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.

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