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!

2 thoughts on “Former Treasury Chief Restructuring Officer: Jim Millstein

  1. Pingback: Louise Rafter, meet Judge Margaret Sweeney. Order grants Amicus brief. (Fairholme lawsuit/ Ackman commons lawsuit) | timhoward717

  2. Next week, Jim Millstein will be talking restructuring of Fannie and Freddie at the 21st Annual Distressed Investing Conference in New York.
    Mon., Dec. 1, 2014, at The Helmsley Park Lane.
    1:30 p.m. — Fannie Mae & Freddie Mac Conservatorship Proceedings — Matthew D. McGill, Esq., GIBSON DUNN; Bill Maloni, former Fannie Mae lobbyist; James E. Millstein, Founder and Chief Executive Officer, MILLSTEIN & CO.; and Kent Collier, REORG RESEARCH INC.


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