miscalculation and the vulnerability the US has to foreign debt holders.

According to the Group of Thirty’s website :

“The Group of Thirty, established in 1978, is a private, nonprofit, international body composed of very senior representatives of the private and public sectors and academia. It aims to deepen understanding of international economic and financial issues, to explore the international repercussions of decisions taken in the public and private sectors, and to examine the choices available to market practitioners and policymakers.”

The members of the Group of Thirty include familiar names like Timothy Geithner, Lawrence Summers, William Dudley and Paul Volcker.

The paper is 143 pages, however the following excepts relate to Fannie and Freddie…

The 2008 Financial Crisis and Its Aftermath: Addressing the Next Debt Challenge

Occasional Paper 82, Group of Thirty, Washington, DC

2011: Thomas A. Russo and Aaron J. Katzel

“Governments throughout the world contributed in a variety of ways to the expansion of leverage. As we have seen, central banks played a significant role through their control of interest rates (at least at the short end of the yield curve). However, governments contributed to the crisis at the legislative, executive, and regulatory levels, as well. By holding interest rates at abnormally low levels during the extended period between 2000 and 2008, central banks encouraged the massive glut in worldwide liquidity and the corresponding asset price inflation that characterized those years. Moreover, in addition to providing liquidity by keeping interest rates low, central banks and other bank regulators allowed higher levels of effective leverage to arise throughout the financial system by granting unwarranted credit to risky assets on bank balance sheets. Thus, for example, banks were encouraged to purchase highly rated tranches of subprime mortgage-backed securities because they were granted favorable capital treatment under Basel II and related bank regulatory regimes. Through their roles in increasing liquidity and encouraging it to be directed to risky real estate assets, central banks and bank regulators cannot escape their share of blame for the crisis—as noted by John Taylor, who observes that the “New York Fed had the power to stop Citigroup’s questionable lending and trading decisions and, with hundreds of regulators on the premises of such large banks, should have had the information to do so. The…SEC…could have insisted on reasonable liquidity rules to prevent investment banks from relying so much on short-term borrowing through repurchase agreements to fund long-term investments.”

Taylor’s view is echoed by the Financial Crisis Inquiry Commission, which observed that among U.S. regulators “there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner. The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not.”

The legislative branch also bears some level of responsibility for the crisis, at least in the United States. This responsibility derives in significant part from various forms of congressional support provided to Fannie Mae and Freddie Mac since their formation in the post-World War II era, which distorted mortgage interest rates, thereby increasing leverage throughout the economy by facilitating increased lending to homebuyers, and allowed the Government Sponsored Enterprises (GSEs) to conduct business at an inadequate level of capitalization that would not have been possible without their implicit government guarantee.

This begs the question, however, of why the government promoted increased lending to consumers, especially to groups that did not have extensive previous experience with homeownership or debt management. Some commentators believe that government promoted residential real estate lending as a way that both major political parties could accept to increase the middle class’s perception of wealth during an extended period of stagnant wage growth. As noted by the former chief economist of the IMF, “We have long understood that it is not income that matters, but consumption. A smart or cynical politician knows that if somehow the consumption of middle-class householders keeps up, if they can afford a new car every few years and the occasional exotic holiday, perhaps they will pay less attention to their stagnant monthly paychecks. Therefore, the political response to rising inequality—whether carefully planned or the path of least resistance—was to expand lending to households, especially low income ones.”

In addition, Congress’s decision to exempt over-the-counter derivatives from regulation allowed for the rapid growth of a product that played a critical role in the crisis by magnifying the risks presented by mortgage-backed securities, while increasing the interconnectedness of financial institutions and decreasing transparency. As noted by the Financial Crisis Inquiry Commission, the “enactment of legislation in 2000 to ban the regulation by both the federal and state governments of over-the-counter (OTC) derivatives was a key turning point in the march toward the financial crisis.… [W]ithout any oversight, OTC derivatives rapidly spiraled out of control and out of sight, growing to $673 trillion in notional amount.… They amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities and spread them throughout the financial system.… [T]he existence of millions of derivative contracts of all types between systemically important financial institutions—unseen and unknown in this unregulated market—added to the uncertainty and escalated panic, helping to precipitate government assistance to those institutions.”

In the United States, these efforts took both the form of providing capital support to significant financial institutions whose failure was seen as severely disruptive of global liquidity, and programs designed to encourage the revival of markets for specific types of liquidity. Examples of the former include the support provided in the cases of the nationalizations of Fannie Mae and Freddie Mac, the TARP bailouts of AIG, Bank of America / Merrill Lynch, Citibank, and others, and the implicit support provided to Goldman Sachs and Morgan Stanley through the government’s accelerated conversion of those entities to bank holding companies. To get a true perspective on the problems presented by government indebtedness, one must also consider the off-balance-sheet obligations of the U.S. government, which are in the neighborhood of $132.8 trillion on a gross basis (or approximately $66.3 trillion, net of related allocated revenues such as Medicare and Social Security taxes and revenues associated with the assets of Fannie Mae and Freddie Mac).

Even assuming the federal government has the willpower to undertake the mammoth task of reforming entitlements, attention has only recently begun to focus on another significant elephant in the room: how to address Fannie Mae, Freddie Mac, and the federal government’s role in housing finance. As noted by the Wall Street Journal, the “biggest single bill to taxpayers [from the 2008 crisis] will come not from a bank bailout, but from mortgage giants Fannie Mae and Freddie Mac.” Unlike other financial institutions rescued by the federal government’s support, which in many cases “have paid back taxpayers with interest[,] Fannie and Freddie…burdened by huge mortgage portfolios, have taken $145 billion so far.… Alan Blinder of Princeton University and Mark Zandi of Moody’s Analytics put the ultimate price for saving them at $305 billion.”

The cost of the rescue of Fannie and Freddie, however, is not reflected in the federal government’s budget. As a result, the already staggeringly large official budget deficit is significantly higher when the government’s support for Fannie and Freddie is included: “The Congressional Budget Office estimates that if the entities had been included in the 2009 federal budget, they would have added $291 bn to the deficit, pushing it up by 20 percent.”

Moreover, in addition to the costs associated with the Fannie / Freddie bailout, there remains the vexing challenge of how to address the government’s role in private U.S. residential mortgage finance. Even prior to the bailout, the prime mortgage financing market depended on the critical role played by Fannie and Freddie purchases and securitization of prime mortgage loans, which was in turn supported by the federal government’s implicit guarantee and its consent to the GSEs’ enormous leverage ratios of nearly 70 to 1. As with other overleveraged financial institutions, in 2008 the GSEs lost liquidity and faced insolvency as asset prices dropped. Unlike other financial institutions rescued by the U.S. government, which in most cases have stabilized since 2008 and have been able to begin to repay government support, the GSEs in 2008 played (and continue to play) an integral and preeminent role in U.S. housing finance. Because a collapse of Fannie and Freddie in 2008 would have threatened the entire system of U.S. housing finance with collapse, the federal government “nationalized the mortgage market and hasn’t found a way out. So taxpayers keep pumping money into Fannie and Freddie at a rate of greater than $1 billion a week.”

As a result of the GSEs’ continued centrality to the U.S. residential real estate market, the Wall Street Journal has correctly observed that the “mortgage-finance debate will be highly contentious because it requires a re-examination of just how much the U.S. government should subsidize homeownership.” Confronting this issue will force the government to consider politically charged questions such as which socioeconomic segments of the population should be able to purchase homes and what form of mortgage finance best promotes the stability of the U.S. (and international) financial system and the U.S. economy. It will entail confronting hard truths, such as the observation bluntly made by PIMCO’s Bill Gross that “‘America has been overhoused.’” Fundamentally, as noted by the Wall Street Journal, “At the heart of the debate is whether the U.S. should continue to promote a low-cost, 30 year, fixed rate mortgage, which often requires some type of government guarantee to make investors willing to buy mortgage-backed securities.”

Although 30-year fixed-rate residential mortgages have been the conventional means of housing finance in the United States for almost 80 years, this was not always the case, and does not hold true in all countries outside the United States. As reported by the Financial Times, “in the 1930s, the average [U.S.] home loan was of short duration, typically three to five years; required a large deposit; and carried high interest rates, putting it out of reach of most.” While the GSEs are today widely criticized for contributing to the debt-fuelled housing bubble that led to the 2008 financial crisis, it is also worth remembering that, in the 1930s, it was “government agencies [that] developed long-term loans, later followed by fixed rates, lending stability to the market and making mortgages more widely available.”

The widespread availability of the 30-year fixed-rate mortgage has contributed in part to U.S. homeownership levels of approximately 67 percent today, higher than the wealthy industrial country average of approximately 60 percent and a significant increase over the approximately 45 percent homeownership rate prior to Fannie’s formation in 1938. While other factors also contributed to this increase, in part it occurred because the 30-year fixed rate mortgage provides undeniably useful benefits to homeowners, such as making monthly payments more affordable and offering protection against interest rate shifts. However, those very benefits make it a troublesome private investment. Indeed, the possibility of borrower prepayment and insulation against increases in inflation and interest rates over a long period of time make it difficult to imagine a vibrant private market in conventional residential mortgages arising without some level of government support.

For example, at the recent GSE summit PIMCO’s Bill Gross asserted that “loan rates would be ‘hundreds of basis points higher, creating a moribund housing market for years’ without government-guaranteed bonds, and that he wouldn’t buy securities without such backing unless they contained loans with 30 percent down payments.” Thus, while the Obama administration has called for a “process of weaning the markets away from government programs[to] make room for the private sector to get back into the business of providing mortgages,” Treasury Secretary Geithner’s remarks at an August 2010 conference on the GSEs “offered the clearest indication yet that the administration’s working plans to reinvent mortgage giants Fannie Mae and Freddie Mac—and the entire mortgage-finance system—will almost certainly include some role for government.”

In addition to the difficulties in addressing the government’s role in the housing market the enormous capital shortfall of the GSEs significantly complicates efforts to find a solution. As observed by the Financial Times, “if the GSEs are privatised, they will be forced to recapitalise.…

Given that the GSEs have a combined balance sheet of $5,000 bn, they would need to raise some $250 bn” to have capital levels comparable to private lenders, which under Dodd-Frank will be required to have “skin in the game” of 5 percent retained credit risk with respect to mortgages they securitize. Although the Obama Administration in August 2010 convened a multidisciplinary summit on the issue, and has indicated that it will present a detailed proposal to address the GSEs, there is no easy solution to the government’s ownership of Fannie and Freddie, or the more fundamental question of their (and the government’s) role in U.S. housing finance. As noted by the Wall Street Journal, “Fannie and Freddie,…together with the Federal Housing Administration are backstopping nine out of every 10 new [residential mortgage] loans.”

The difficulty in extracting the U.S. government from such a dominant role in residential mortgage finance is compounded by the enormous amount of outstanding GSE debt, which is widely held by institutions and foreign governments. This complication was highlighted in comments in August 2010 by PIMCO executive Bill Gross, “whose firm is among the biggest holders of U.S.-backed mortgage debt[, that]…the U.S. should consider ‘full nationalization’ of the mortgage-finance system.” While PIMCO’s position “is at odds with industry and government officials who have urged a smaller federal role, it reflects the difficult nature of the government’s ultimate decision: whether to pursue a more fundamental reform of the housing market that would adversely affect existing bondholders. Given this tension, and the size and importance of the GSE bond markets, although “administration officials have said the previous ownership model for Fannie and Freddie should be discarded[, and have thus]…promised to deliver ‘fundamental change,’ officials are likely to proceed slowly—focusing as much attention on any transition as they do on the final destination—to avoid rattling the $5 trillion bond market for government-backed mortgages.”

Moreover, the size of the GSE bond market and the identities of its largest investors mean that the implications of addressing Fannie and Freddie are not simply limited to its effect on U.S. housing finance. Rather, as noted by the Financial Times “a mishandling of the problem would have implications not just for U.S. homeowners, who could face scarcer financing, but also investors the world over, including the Chinese, Japanese and other governments and central banks[, because f]oreign investors own about one-third of Fannie’s and Freddie’s noncallable notes.” In fact, some market observers believe this dynamic explains the unconventional 2008 “conservatorship” of Fannie and Freddie, in which existing creditors were made whole regardless of the GSEs’ insolvency: “The political importance of these institutions created a new world, one in which a bond’s performance is determined by the reputation of its holders.… Russia and China were among the largest holders of Fannie and Freddie bonds [in 2008.] Recall in 2008 that Russian tanks were rolling into Georgia, while the U.S. was utterly dependent on China to purchase its debt. So, unusually, the identity of the holders, not the condition of the issuer, determined the bond’s fate.”

The concept that powerful bondholders can have a greater influence on the result of a restructuring than the issuer’s financial condition has important implications for sovereign issuers struggling with their debts. As noted by the Financial Times, “the same pattern was seen in Greece, where a rescue came because the debt holders were vulnerable European banks. More typical sovereign debt restructures, as seen in Brazil and Mexico in the 1980s, followed different rules.” Because any resolution of Fannie and Freddie will need to address not only the fundamental question of how housing in the United States is financed, but also account for the risks any reform will present to such an enormous, critical market, it is difficult to see how government will find the resolve to address them in a way that allows the United States to limit its role in housing finance while reducing the likelihood of future real estate bubbles. Resolving the issues presented by Fannie and Freddie takes on additional urgency when considered in light of the potential future strain on the federal budget resulting from the needs of state and local governments and the significant increase in entitlement spending expected from the impending retirement of the baby boomers. Continued funding of the GSEs has the potential to divert federal resources from these other critical priorities amid growing concern over mounting deficits. Given the slow economic recovery, the limited resources the federal government has to respond to a potential municipal crisis, and the need to address growing entitlement demands and the significant amount of federal, state, and local debt, a multifaceted approach is required that includes a combination of short-term, medium-term, and long-term initiatives.

As this paper has shown, the challenges facing the U.S. economy are difficult and interrelated, and addressing them will result in uncomfortable sacrifices across U.S. society. Because interest groups will lobby to promote their narrow, short-term interests and legislators focused on the next election will be vulnerable to a cherry-picking approach, the traditional legislative approach cannot successfully address the country’s long-term problems.”


When you see something, say something!

Calling all Whistleblowers!

Let’s imagine there is at least one person out there that has information that could lead to the prosecution of a high-level government official (past or present) relating to the mishandling of Fannie Mae and Freddie Mac.   Let’s further imagine there are likely several people that exist that perhaps have information regarding wrongdoing involving several government or institution officials.

Why wouldn’t they come forward?

Observe what happened on timhoward717’s blog this weekend with a former OFHEO official making harassing statements and threatening legal action based on comments posted on the blog.

Intimidation, retaliation, character assassination, threat of lawsuits, loss of employment… Those are some of the potential consequences for reporting wrongdoing.

However, two other results could occur:

  1. the whistleblower could be successful in uncovering illegal activity and may even receive a financial reward or,
  2. if the potential whistleblower has knowledge of illegal activity and does not come forward, they may be implicated as complicit by another whistleblower or as a result of an investigation.

Let’s face it… blowing the whistle on the likes of a top government official or any of their top lieutenants is really an intimidating proposition.   The names associated with the Fannie/Freddie debacle include Hank Paulson, Tim Geithner, Ben Bernanke, Jim Lockhart and Ed DeMarco, to name just a few.

And how about several members of Congress who have rallied to destroy these two private companies? Is there anyone with knowledge that could come forward by exposing a nefarious motive?

The reactions of some of the accused when faced with being exposed with wrongdoing could go to great lengths to divert attention or otherwise cover-up what they have done.

Consider the protective order requested by the US Government in Judge Sweeney’s court. What and who are being protected and why? Has everyone who has knowledge of the events being “protected” come forward or are they being coerced into silence?

What about the initial take-over of Fannie and Freddie orchestrated at the highest level of the US Government? Is there someone who has information exposing illegal or immoral activities that hasn’t come forward, yet?

Or maybe the Third Amendment (Sweep Agreement) – the deal that changed the rules in the middle of the game without public debate. It seems highly implausible that only Mr. DeMarco and Mr. Geithner (the signers on the Agreement) know the details leading up to that secretive arrangement. Surely there are people out there with knowledge. Who initiated the secret deal, what was the motivation, was anyone intimidated or coerced, why is everyone keeping quite, etc.?

Going against the likes of the US Government, the Federal Reserve Bank or a TBTF institution is a serious matter. One should do their research and seek legal advice before embarking on that “journey.” However, many have taken the proper, moral course of action in the past by coming forward and reporting wrongdoing.

This list is not meant to be all-inclusive, though consider whistleblowers in 2002 like Cynthia Cooper (Worldcom) and Sherron Watkins (Enron).

If you see something, say something…they did.

Or more recently with Edward O’Donnell and Michael Winston (Countrywide), Eileen Foster (BoA), Richard Bowen (Citigroup), Linda Almonte (JP Morgan) and Alex Grabcheski (AIG). Each of these individuals had the courage to come forward – against formidable foes – and reported what they knew to be wrong.

Carmen Segarra’s (NY Fed/Goldman Sachs) whistleblowing resulted in a change of behavior at the Federal Reserve Bank of New York as reported just yesterday:

Federal Reserve Announces Sweeping Review of Its Big Bank Oversight

By Jake Berstein, November 24, 2014

All of us just want to know the truth.

Perhaps there are people or groups who could help uncover the truth and provide assistance to potential whistleblowers.

For instance New York State Attorney General Eric Schneiderman could call for a Special Prosecutor to investigate wrongdoing. New York County District Attorney Cyrus Vance, Jr. could convene a Grand Jury. This process also starts with one person – one individual willing to start the investigative process.

There could be Congressional inquires.

If a whistleblower has information that implicates himself/herself could immunity be offered to help expose the greater truth?

Could the U.S. Office of Special Counsel (OSC) help?

On their website ( it states OSC…”is an independent federal investigative and prosecutorial agency. Our basic authorities come from…federal statutes: …the Whistleblower Protection Act… OSC’s primary mission is to safeguard the merit system by protecting federal employees and applicants from prohibited personnel practices, especially reprisal for whistleblowing.”

Perhaps a whistleblower does not want to come forward to the US Government with an accusation against the US Government. Could a whistleblower go to their state’s attorney general rather than the Federal Government?

National Association for Attorneys General:

With the lawsuits filed by shareholders of Fannie and Freddie will come depositions – it will be interesting to see whom those testifying implicate. Will those witnesses point the finger at someone who is now a potential whistleblower? Perhaps you, as a whistleblower, should not wait to become the scapegoat or fall guy.

Equally interesting will be documents presented during discovery. Will all of the documents be presented or will some “be lost?” Could these selective documents that are presented implicate you, a potential whistleblower, as complicit in illegal activity? Perhaps be preemptive and come forward now.

Sound advice for a whistleblower is to seek legal council. Maybe you and your lawyer decide to enlist the help of CBS 60 Minutes to help uncover the truth.

There must come a time in someone’s life when they realize they need to take a stand; to do what’s right and stop the intimidation. If someone is being coerced or bullied into silence, they need our help. We all need to take a stand against what’s wrong and stand for what’s right.  It’s time we learn the whole truth!

Additional Whistleblower references:

U.S. Securities and Exchange Commission:

“The Commission is authorized by Congress to provide monetary awards to eligible individuals who come forward with high-quality original information that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the money collected.”

The National Whistleblowers Center (NWC)

“Mission: NWC is a non-profit, non-partisan organization dedicated to protecting employees’ lawful disclosure of waste, fraud, and abuse.”


“The Whistleblower Protection Act (WPA) prohibits taking or not taking a personnel action (or threatening either) with respect to any employee…which he or she reasonably believes evidences a violation of any law, rule, or regulation or gross mismanagement…an abuse of authority…”

U.S. Department of Treasury:

“As employees of the Federal Government…who are aware of these protections will be more confident in coming forward to report possible violations of law…”


“There are certain personnel practices that are, by statute, forbidden in the Federal Government… One of the most frequently discussed…is the prohibition against retaliating against an employee for the act of disclosing a violation of any law…”

Former Treasury Chief Restructuring Officer: Jim Millstein

“Could Fannie and Freddie Pay Back Taxpayers Someday?”

That was the title of an article written 2.5 years ago by Alan Zibel on May 22, 2012.

“Conventional wisdom holds that taxpayers will never recoup the money they’ve poured in to prop up Fannie Mae and Freddie Mac, the government-controlled mortgage giants whose rescue has cost taxpayers nearly $150 billion to date.

That assumption is false, says Jim Millstein, a former Treasury Department official.

Mr. Millstein…has a plan for the government to be repaid on its investment in Fannie and Freddie. The idea is for Fannie and Freddie to be spun off from the government as private companies again. Mr. Millstein’s former colleagues in the Obama administration have emphasized repeatedly that Fannie and Freddie should ultimately be wound down – calls that Mr. Millstein derided as ‘ritual slaughter.'”

Jim Millstein served as chief restructuring officer at the Treasury Department from 2009 to 2011. Phillip Swagel served as assistant Treasury secretary for economic policy from 2006 to 2009 and worked on implementing the Troubled Assets Relief Program.

Mr. Millstein and Mr. Swagel co-wrote a Washington Post article on October 12, 2012.

“It’s time to end the bailout of Fannie and Freddie. Here’s how.”

By Jim Millstein and Phillip Swagel 10/12/2012

“Four years after the worst phase of the financial crisis…it is time to end the most costly bailout of all: the government takeover of Fannie Mae and Freddie Mac. This (bailout) support has allowed the two companies to continue to service the $4.5 trillion in guarantees against mortgage default and $900 billion in debt that they had racked up before the crisis, and to underwrite trillions of dollars in new mortgage credit. As a result, Americans have been able to get mortgages to buy homes and especially to refinance at lower interest rates.

But (Fannie and Freddie) shoulder an immense amount of risk, both by guaranteeing home loans against default and by owning them outright. This puts taxpayers on the hook for further losses and short-circuits the normal role of private investors in shaping housing and capital markets. Yet neither the administration nor Congress has a viable plan to end the government control of and exposure to Fannie and Freddie.

There is a way out that would protect the nascent housing recovery, revive the private mortgage marketplace and recover taxpayers’ investments in the firms. And the time to start is now.

Home prices have finally stabilized and are rising in many areas, and Fannie and Freddie are profitable again in their main line of business: bundling mortgages into securities and guaranteeing those securities against losses. This is the good news.

The bad news is that, four years after the takeover of Fannie and Freddie, the government now backstops 90 percent of all new mortgages and has no plan to reduce its market share, no plan to protect taxpayers against future losses on the trillions of dollars of mortgage credit underwritten since the firms were placed under government control…

With the Troubled Assets Relief Program, the government worked with recipients to replace public investments with private capital as quickly as possible. Not so with Fannie and Freddie. Worse yet, two recent government actions threaten to make the companies permanent wards of the state.

First, Treasury decided to take all future earnings from Fannie and Freddie as a dividend on its outstanding investment. At first glance, that “cash sweep” seems laudable: Taxpayers should recover their investments in the companies before other shareholders recover a dime. The problem is that, if all earnings go to Treasury, the firms cannot use that money to build capital and reserves to protect taxpayers against potential losses. Private insurance companies hold capital against the risks they underwrite and build reserves to make good on future claims. If Fannie and Freddie don’t do so, it means that taxpayers will be on the hook for the firms’ losses for the remaining life of the 30-year mortgages they have written on the government’s watch.”

Here’s another article dated April 5, 2013 by Dan Freed titled “Obama AIG Fix-It Man Bets on Fannie and Freddie Turnaround”

Mr. Millstein stated, “I do not like the original 2008 takeover… Indeed they were very careful, (however) last year they were sloppy (referencing the self-dealing August 2012 Third Amendment).”

Further, in that 2013 article, Mr. Millstein conjectures about the fate of Fannie and Freddie by proclaiming, “when that privatization is started in 2015 or ’16.”

“On December 2, 2013, Jim Millstein, former chief restructuring officer at the U.S. Treasury talks about the outlook for Fannie Mae and Freddie Mac. Millstein speaks with Stephanie Ruhle on Bloomberg Television’s ‘Market Makers.'”

It’s a 9:38 minute video but worth watching to the end as Mr. Millstein, regarding the Sweep Amendment, refers to his former US Treasury co-workers …”perhaps without thinking through the consequences of their actions.”

It is interesting to go back and review that many experts – then and now – were against the Conservatorship, against the Sweep and have been calling for the release and privatization of Fannie and Freddie.  Former high-level Treasury Department officials state “the time is now” to end Conservatorship and that was over two years ago!


Treasury’s Fannie Mae Heist

The government asked investors to shore up the two mortgage giants. Now those investors are being stiffed.

WSJ: Opinion


July 23, 2013 

The federal government currently is seizing the substantial profits of the government-chartered mortgage firms, Fannie Mae and Freddie Mac, taking for itself the property and potential gains of private investors the government induced to help prop up these companies. This conduct is intolerable.

Earlier this month I filed a lawsuit to stop it, now known as Perry Capital v. Lew, and other lawsuits challenging the government’s authority to demolish private investment are stacking up. Perhaps it’s time for the government to change course.

When the nationwide mortgage crisis first took hold in 2007 and 2008, Fannie and Freddie shored up their balance sheets with some $33 billion in private capital, much of it from community banks, which federal regulators encouraged to invest in the companies. As the crisis deepened, the government determined that Fannie and Freddie also needed substantial assistance from taxpayers. Congress passed the Housing and Economic Recovery Act of 2008, and under that law the government ultimately plowed $187 billion into the companies.

Taxpayers should get their investment back, but once they do, so should the private investors who first came to Fannie and Freddie’s aid. The government’s scheme to wipe out these investors is bad policy and a plain violation of the law that respects private, investment-backed expectations and our constitutional protection of property rights.

When the government intervened in Fannie and Freddie in 2008, it faced a choice: It could place the companies into a receivership and liquidate them, or it could operate them in a conservatorship and manage them back to financial health. Conservatorship, the government agreed, offered the best chance of stabilizing the mortgage market while repaying the taxpayers for their investment.

Today, Fannie and Freddie are back. Last quarter, Fannie announced a quarterly profit of over $8 billion; Freddie made $7 billion.

Rather than allow private investors to share in these profits, the federal government unilaterally decided to seize every dollar for itself. Last summer the government changed the terms of its investment from a fixed annual dividend of 10%—a healthy return in this market—to a dividend of nearly every dollar of the companies’ net worth for as long as they remain in operation.

So, at the end of last month, Fannie and Freddie sent a whopping $66 billion to the Treasury as a dividend. None of this money went to pay down the government’s investment. Whatever amount of money the government takes out of Fannie and Freddie, the amount owed to the government is never to be reduced, meaning there can never be any recovery for private investors.

It’s a splendid deal for the government: The president’s budget estimates, over the next 10 years, that the government will recover $51 billion more than it invested in the companies—and that’s on top of tens of billions in dividends the government took out of the companies from 2008-12. But it’s a complete destruction of the investments of private shareholders.

That is unlawful for at least three reasons. First, the government’s authority to revise its investments in Fannie and Freddie expired more than three years ago. Its change in the payment structure was utterly lawless.

Second, the Housing and Economic Recovery Act expressly requires the government to consider how its actions affect private ownership of the companies. The government has evidently given no attention to that requirement.

Third, that same law requires the government, operating Fannie and Freddie as a conservator, to safeguard their assets, but the government’s new dividend scheme conserves nothing. In fact, the government has acknowledged it intends to facilitate the companies’ ultimate liquidation. That is the opposite of conservatorship and it violates virtually every limitation that Congress imposed on the government’s authority to intervene in Fannie and Freddie.

Some have suggested that this illegal extinction of private investment is justified by the extraordinary levels of support that taxpayers provided to Fannie and Freddie during the financial crisis. Certain recent legislative proposals even purport retroactively to legalize the government’s cash-grab in the name of ensuring the taxpayers are repaid. But the companies’ return to profitability means that taxpayers likely will be repaid in full, with interest, by the end of next year.

In these circumstances the right thing to do is to permit the companies to pay down what they owe to the government’s investment so that private investors also might have the opportunity to earn returns on theirs. Yet, the “right thing” here is not just what the law requires. It may benefit the taxpayers as well. If Fannie and Freddie ever return to private ownership, the government has rights to 80% of the companies’ common stock.

The government’s recent cash grab squanders that opportunity, but it threatens even more serious harms. The United States has the most liquid securities markets in the world only because of its strong commitment to the rule of law and respect for private property. The government’s actions here are an affront to those commitments.

Mr. Olson, a former U.S. solicitor general, is a partner at Gibson, Dunn & Crutcher.


Fannie, Freddie and Charlie Brown

By Ronald A. Cass – 07/10/14 01:35 PM EDT

Like Charlie Brown — ever hopeful of kicking the football — players in the U.S. housing market have been hoping for congressional proposals for home finance reform that were not mere enticements to foolish investment or greater taxpayer burden.

Each crisis in the market has underscored problems with congressional reform proposals and has invited new efforts to make things right. But in every case, short-term interests or misunderstandings of what needs to be fixed have, like Lucy, pulled the ball away.

Since the 1930s, government-sponsored enterprises (GSEs) Fannie Mae, and later Freddie Mac, were supposed to assure liquidity in the housing market, with a sometimes implicit (sometimes explicit) government guarantee that would lower borrowing costs, protect investors and help promote homeownership.

Increased homeownership and a vibrant housing market seemed to signal their success. But in the aftermath of the financial crisis and changes in the incentives offered to mortgage issuers, the GSEs were left on the hook for much of the cost, and it was obvious that something needed fixing.

The 2008 Housing and Economic Recovery Act (HERA) placed the GSEs in conservatorship under the Federal Housing Finance Agency (FHFA) and provided substantial cash infusions in exchange for an annual 10 percent dividend on investment (i.e., on the government’s “senior preferred stock”) and rights to almost 80 percent of the GSEs’ common stock.

As the market improved, Fannie and Freddie’s finances improved, too. They now have paid “dividends” to the U.S. Treasury above the $188 billion received as bailouts. The GSEs seemed poised to return to profitability and a more stable operation. Then the U.S. government picked up and moved the ball again.

The FHFA unilaterally amended the HERA-based agreement, eliminating the rights of nongovernment shareholders and sweeping up 100 percent of the profits generated by the GSEs in perpetuity. This “third amendment” to the agreement also reduces capital holdings for the GSEs, making their operations more secure and decreasing need for taxpayer support.

These changes are being challenged in a lawsuit, Perry Capital v. Lew, but it should not take court action to see that there is a problem with the third amendment.

From a policy standpoint, this mini-nationalization seems totally backward. Aside from questions of its legality, the amendment diminishes incentives for private investment needed to boost liquidity for the housing market. It downgrades the security of Fannie and Freddie at a time when the still-undercapitalized GSEs could afford to increase capital assets simply by deferring new dividend payments.

While the FHFA policy provides more money now for the Treasury (which the government can spend on other priorities), the policy contradicts basic common sense. It’s as if, after a young adult moves back home, his parents seeing him saving very little and making potentially risky investments, direct him to save less and give them his paychecks—for them to spend!

A more sensible alternative is for the FHFA to reverse the third amendment, begin rebuilding GSEs’ capital, and put the enterprises on a sound footing to exit conservatorship, as AIG, GM, and other recipients of federal stopgap funding during the economic crisis already have.

A recent report from the Height Analytics group of financial analysts explains that this could make GSEs financially sound in 5–10 years, depending on how high the FHFA sets capital asset requirements. Moreover, this would give Congress better options regarding long-term GSE reform and less time pressure for acting.

With the $10 trillion to $20 trillion U.S. housing market representing much of the wealth of 70 million American homeowners, it is time for government officials to put the largest sources of mortgage-finance backing on sound footing. Financially secure GSEs are good for the housing sector and for home investment. Making a sensible move in this arena would bring a smile to Charlie Brown fans who’ve waited too long to see him kick the ball.

Cass is dean emeritus of Boston University School of Law, a U.S. representative on the panel of mediators for the World Bank’s International Centre for Settlement of Investment Disputes, and author of The Rule of Law in America.


How the $187 Billion GSE ‘Bailout’ Went Awry

NOV 17, 2014 4:34pm ET

When I was a corporate loan officer in the 1990s, some of my clients financed inventory with standby letters of credit, for one very obvious reason. An LC priced at 1% is cheaper than a loan priced at Libor plus 1%.

This banal insight — unfunded credit costs less than funded credit — explains why so much about the $187 billion “bailout” of the government sponsored enterprises makes no sense. The GSEs’ conservator, the Federal Housing Finance Agency, drew down $187 billion of taxpayer cash, which did almost nothing to enhance the companies’ operations or financial soundness.

The FHFA seems to have overlooked two critical distinctions. It overlooked the difference between cash losses and loan loss provisions under GAAP. And it overlooked the difference between a liquidity crisis and insolvency.

The cash draws were supposed to replenish the GSEs’ reported losses, which proved to be a chimera. We can look back with the benefit of hindsight at the 2008-2011 financials of Fannie Mae and Freddie Mac and see that accountants overestimated credit losses by a factor of 2X.

Because the FHFA drew down vast amounts of taxpayer funds to “pay” for accounting provisions that would later be reversed, the GSEs remained saddled with in senior preferred stock that paid a dividend rate of 10%, until that rate was revised upward.

Until mid-2012, the FHFA drew down cash to boost the GSEs’ book value from a significantly negative number up to something approximating zero. In the real world, if financial institution’s book equity is close to zero, it’s gone way beyond the tipping point. Under those circumstances, investors don’t really care about net worth; they care about thegovernment’s commitmentto support the company, which included purchases of their mortgage-backed securities.

The GSEs paid fees on the U.S. Treasury’s commitment to purchase up to $200 billion (later $400 billion) of senior preferred stock, which could be issued if the GSEs were ever unable to meet their current obligations. Until that date, there was no reason to draw down government cash for stock that paid out an annual 10% coupon.

By draining cash from the companies, the senior preferred dividends impeded the companies’ ability to build up retained earnings. The coup de grace was the FHFA’s decision to draw down $46 billion in taxpayer funds, so that the GSEs could pay senior dividends to Treasury. At the time, during 2010 and 2011, both GSEs had generated insufficient “earnings” to support those dividend payouts. Where I come from, a taxpayer “bailout” that (a) does nothing to fund company operations and (b) leaves the government with exactly as much cash as before, is oxymoronic.

We can walk through Fannie’s numbers, which show that it was in a situation akin to that of the Federal Housing Administration, which benefited from government guarantees. After 2007, FHA quadrupled its business volume to finance a mortgage portfolio that preformed far worse than those of the GSEs. Yet FHA never drew down a single dollar in bailout funds during the crisis years, and all signs show that FHA will continue to be self-supporting for the indefinite future.

The GSEs Were Not Like Wall Street

Contrary to popular myth, Fannie and Freddie did not face the same kind of liquidity crises that beset Wall Street banks in September 2008. The GSEs did not depend on overnight deposits, which can be withdrawn without notice. They did not require the massive liquidity needed to support trading of securities and derivatives conducted on behalf of clients. The GSEs did not own or insure exotic investments, like collateralized debt obligations, which were subject to margin calls.

Fannie and Freddie required less liquidity because their primary business line, guarantees of mortgage securities, was a form of unfunded credit. Those guarantees did not convert into a major cash drain in September 2008 because the residential mortgages did move in lockstep and all suddenly become 90 days delinquent. As of June 30, 2008, Fannie and Freddie’s serious delinquency rates were 1.36% and 0.93%, respectively.

The GSEs, like banks, financed long-term assets with short-term liabilities. But this duration mismatch was manageable. They funded mortgage loans, in part, by issuing 90-day notes with staggered maturities. But if the GSEs were unable to roll over those notes, they had the means to pay them down. Fannie, for instance, owned $418 billion in loans and $240 billion in short-term debt as of June 30, 2008. If necessary, Fannie could pay down half of its short-term debt by liquidating its cash equivalents and other assets guaranteed by the U.S. government. And it held about $260 billion in GSE mortgage securities, which could be pledged at the discount window the New York Fed.

Solvency Was Anybody’s Guess

Disaster was not imminent, but in September 2008 no one knew what knew future held. Defaults were accelerating everywhere and the size of the GSEs’ net worth was anybody’s guess. Using conservative loan loss assumptions, accountants inferred that the companies world never realize economic value for their deferred tax assets. Consequently, Fannie and Freddie recognized huge accounting losses, which were based on guesstimates about the future outcome of an unprecedented housing crash. As any banker will tell you, a bank’s solvency is based on a series of guesstimates — loan loss provisions, estimated prepayment rates — that are continually revised in both directions.

The bigger issue was the GSEs’ wherewithal to keep lending into a declining market after all the private players had walked away. So, to preempt any misgivings about doing business with two companies with negative equity, the federal government announced its bailout package.

From that point onward, there was no reason to draw down government funds to support the GSEs. Their government backing was akin to the government guarantee afforded the Federal Housing Administration, which quadrupled its business volume after 2007, while financing a mortgage portfolio that preformed far worse than those of the GSEs. Yet FHA never drew down a single dollar in bailout funds during the crisis years. And for the foreseeable future, FHA looks on track to be self-supporting.

Most sophisticated investors recognize that a bank’s solvency can change dramatically on a future date, when loans are taken off the books, and accounting provisions are reconciled with actual loan recoveries. And until that future date, there’s no reason to buy senior preferred shares prematurely, and pay a 10% annual dividend prior to that date of reckoning.

Fannie Mae by the Numbers

Let’s walk through Fannie Mae’s numbers, which are substantially similar to Freddie’s numbers. At yearend 2008, Fannie’s single-family mortgage portfolio totaled $2.73 trillion. That $2.73 trillion was comprised of loans segmented by vintage in its Dec. 31, 2008 Credit Supplement. Five years and nine months later, in its Credit Supplementfor Sept. 30, 2014, Fannie discloses the cumulative default rates by vintage. So, looking at the pre-2009 years, we can calculate a cumulative default rate of 6.6%, or about $181 billion of the $2.73 trillion total. Multiplied by a conservative loss severity rate of 37%, those defaults translate into cumulative credit losses of about $74 billion.

From 2008 and 2011, Fannie recognized single-family credit expense of about of $153 billion. That’s $153 billion (loss provisions plus foreclosure costs) versus $74 billion in actual credit losses to date.

Because Fannie’s credit losses were presumed to be so high during 2008 through 2012, virtually all of its deferred tax assets were presumed by accountants to be worthless. (Deferred tax assets measure GAAP loan loss provisions recorded before troubled loans are liquidated, when a tax deduction may be recognized.) By yearend 2011, $64 billion in deferred tax assets were offset by a deferred tax “valuation allowance” which represented a $64 billion reduction of shareholder equity.

If you appreciate the difference between cash items and non-cash charges, the FHFA’s decision to draw down taxpayer funds to supplant the loss of deferred tax assets seems especially foolish. Compared to all the other assets on Fannie’s balance sheet — anything from office supplies to real estate acquired through foreclosure proceedings — deferred tax assets are unique. Every other asset is convertible into cash. So, any reduction in value of those other assets translates into a reduced ability to pay down debt. But deferred tax assets are never convertible into cash, unless the company starts making so much money that it starts paying cash income taxes. Which is why, in the history of modern accounting, no deferred tax asset had ever been used to pay down a debt.

Beginning in 2012, the housing market had reached an inflection point, and prices started rising again. That year, Fannie started reversing those loan loss reserves and started earning profits. For fiscal year 2012, Fannie earned $17.2 billion in income before taxes, which was more than enough to pay down $11.7 billion in cash dividends, or 10% of the $117.1 billion in senior preferred stock owned by Treasury.

But 2013proved to be an earnings bonanza, thanks in large part to prior period accounting adjustments. In 2012, Fannie’s single-family credit expense was about $1 billion. In 2013, some loan loss provisions from prior years were reversed, so that credit “expenses” added back $11.2 billion to corporate income.

Fannie earned $38.6 billion before taxes in 2013. But there was a double accounting whammy. Since it was obvious to everyone that Fannie might start paying income taxes in the future, a $45.4 billion “tax benefit,” which was the reversal of a valuation allowance, caused Fannie to report $84 billion in net income for that year.

Let’s do some math. Take $84 billion in net income 2013; then add back $30 billion in senior preferred cash dividends paid during 2009-2012. That would have been $114 billion available to boost retained earnings, which is pretty close to $117 billion drawn down by FHFA to “bail out” Fannie.

And even today it looks like Fannie’s loan loss provisions are excessively high. Remember, Fannie incurred $153 billion in credit expense during 2008-2011 versus $74 billion in actual credit losses to date.

So guess how much of that $84 billion in 2013 net income was used to boost Fannie’s net worth. Almost none of it. In mid-2012, the FHFA and the Department of Treasury decided that it was best for everyone if the GSEs paid Treasury cash dividends equal to 100% of net income. Which is why, in 2013, Fannie paid Treasury cash dividends totaling $82.5 billion.

That’s right. Most of Fannie’s earnings in 2013 were comprised of reversals of non-cash provisions from prior periods. But those non-cash gains were used to justify cash dividend distributions to the government.

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.


The Party

So, you and your sister go to a beer party. It turns out your parents and both sets of grandparents are at the same party. The people who purchased the beer lied about their age and the shop owner who sold the beer failed to ask for ID and proof of age. Further, there was a liquor control agent in the shop at the time and approved the transaction.

Everyone at the party had at least one beer, though the guys who brought the beer to the party were drinking pretty heavily. The beer shop owner was also getting really drunk. The party was getting so ruckus that the police showed up to put an end to the whole shindig!

What happened next is unbelievable. Of all involved, you and your sister take all the blame for the party! Everyone points the finger at you and your sister! Injustice!

Your grandparents then direct your parents to severely punish you and your sister indefinitely.  You and your sister are allowed to keep your jobs, however your parents collect all your earnings and then give all your money to your uncle. There is no end in sight to the situation.

Your parents and grandparents who encouraged you and your sister to attend the party are now upset with you, despite the fact that it was their role to supervise your actions and provide guidance.  However, they all decide to blame you for the entire out-of-control party. Shockingly, it becomes apparent that your parents, grandparents and uncle are secretly arranging for you and your sister to receive the death penalty for your role in “The Party.” Could this travesty happen in America!?

Let’s reveal the identity of all involved:

You – Freddie Mac
Sister – Fannie Mae
Beer Purchaser – Home Buyers
Shop Owner – Banks
Liquor Control Agent – Real Estate Appraisers
Parents – FHFA (though called something different at the time of the party)
Grandparents – Senate and House Oversight Committees
Uncle – The US Department of Treasury

If it didn’t actually happen, it would be incomprehensible to believe.


“You Can’t Handle The Truth!”

Just like Colonel Jessup played by Jack Nicholson in the movie A Few Good Men was adamant that his actions were just though illegal, we find similar examples of these actions by members of our government.

The actions are buried deep in the details in the current quagmire involving the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), the U.S. Congress, the Federal Housing Finance Agency, the U.S. Department of Treasury and the U.S. Court System.

Let’s first answer some questions… Are Fannie Mae and Freddie Mac private entities or government entities? Is the government-controlled conservatorship of those entities in place to revive or wind-down those entities?

These questions were answered in April 2012.

On April 30, 2012, the United States District Court for the District of Columbia led by United States District Judge Rosemary M. Collyer in Herron v. Fannie Mae ruled that FNMA is a private entity owned by shareholders. The court also ruled that FHFA, as conservator, was meant to be temporary and by its charter cannot act to dissolve or liquidate FNMA.

Caroline Herron vs. Fannie Mae, et al

Judge Collyer wrote:

  • “Congress empowered FHFA to act as conservator of Fannie Mae for the purpose of reorganizing…(and) the enabling statute expressly allows FHFA temporary but complete control over Fannie Mae, not permanent control.”
  • “OMB, Fiscal Year 2012; Analytical Perspectives, Budget of the U.S. Government…budget reflects Fannie Mae as a non-budgetary entity in keeping with its temporary status in conservatorship.”
  • “The complete control exercised by FHFA is authorized by statute; it is how conservatorship is accomplished. Because conservatorship is by nature temporary, the government has not acceded to permanent control over the entity and Fannie Mae remains a private corporation.”
  • “The purpose of the conservator…is to restore the entity to fiscal feasibility…”

Here is a critically important point in the ruling:

“Fannie Mae would be a federal actor if the FHFA conservatorship retained for the government permanent authority to appoint a majority of the corporation’s directors. Lebron, 513 U.S. at 400. To the contrary, the appointment of FHFA as conservator did not establish permanent government authority to control Fannie Mae. First, Ms. Herron insistes (sic) that there is no date certain when the conservatorship of Fannie Mae will end, and, therefore, she erroneously concludes that FHFA control over Fannie Mae must be permanent. In order to be a government actor under the Lebron framework, permanent government control is required.”

Again, US District Judge Collyer ruled on April 30, 2012 that “…the appointment of FHFA as conservator did not establish permanent government authority to control Fannie Mae” and “the purpose of the conservator…is to restore the entity to fiscal feasibility…”

However on August 17, 2012 less than four month after the US District Court ruled that Fannie Mae is a private company and that the conservatorship is not meant to be permanent, FHFA as conservator privately agreed with the Treasury Department to appropriate all current and future profits of Fannie Mae (and Freddie Mac) apparently in an effort designed to bankrupt these two private companies.

It’s interesting to consider if the August 17, 2012 deal was in place prior to Judge Collyer’s ruling, would Ms. Herron have prevailed in her case against the U.S. Government?  Likely so…

It’s also interesting to consider if the August 17, 2012 deal was intentionally postponed until the Herron trial concluded.

If conservatorship is “by nature temporary” (Judge Collyer) with the “goal of preserving and conserving the assets and property of Fannie Mae and Freddie Mac” (FHFA website), then why would FHFA decide to give away all of the profits of this “private company” (Judge Collyer) to the U.S. Government?

And why does the U.S. Treasury take credit for this action on its website:

“Treasury Department Announces Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac” as stated on the website:

It seems like the Conservator is not in control of the situation. It seems like the Treasury Department is in complete and ultimate control of the fate of Fannie and Freddie.

“Further steps to wind down Fannie Mae and Freddie Mac?” What further steps? What wind down? There were no previous steps to wind down the entities before this August 17, 2012 closed-door deal. Congress, taxpayers, shareholders, etc. were all told up until this point that the entities were in conservatorship. This proves that publically the plan was to eventually set Fannie and Freddie free, while privately the FHFA/Treasury plan was to “wind down” the entities. Is this transparency? Ethical? Legal?

Which act of Congress decided to wind down and end Fannie Mae and Freddie Mac? What Executive Order signed by any President directed the elimination of Fannie and Freddie? None. Just a couple of government employees getting together to privately decide the fate of these two private companies.

Tim and Ed’s Excellent Adventure

Who exactly entered into this August 17, 2012 agreement? Tim Geithner, then Treasury Secretary, and Ed DeMarco, who at the time was serving only as acting Director of FHFA. Really!?! The Treasury Secretary had that level of power that he could enter into an agreement with a mere acting Director to render death sentences to Fannie and Freddie? No act of Congress; no Executive Order; no public debate… just two men deciding to eliminate important American institutions, one of which dates back to FDR and the New Deal. Sounds more like Tim and Ed’s Bogus Journey!

Housing and Economic Recovery Act of 2008 (HERA 2008)

HERA 2008 provided the authority, under the then-current conditions, to FHFA to act as conservator. That Act specifically mandated that FHFA not perform any action that would liquidate, wind down, or otherwise weaken Fannie and Freddie. The Act provided no authority for the Treasury Department to proceed with “further steps to expedite wind down of Fannie Mae and Freddie Mac.”

So, why hasn’t Congress done anything to stop this injustice? Given today’s Congress, that appears at best to be a rhetorical question.

The August 17, 2012 Geithner/DeMarco Agreement:

  • Made the Conservatorship permanent
  • Put the U.S. Treasury Department in complete control of these two companies
  • Put Fannie and Freddie on a path toward insolvency thus automatically triggering Receivership
  • Changed the status of Fannie and Freddie from private companies to government actors

According to HERA:

‘(4) MANDATORY RECEIVERSHIP. ‘‘(A) IN GENERAL. The Director shall appoint the Agency as receiver for a regulated entity if the Director determines, in writing, that—

‘‘(i) the assets of the regulated entity are, and during the preceding 60 calendar days have been, less than the obligations of the regulated entity to its creditors and others…”

So, it appears that Mr. Geithner and Mr. DeMarco intentions in the 8/17/12 Agreement (aka the Third Amendment or the Sweep Agreement) were to force Fannie Mae and Freddie Mac into Mandatory Receivership thus effectively “furthering steps to expedite wind down” thereby eliminating these two pillars of the American housing and financial system.

Did the Legislative Branch of the U.S. Government really intend to cede so much power into the hands of two government employees while banning the Judicial Branch from considering cases based on constitutionally and also sparring these two employees (and any other complicit party) from criminal or civil review? Did President Obama know about the actions of these two employees? He surely must have known, as he was their supervisor.

The problem with two federal employees deciding on August 17, 2012 to eliminate Fannie and Freddie was that Mr. Geithner and Mr. DeMarco failed to establish any entity or system to replace Fannie and Freddie. Change…and Hope! Sounds familiar…

The other problem with the August 17, 2012 Geithner/DeMarco deal (which makes the whole “Conservatorship” a sham which must violate SEC laws) is that Fannie Mae and Freddie Mac are effective and profitable. Not just profitable today, but profitable on August 17, 2012.

So, with Congress not holding the Executive Branch accountable, the owners of Fannie and Freddie took their case against the U.S. Government to court. Now justice will be served!

Not so fast… The U.S. Treasury Department lawyers asked the court to dismiss the cases stating, among other things, that the HERA 2008 law contained a provision that barred judicial review. Surely, the Legislative Branch does not have the ability to ban the Judicial Branch from reviewing its laws and reviewing the actions of the Executive Branch.

Well, according to the U.S. District Court for the District of Columbia presided by the Honorable Senior United States District Judge Royce C. Lamberth, Congress does have the ability to exclude the Judicial Branch from functioning as intended in HERA-related matters. On September 30, 2014 Judge Lamberth agreed with U.S. Treasury Department lawyers and summarily dismissed several lawsuits seeking justice in the illegal takeover of Fannie and Freddie (Perry, Fairholme, et al vs. U.S. Government). Case dismissed without discussion… Without discussion!

Is this what our Senators and Congressmen who voted for HERA intended? Did they really intend to exclude the entire Judicial Branch of government from even having the ability to rule on the intentional bankrupting of such important pillars of the country’s financial system?

HERA 2008:

‘‘(D) LIMITATION ON JUDICIAL REVIEW.—Except as otherwise provided in this subsection, no court shall have jurisdiction over—

‘‘(i) any claim or action for payment from, or any action seeking a determination of rights with respect to, the assets or charter of any regulated entity for which the Agency has been appointed receiver; or

‘‘(ii) any claim relating to any act or omission of such regulated entity or the Agency as receiver.

But, that section barring judicial review clearly applies to the Agency (FHFA) “as receiver.” FHFA has never acted as receiver, only conservator.

Well, that being said, did the Senators and Congressmen who voted for the Housing and Economic Recovery Act of 2008 really intend to empower the Executive Branch, and more specifically two employees of the Executive Branch – Timothy Geithner and Edward DeMarco – with the enormous power to kill Fannie Mae and Freddie Mac? Two people!? Without discussion!?

HERA 2008:

‘‘(7) AGENCY NOT SUBJECT TO ANY OTHER FEDERAL AGENCY.—When acting as conservator or receiver, the Agency shall not be subject to the direction or supervision of any other agency of the United States or any State in the exercise of the rights, powers, and privileges of the Agency.”

Attached are the voting records from the Senate and House on HERA 2008. Perhaps we should each ask our elected representatives if their vote for this law was intended to give such ultimate power to few individuals while precluding the judiciary from participation.

Senate Vote: 84 For – 12 Against – 4 No Vote

It is interesting that a few Senators abstained from voting – Barack Obama, Hillary Clinton, Elizabeth Dole and John McCain. Why no stand on this important issue…?

House Vote: 241 For – 172 Against – 20 No Vote

Points to consider:

  • HERA and Treasury stated that a bailout loan was necessary and that a conservatorship would return Fannie and Freddie into sound going concerns, yet conspired to not have any of the payments go toward loan repayment. All of the money is considered interest. Loan? Conservatorship? Conspiracy to violate an Act of Congress? Conspiracy to commit SEC violations by not being forthright as it applied to actively traded securities?
  • Treasury stated that Fannie and Freddie were the cause of the financial melt down in 2008 thus creating the need for their hostile take-over. However, Treasury after taking over FnF decided that the melt down was the result of major banks defrauding FnF. The banks settled and Treasury collected huge settlements on behalf of FnF, with the funds going right back to the Treasury as the August 17, 2012 agreement states Treasury gets all of FnF profits.
  • Treasury bailed out the Too Big to Fail banks under the Troubled Asset and Relief Program. As a part of this ordeal, Treasury forced the now Treasury-controlled FnF to purchase toxic loans from the troubled banks they were bailing out. And despite transferring these bad assets to FnF, both entities still returned to profitability by August 17, 2012. If FnF were not profitable on this date why would Mr. Geither direct Mr. DeMarco to siphon off profits that didn’t exist?
  • If the September 2008 Conservatorship is “by nature temporary” (Judge Collyer) why is there no discussion of ending Conservatorship (another rhetorical question…)
  • If FnF were profitable on August 17, 2012 (and are even more profitable today) why were they both forced onto a train that is headed to the gallows via station stops at Insolvency then Receivership and finally Annihilation?
  • Is it possible for someone to commute Fannie and Freddie’s August 17, 2012 wrongfully-convicted death sentence?

How is business today at Fannie and Freddie:

Fannie Mae Reports Net Income of $3.9 Billion and Comprehensive Income of $4.0 Billion for Third Quarter 2014: November 6, 2014

“This was another solid quarter, with the company reporting strong financial results and continuing to provide much needed liquidity to the market,” said Timothy J. Mayopoulos, president and chief executive officer. “We continue to build a strong book of business based on appropriate standards. We are committed to being our customers’ most valued business partner and delivering the products, services, and tools our customers need to serve the entire market confidently, efficiently, and profitably.”

“Fannie Mae expects to pay $4.0 billion in dividends to Treasury in December 2014. With the December dividend payment, Fannie Mae will have paid a total of $134.5 billion in dividends to Treasury in comparison to $116.1 billion in draw requests since 2008. Dividend payments do not reduce prior Treasury draws.”

What would FDR think of this New (Gaithner/DeMarco) Deal? All payments are considered interest…


“It was another solid quarter for Freddie Mac, our twelfth straight of profitability,” said Freddie Mac CEO Donald H. Layton. “The fundamentals of our business continued to improve… Our work to become a more competitive company is bearing fruit in increased customer satisfaction and market share between the GSEs. We also strongly delivered on our mission to be one of the leading sources of liquidity in the market, funding approximately one in four home loans and nearly 214,000 units of rental housing in the first nine months of 2014. At the same time, we are working with FHFA and the industry to strengthen and modernize the housing finance system,” Layton added. “We’re doing this by upgrading critical infrastructure, providing our customers with greater certainty through, as one example, refined representation and warranty terms, and also reducing taxpayer exposure through credit risk sharing transactions and the efficient liquidation of several types of legacy assets. These innovations will benefit millions of homebuyers and renters as well as taxpayers today and in the future.”

Looks like Mr. Mayopoulos and Mr. Layton are trying to get off the Annihilation-bound train.

Care to comment Director Watt?,-Director,-Federal-Housing-Finance-Agency-at-the-MBA-Annual-Convention.aspx

“During my tenure as Director of FHFA, we have made substantial progress by working together and I believe we can sustain this progress.  We have started to move mortgage finance back to a responsible state of normalcy – one that encourages responsible lending to creditworthy borrowers while maintaining safety and soundness of the Enterprises… This will result in a housing market that is not only better for borrowers, but also better for the Enterprises and lenders and beneficial to our country.”

“As I have consistently done since becoming Director of FHFA, I want to emphasize that getting input and feedback from stakeholders is a crucial part of FHFA’s policymaking process. So give us your input, not only on our FHLB Proposed Rule, but on other policy initiatives and decisions we are evaluating.”

Hmmm…oh, I have one…Stop the Train.

How about repeal the Gaithner/Demarco Agreement? Or ending the Conservatorship? Or at least communicate exactly how the conservatorship could be ended?

And does Secretary Lew have a comment?

CNBC interview with Treasury Secretary Jack Lew onWednesday, July 16, 2014.

“JIM CRAMER: Mr. Secretary, on a very positive story that I question why you don’t talk about it, our treasury refunding. You’ve got Fannie Mae paying you a $122 billion. Their obligation was for $160 billion.

Can this continue, or are you going to make it so that, or do you recommend, because I know it’s Congressional, that the preferred be made good and even the common stock be made good? Because Treasury’s gotten all its money back.

JACOB LEW: You know, Jim, if you look at the most recent exposure report, stress test reports on the GSEs, on Fannie Mae and Freddie Mac, it shows that in a crisis, that the exposure would still be to the taxpayer, and it would still vastly outweigh what current profits are. I think as long as U.S. taxpayers are on the hook, it is appropriate for us to stay in the structure of conservatorship that we’re in. We need to get on with financial reform, we need to have a clear plan for future that circumscribes the taxpayers’ exposure in a very limited way. And the sooner we do that, the better.”

Agreed…the sooner the better. So, the train is not heading toward Annihilationville?

Would it not make sense to repeal the loan shark GD Agreement that implemented usury / predatory lending practices and recognize that the payments made by Fannie and Freddie should be applied to the principal loan amounts? Then, allow Fannie and Freddie to recapitalize with their profits?

Or, Secretary Lew, are you in agreement with Gaithner/DeMarco? Staying “in the structure of conservatorship” under the terms of Gaithner/DeMarco will never lead to a release of the conservatorship.

Mr. Lew, it’s noble to protect U.S. taxpayers. I am a U.S. taxpayer, you’re a taxpayer, we’re all taxpayers. It’s also noble to protect the pension funds of U.S. teachers, U.S. policemen and U.S. firefighters who are the owners of Fannie and Freddie. And they want their companies back.

Is there a conspiracy in play? Conservatorship and Gaithner/DeMarco cannot co-exist.

HERA 2008

‘‘(B) OPERATE THE REGULATED ENTITY.—The Agency may, as conservator…preserve and conserve the assets and property of the regulated entity”

Was the government takeover of the two private companies by FHFA/Treasury necessary in the first place?


According to the Financial Crisis Inquiry report the “…conservatorship was not a foregone conclusion. Paulson, Lockhart, and Bernanke met with Mudd, Syron, and their boards to persuade them to cede control. Essentially the GSEs faced a Hobson’s choice: take the horse offered or none at all. “They had to voluntarily agree to a consent agreement,” Lockhart told the FCIC. The alternative, a hostile action, invited trouble and “nasty lawsuits,” he noted. “So we made a . . . very strong case so the board of directors did not have a choice.” Paulson reminded the GSEs that he had authority to inject capital, but he would not do so unless they were in conservatorship. Mudd was “stunned and angry,” according to Paulson. Tom Lund, who ran Fannie Mae’s single-family business, told the FCIC that conservatorship came as a surprise to everyone. Levin told the FCIC that he never saw a government seizure coming. He never imagined, he said, that Fannie Mae was or might become insolvent. Interviewed in 2010, Mudd told the FCIC: “I did not think in any way it was fair for the government to have been in a position of being in the chorus for the company to add capital, and then to inject itself in the capital structure.”

HERA 2008

‘‘(6) DIRECTORS NOT LIABLE FOR ACQUIESCING IN APPOINTMENT OF CONSERVATOR OR RECEIVER.—The members of the board of directors of a regulated entity shall not be liable to the shareholders or creditors of the regulated entity for acquiescing in or consenting in good faith to the appointment of the Agency as conservator or receiver for that regulated entity.”

Should “consenting in good faith” be interpreted as not being coerced, intimidated or agreeing under duress?

“(Fannie Mae CEO Daniel) Mudd and (Freddie Mac CEO Richard) Syron said their companies could weather the downturn, but recently the government, reviewing the companies’ books, disagreed. Last weekend, (FHFA Director) Lockhart and Treasury Secretary Henry M. Paulson Jr. seized Fannie Mae and Freddie Mac and named new chief executives.”

“The first sound they’ll hear is their heads hitting the floor,” Henry Paulson.

“Do they know it’s coming, Hank?” President Bush asked me. “Mr. President,” I said, “we’re going to move quickly and take them by surprise. The first sound they’ll hear is their heads hitting the floor.”

It was Thursday morning, September 4, 2008, and we were in the Oval Office of the White House discussing the fate of Fannie Mae and Freddie Mac…I had proposed that we seize control of the companies, fire their bosses…I’m a straightforward person. I like to be direct with people. But I knew that we had to ambush Fannie and Freddie.”

From the movie A Few Good Men:

“Col. Jessup: You can’t handle the truth!

Lt. Kaffe: Colonel, did you order the Code Red.

Col. Jessup: You’re God Damn Right I Did!!!”

Federal Housing Finance Agency Office of the Inspector General FAQs

How were the Federal Housing Finance Agency conservatorships established?

Pursuant to authority granted under Housing and Economic Recovery Act and the Safety and Soundness Act, on September 6, 2008, the Boards of Fannie Mae and Freddie Mac both assented to the order of Federal Housing Finance Agency Director Lockhart appointing the Federal Housing Finance Agency as conservator of Fannie Mae and Freddie Mac.

Under what conditions could a conservatorship be instituted?

The Housing and Economic Recovery Act prescribes that the director may appoint a conservator (or receiver) in cases of insolvency, undercapitalization, operating in an unsafe or unsound condition, concealment of books and records to regulators, inability to pay obligations or meet the demands of creditors, violations of law, consent of the Board of Directors, and others.

Under the Housing and Economic Recovery Act, the Director must place the entity under receivership if the entity is insolvent for the preceding 60 days, or has not paid its obligations for the preceding 60 days.

When did the Federal Housing Finance Agency become conservator of Fannie Mae and Freddie Mac, and what does it mean to be conservator?

On September 6, 2008, weeks after enactment of the Housing and Economic Recovery Act, Fannie Mae and Freddie Mac were placed into conservatorships overseen by the Federal Housing Finance Agency. As conservator, the Federal Housing Finance Agency assumed all the powers of the shareholders, directors, and officers, with the goal of preserving and conserving the assets and property of Fannie Mae and Freddie Mac.

The Fifth Amendment of the U.S. Constitution states:

“No person shall…be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”

The United States District Court for the District of Columbia ruled by United States District Judge Rosemary M. Collyer in Herron v. Fannie Mae decided that Fannie Mae (and thus Freddie Mac) is a private company and therefore its profits are considered private property.

The August 17, 2012 agreement is a violation of the U.S. Constitution as it deprives US citizens, without due process of law, of their private property without just compensation.

So, the US District Court for the District of Columbia is mixed in its interpretation of HERA regarding barring judicial review. Judge Collyer allowed a case to proceed, while Judge Lamberth summarily dismissed several cases which then led to an additional related case to be withdrawn in his court as he would have summarily dismissed that case, too (Pershing Square vs. U.S. Government).

Now all eyes are Margaret Sweeney…Honorable Judge Margaret M. Sweeney of the United States Court of Federal Claims. Judge Sweeney is presiding over similar lawsuits, which she is allowing to continue, and has yet to find that HERA prohibits her court from allowing these proceedings (Fairholme et at).

Also, the U.S. District Court for the Southern District of Iowa has a case in its court (Continental Western Insurance Company).

The practice of Congress passing laws that intentionally bar Courts from both constitutional review of said laws and from reviewing the actions resulting from those laws should scare, if not incense, every American.

Perhaps not every American cares about Fannie Mae or Freddie Mac. Perhaps the media has no interest in reporting on these fundamental issues involved here.

However, these issues are about the checks and balances of our three-branch government. The issues are about the U.S. government taking over private companies and not being forthright about it. It’s about the Government taking private property without just compensation. It’s about honesty, integrity, morality, civility… At the risk of sounding Pollyannaish, it’s about bringing back yesterday’s America.

If we don’t care about this unconstitutional act, why should we care about the next one? If we’ve caught the government in a dishonest act and lies, why not do something about it?

Or have we given up Hope for America?

We need to be like Lieutenant Kaffe (Tom Cruise) who bravely stood up against Colonel Jessup (Jack Nicholson) in the movie A Few Good Men. Lt. Kaffe uncovered the facts, battled the establishment and won! The U.S. Government and the Court system put up a formidable fight…but the truth came out and the battle was won…

No, we should not give up on America!

Congress should find the US Department of the Treasury and the Federal Housing Finance Agency in Contempt of Congress for their August 17, 2012 closed-door, back office GD agreement…and anyone else in Government that had or should have had prior knowledge of this deal…

The U.S. Supreme Court should rule that Congress is in Contempt of Court for opposing the entire authority of the Judicial Branch as a part of their HERA 2008 act as evidenced in U.S. District Court for the District of Columbia presided by the Honorable Senior United States District Judge Royce C. Lamberth on September 30, 2014 in the Perry and Fairholme vs. U.S. Government cases. The Senior US District Judge Lamberth’s ruling affirmed that the legislative branch successfully barred the judicial branch from reviewing the law and the actions by those supposedly following the law. If the lower court’s decision was correct, then the higher Supreme Court should act post-haste to restore faith in our checks-and-balances three-branch system.

One last passage from A Few Good Men:

“Col. Jessep: What the hell is this?

Capt. Ross: Colonel Jessep, you have the right to remain silent; Any statement you make may be used against you in a trial by court-martial or in other judicial or administrative proceedings. You have the right to consult with a lawyer prior any further questions. This lawyer may be a civilian lawyer retained by you at your own expense…

Col. Jessep: I’m being charged with a crime? Is that what this is? I’m being charged with a crime? This is funny. That’s what this is…

[Turning to Kaffee and lunging at him. But the MP’s restrain Colonel Jessep]

Col. Jessep: … I’m gonna rip the eyes out of your head and puke into your dead skull, you messed with the wrong marine!

Capt. Ross: Colonel Jessep, do you understand these rights as I have just read them to you?


Col. Jessep: You friggin’ people. You have no idea how to defend the nation. All you did was weaken a country today, Kaffee. That’s all you did. You put people’s lives in danger. Sweet dreams, son.

Kaffee: Don’t call me son. I’m a lawyer, and an officer in the United States Navy, and you’re under arrest, you son of a bitch.

[Glares at Jessep]

Kaffee: The witness is excused.

Keep up the fight!

And for your feel-good, reading pleasure, the Treasury press release:

“Treasury Department Announces Further Steps to Expedite Wind Down of Fannie Mae and Freddie Mac


Modifications to Preferred Stock Purchase Agreements Will Make Sure That Every Dollar of Earnings Fannie Mae and Freddie Mac Generate Will Benefit Taxpayers

Announcement Will Support the Continued Flow of Mortgage Credit during a Responsible Transition to a Reformed Housing Finance Market

WASHINGTON — The U.S. Department of the Treasury today announced a set of modifications to the Preferred Stock Purchase Agreements (PSPAs) between the Treasury Department and the Federal Housing Finance Agency (FHFA) as conservator of Fannie Mae and Freddie Mac (the Government Sponsored Enterprises or GSEs) that will help expedite the wind down of Fannie Mae and Freddie Mac, make sure that every dollar of earnings each firm generates is used to benefit taxpayers, and support the continued flow of mortgage credit during a responsible transition to a reformed housing finance market.

“With today’s announcement, we are taking the next step toward responsibly winding down Fannie Mae and Freddie Mac, while continuing to support the necessary process of repair and recovery in the housing market,” said Michael Stegman, Counselor to the Secretary of the Treasury for Housing Finance Policy. “As we continue to work toward bi-partisan housing finance reform, we are committed to putting in place measures right now that support continued access to mortgage credit for American families, promote a responsible transition, and protect taxpayer interests.”

The modifications to the PSPAs announced today are consistent with FHFA’s strategic plan for the conservatorship of Fannie Mae and Freddie Mac that it released in February 2012. The modifications include the following key components:

Accelerated Wind Down of the Retained Mortgage Investment Portfolios at Fannie Mae and Freddie Mac

The agreements require an accelerated reduction of Fannie Mae and Freddie Mac’s investment portfolios. Those portfolios will now be wound down at an annual rate of 15 percent – an increase from the 10 percent annual reduction required in the previous agreements. As a result of this change, the GSEs’ investment portfolios must be reduced to the $250 billion target set in the previous agreements four years earlier than previously scheduled.

Annual Taxpayer Protection Plan

To support a thoughtfully managed wind down, the agreements require that on an annual basis, each GSE will – under the direction of their conservator, the Federal Housing Finance Agency – submit a plan to Treasury on its actions to reduce taxpayer exposure to mortgage credit risk for both its guarantee book of business and retained investment portfolio.

Full Income Sweep of All Future Fannie Mae and Freddie Mac Earnings to Benefit Taxpayers for Their Investment

The agreements will replace the 10 percent dividend payments made to Treasury on its preferred stock investments in Fannie Mae and Freddie Mac with a quarterly sweep of every dollar of profit that each firm earns going forward.

This will help achieve several important objectives, including:

  • Making sure that every dollar of earnings that Fannie Mae and Freddie Mac generate will be used to benefit taxpayers for their investment in those firms.
  • Ending the circular practice of the Treasury advancing funds to the GSEs simply to pay dividends back to Treasury.
  • Acting upon the commitment made in the Administration’s 2011 White Paper that the GSEs will be wound down and will not be allowed to retain profits, rebuild capital, and return to the market in their prior form.
  • Supporting the continued flow of mortgage credit by providing borrowers, market participants, and taxpayers with additional confidence in the ability of the GSEs to meet their commitments while operating under conservatorship.
  • Providing greater market certainty regarding the financial strength of the GSEs.”

Colonel Jessup defending the Nation!