Fantastic February for Fans of Fannie and Freddie

Thanks Gretchen!

First, Gretchen Morgenson must hold a special place in her heart for Freddie and Fannie. She wrote about them on Valentine’s Day for the last two years.

This year, Ms. Morgenson’s February 14 piece, “After the Housing Crisis, a Cash Flood and Silence,” was motivated by Bruce Berkowitz.

On January 28, 2015, Fairholme Funds released a letter addressed to their shareholders. The portion that pertains to Fannie Mae and Freddie Mac can be viewed in an earlier post here:

Mr. Berkowitz followed up with a conference call on February 3, 2015 – the transcript of that call can be viewed here:

As follow-up to the shareholder letter and conference call, Ms. Morgenson wrote in her recent article:

“In a Jan. 28 letter to investors, Bruce Berkowitz, Fairholme’s managing member, questioned the broad sweep of the government’s claims to secrecy.

‘Why are F.H.F.A. and, particularly, Treasury resisting discovery so fiercely?’ (Berkowitz) wrote. ‘Is it because the document trail directly implicates some of the president’s most senior advisers in the White House?’

The question that Mr. Berkowitz raised is more than fair. The problem with the apparent involvement by Treasury and White House officials in the decision to commandeer Fannie’s and Freddie’s earnings is that by congressional statute, the F.H.F.A. is supposed to be an independent agency, tasked by law to protect the safety and soundness of the companies. Letting the companies’ profits flow to the Treasury had the opposite effect. Allowing them to rebuild their capital with profits after they repaid the taxpayer seems more like it.

Whatever the case, it is disturbing that the government goes to such lengths to shroud the details of the profit-sweep decision.”

Indeed, the Fairholme letter and conference call were pretty direct regarding White House, US Treasury and US Justice Department secrecy with their broad use of Presidential Privilege.

Excepts from the Fairholme call, where Mr. Berkowitz stated:

“…the government has convinced the court that all of the materials produced in discovery could quote, unquote, “roil the national economy,” and therefore, must be shielded by a protective order.

…This raises an obvious question: what is the government hiding? If their actions were lawful, then they should show all to support their case.

And we expect thousands of such communications to be listed. The common theme of what we have seen among almost all of the cast of characters is their connection to the United States Treasury Department.”

Bill Ackman of Pershing Square Capital also contributed on February 12 while at the Harbor Investment Conference.

The transcript of the Bill Ackman interview with Stephanie Ruhle can be seen here:


Excerpts from Mr. Ackman:

“…the U.S. government, every quarter, is taking out 100 percent of their profits, right. So you have the housing finance system, this is supposedly an off balance sheet company. It’s not consolidated into the balance sheet of the U.S. government. And the U.S. government is taking 100 percent of the profits and, you know, these — these are the — the worst capitalized institutions in the world. And that’s not a sustainable situation.”

“I think there are some members of government who want to see Fannie and Freddie go away. But if Fannie and Freddie go away, so does the 30-year pre-payable fixed rate mortgage and so does the housing market.”

“…the government is not one unified body. It’s a series of people. There are a lot of very intelligent people who work in the Senate and in the Congress. And a, you know, I think that ultimately, truth prevails. That’s been my experience as an investor and my experience in life. And we need to recapitalize Fannie and Freddie.”

Now, getting back to Ms. Moganson’s Valentine’s affection of Fan and Fred. Last year on February 15, 2014 (ok, the day after V-day…but close enough!), she penned “The Untouchable Profits of Fannie Mae and Freddie Mac”

In that piece Ms. Morganson questioned the government’s lack of transparency, if not outright deception, involving the 3rd Amendment to the PSPAs.

“Would you buy stock in a company that barred you from sharing in its future earnings? Of course not. Participating in the upside is what stock ownership is all about.

And yet, as of December 2010, holders of Fannie Mae and Freddie Mac common stock were subject to such a restriction by the United States government. They didn’t know it at the time, though, because the policy was not disclosed.

That the government would deny a company’s shareholders all its profits certainly seems material, but the existence of this policy cannot be found in the financial filings of Fannie Mae.

Neither have the Treasury’s discussions about the future of the two finance giants mentioned the administration’s commitment to shut common stockholders out of future earnings. Freddie Mac’s filings do refer, albeit incompletely, to the administration’s stance, noting that the Treasury “has indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment.” Note that this reference does not say all earnings.”

Gretchen Moganson is also known for her book, written with Joshua Rosner in May 2011, “RECKLESS ENDANGERMENT: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.”

Attached is a condensed version of the book also written by Ms. Morgenson “[My personal best of] RECKLESS ENDANGERMENT: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.”

The book covers many aspects of the 2008 financial crisis. Among other things, Ms. Morgenson and Mr. Rosner are clear that former Fannie Mae CEO Jim Johnson played a key role in the economic devastation.

“Even as Fannie and Freddie sped toward insolvency in 2008, Jim Johnson held sway in Washington. No one seemed to connect him and his years at Fannie’s helm with any of the problems that doomed the company. His ballooning of Fannie’s balance sheet and mortgage portfolio, his successful battle to keep the company’s capital cushion razor thin—all was forgotten.”

Ms. Morgenson also recently wrote on December 20, 2014 about the AIG lawsuit, “Fresh Doubt Over the Bailout of A.I.G” with noticed similarities to Fannie and Freddie.


“To me, however, the case’s significance lies in the information it unearthed about what the government did in the bailout — details it worked hard to keep secret.

And new documents produced after the trial seem to bolster Starr’s case, casting doubt on central testimony by some of the government’s witnesses.

There’s also the matter of whether the New York Fed had legal authority to receive the 80 percent equity stake in A.I.G. in exchange for an initial $85 billion loan. A.I.G. was the only financial company rescued in the 2008 crisis that surrendered equity to the government.

During the trial, Fed officials contended that they had no doubts about their authority to take shares. But according to the email written by Randall Guynn of Davis Polk & Wardwell, the lawyer who worried about being on thin ice, the Fed knew that it had no “express authority” to acquire an equity interest in A.I.G.”

Again, many of us want to thank Ms. Morgenson for her reporting on Fannie Mae and Freddie Mac.  In recent twitter posts, she proclaims her continued dedication with her investigative journalism on the subject.

Other journalists are encouraged to ask some of the same questions posed by Ms. Morgenson.

3 thoughts on “Fantastic February for Fans of Fannie and Freddie

  1. Fred, good overview, thanks. And thanks to Gretchen for publicizing these issues. Please don’t let up. What cataclysmic info could the government be hiding…again? They seem to be habitually hiding in secret versus being transparent. What will the light of day disclose?


  2. Pingback: Be Mine: Happy Valentine’s Day | thetruthaboutfannieandfreddie

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