Access Washington

Gretchen Morgenson was the keynote speaker last week at the 2015 Page One Awards banquet. Of all of the topics that Ms. Morgenson could have covered in her speech, she chose to address the lingering issues around the government take-over of Fannie and Freddie. Specifically, she addressed the complicity that many journalists have played in the scandal.

Among other important points in the speech , Gretchen said,

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

As you can imagine, many people on Twitter posted comments about Gretchen’s speech. In the following exchange with fellow Tweeter Andrew Tomlinson @SleipnirPerkins we called out a few Wall Street Journal staff that many have accused of practicing access journalism. Immediately after I posted my “D- student” tweet, I was blocked by WSJ reporter Nick Timeraos. So, that peaked my curiosity wondering what he had to hide.

Access Journalists

I then discovered a prime example of access journalism. Compare the following WSJ article posted online just after 8:30 PM on July 30, 2012 with a US Treasury Department news release posted the following morning on July 31, 2012. You be the judge whether Nick had access to information from Treasury prior to everyone else and whether he used his position at the WSJ to promote Treasury’s agenda.

Forgiveness of Debt Could Yield Savings


July 30, 2012 8:38 p.m. ET

As the regulator for Fannie Mae and Freddie Mac nears its decision on whether to approve debt forgiveness for troubled borrowers, a new analysis by the regulator suggests taxpayers could benefit from the move, according to people briefed on the findings.

Fannie and Freddie could save about $3.6 billion more than current loss-mitigation approaches by reducing balances for some borrowers who owe much more than their homes are worth, these people said.

The Federal Housing Finance Agency is nearing a decision on whether to allow the companies to participate in the debt-forgiveness program that it consistently has resisted. Until now, the Federal Housing Finance Agency has maintained that the current housing-rescue programs offered by the taxpayer-supported mortgage companies are less-expensive options.

The new analysis was done because the Treasury Department said in January it would pick up part of the tab if the companies would reduce principal balances when modifying mortgages for troubled borrowers. It would use unspent housing funds from the $700 billion Troubled Asset Relief Program.

The Obama administration has argued strongly in favor of the FHFA adopting the principal-reduction program for Fannie and Freddie, saying it would provide more sustainable loan modifications. “We think there’s a set of cases where it’s clearly in the interest of the taxpayer for them to do principal reduction upfront,” said Treasury Secretary Timothy Geithner in congressional testimony earlier this year.

In April, the agency said that loan forgiveness would save about $1.7 billion for the companies, relative to other types of relief. At the time, the agency said that because the Treasury was paying to subsidize those write-downs, the relief would still cost taxpayers $2.1 billion, offsetting any savings to the companies.

But the latest analysis done by the agency found that such write-downs would generate $3.6 billion in savings for the companies, under certain assumptions, according to people familiar with the analysis. Even after subtracting the cost of the Treasury subsidies, the program would save $1 billion, these people said. As many as 500,000 borrowers could be eligible, these people said.

Spokeswomen for the Federal Housing Finance Agency and the Treasury Department declined to comment.

The FHFA has raised other concerns beyond the cost of such write-downs. Chief among them is the fear that more borrowers, upon hearing that Fannie and Freddie are instituting a debt-forgiveness program, might default to seek more generous terms. Fannie and Freddie were taken over by the U.S. government four years ago and have cost taxpayers about $145 billion.

A related worry is that unlike banks, which sometimes cut debts on loans they own, Fannie and Freddie would have to rely on hundreds of mortgage companies that manage payments on their behalf, creating greater operational headaches.

The Treasury Department rolled out the debt-forgiveness program in 2010. Fannie and Freddie opted against participating. The initiative, part of the administration’s Home Affordable Modification Program, is open to homeowners who have missed their mortgage payments or face imminent hardship and who owe more than their homes are worth.

The program has been increasingly adopted by mortgage servicers that handle deeply underwater loans which aren’t guaranteed by Fannie and Freddie. To qualify, homeowners must make at least three payments under the reduced loan amount, and principal balances are cut in installments over three years. The median principal amount reduced under the program has been $69,000.

Separately, Freddie Mac is preparing to expand rules devised to boost refinancing for borrowers with loans that the company guarantees, according to people familiar with the matter. The company currently allows its borrowers who are underwater or who have less than 20% equity to refinance with reduced documentation and fees under the Home Affordable Refinance Program.

The coming change will allow all borrowers with loans backed by the company, regardless of their loan-to-value ratio, to benefit from the streamlined program. Fannie Mae had already extended the HARP program to all borrowers, regardless of their equity position.

The FHFA last fall announced a sweeping revision of HARP guidelines, including eliminating a previous cap that limited the program to borrowers who owed up to 125% of their current property value.

But the Obama administration had been critical of the decision not to open up the program to borrowers with more home equity. “Have you ever heard of any program in any country at any time in history where borrowers with better collateral got a worse deal, or are even shut out altogether?” said Gene Sperling, director of the White House’s National Economic Council, in a speech to the National Association of Realtors in May.



Letter from Secretary Geithner to Acting FHFA Director DeMarco on the Principal Reduction Alternative (PRA) Program Forgiveness of Debt Could Yield Savings

By: Anthony Reyes


Today, Secretary Geithner sent the following letter to Acting Federal Housing Finance Agency Director Ed DeMarco on the Principal Reduction Alternative (PRA) program. Read the full letter here:​


July 31, 2012

Federal Housing Finance Agency

Office of the Director

400 7th Street S.W.

Washington, D.C. 20024

Dear Acting Director DeMarco,

I am writing in response to the decisions announced in your letter to Congress today. While I was encouraged that the Federal Housing Finance Agency (FHFA) is making progress on some initiatives we have discussed that will help the housing market recover, I am concerned by your continued opposition to allowing Fannie Mae and Freddie Mac (GSEs) to use targeted principal reduction in their loan modification programs.

FHFA is an independent federal agency, and I recognize that, as its Acting Director, you have the sole legal authority to make this decision. However, I do not believe it is the best decision for the country, because, as we have discussed many times, the use of targeted principal reduction by the GSEs would provide much needed help to a significant number of troubled homeowners, help repair the nation’s housing market, and result in a net benefit to taxpayers.

Indeed, notwithstanding the selective numbers cited in your letter, FHFA’s own analysis, which you have shared with us previously, has shown that permitting the GSEs to participate in the Principal Reduction Alternative program (HAMP-PRA) could help up to half a million homeowners and result in savings to the GSEs of $3.6 billion compared to standard GSE loan modifications. Furthermore, if the GSEs were to participate in HAMP-PRA, taxpayers would save as much as $1 billion on a net basis. In view of the clear benefits that the use of principal reduction by the GSEs would have for homeowners, the housing market, and taxpayers, I urge you to reconsider this decision.

I have asked Michael Stegman of my staff to restate in writing for you the case for principal reduction, consistent with FHFA’s mandates as conservator and regulator of the GSEs, that the Treasury has made to you and your staff over the last several months. His memorandum is enclosed. Treasury stands ready to provide any additional analytical support to make a targeted principal reduction program at the GSEs successful.

We welcome the positive steps you announced today regarding further refinancing opportunities, providing clarity to lenders on legal exposures, aligning short sale practices, and putting foreclosed properties back on the market. All of these have the potential to help advance recovery of the housing market. As we have previously discussed, the impact of these steps will depend on the speed with which you act and the extent of the changes you make.

Five years into the housing crisis, millions of homeowners are still struggling to stay in their homes, and the legacy of the crisis continues to weigh on the market. You have the power to help more struggling homeowners and heal the remaining damage from the housing crisis. I hope you will move to address these problems with a sense of urgency and force commensurate with the scale of the remaining challenges.


Timothy F. Geithner


If you like irony, consider if Nick did not block my access to his Twitter account, I would not have exposed his clandestine access to Timothy Geithner… karma is a curious thing!  Perhaps the plaintiffs in the Fan/Fred trials should consider deposing Mr. Timiraus as he was evidently acting as an insider and his testimony could be contrasted with others. Perjury is an even more curious thing… 

Archives Dec 2009: Goldman Sachs Made Tens of Billions of Dollars

How Goldman Sachs Made Tens Of Billions Of Dollars From The Economic Collapse Of America In Four Easy Steps

By Michael Snyder, on December 30th, 2009

Investment banking giant Goldman Sachs has become perhaps the most prominent symbol for everything that is wrong with the U.S. financial system, but most Americans cannot even begin to explain what they do or how they have made tens of billions of dollars from the economic collapse of America. The truth is that what Goldman Sachs did was fairly simple, and there may not have even been anything “illegal” about it (although they are now being investigated by the SEC among others).

The following is how Goldman Sachs made tens of billions of dollars from the economic collapse of America in four easy steps….

Step 1: Sell mortgage-related securities that are absolute junk to trusting clients at vastly overinflated prices.

Step 2: Bet against those same mortgage-related securities and make massive bets against the U.S. housing market so that your firm will make massive profits when the U.S. economy collapses.

Step 3: Have ex-Goldman executives in key positions of power in the U.S. government so that bailout money can be funneled to entities such as AIG that Goldman has made these bets with so that they can get paid after they win their bets.

Step 4: Collect the profits – Goldman Sachs is having their “most successful year” and will end up reporting approximately $50 billion in revenue for 2009.

So is it right for the biggest fish on Wall Street to make tens of billions of dollars by betting that the U.S. housing market will collapse?

You see, when you are talking about a financial giant the size of Goldman Sachs, the line between “betting that something will happen” and “making something happen” gets blurred very quickly.

Not that Goldman Sachs was the only one betting against the housing market.

According to the New York Times, firms like Deutsche Bank and Morgan Stanley also created mortgage-related securities and then bet that they would fail…..

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc.

But certainly Goldman Sachs was the most prominent financial player involved in this type of activity.

In fact, without mentioning specifics, Goldman has even admitted publicly to wrongdoing. On November 17th, 2008 Goldman Sachs CEO Lloyd Blankfein even issued a public apology….

“We participated in things that were clearly wrong and have reason to regret.”

But complicated financial transactions are something that most Americans simply do not understand, so the public outrage towards Goldman Sachs and others has been somewhat limited. But that does not change the very serious nature of the activities that Goldman was involved in….

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” Sylvain Raynes, an expert in structured finance at R & R Consulting in New York, recently told The New York Times. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

But the sad thing is that many Americans do not even understand what Goldman Sachs is. Goldman Sachs was founded in 1869 and has forged a reputation as one of the elite financial institutions in the entire world. They only hire “the best and the brightest” and Ivy League graduates flock to the firm. Of the five major investment banks that dominated Wall Street before the crash, only Goldman Sachs and Morgan Stanley have survived. Merrill Lynch and Bear Stearns were severely damaged by the crash and ended up being purchased by retail banks and Lehman Brothers ended up folding.

There are persistent rumors that Goldman played a major role in the collapse of Bear Stearns and that ex-Goldman CEO Hank Paulson could have done much more to bail out Lehman Brothers, but perhaps nobody will ever know the full truth. All we do know is that at the end of the crash several of Goldman’s competitors were destroyed and Goldman found itself in a more dominant position than ever.

The truth is that Goldman is a financial shark and they do not apologize for it.

An article in Rolling Stone recently put it this way….

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

So how did Goldman Sachs prosper so greatly in an environment that destroyed their competitors?

The following is an extended breakdown of just how Goldman Sachs was able to reap tens of billions of dollars in profits from the collapse of the U.S. housing market….

Step 1: Sell mortgage-related securities that are absolute junk to trusting clients at vastly overinflated prices.

In late 2006, Goldman Sachs made some fundamental changes in the way that they were approaching the U.S. housing market. According to a McClatchy report, Goldman spokesman Michael DuVally said that the firm decided at that time to reduce its mortgage risks by selling off subprime mortgage-related securities and by purchasing credit-default swaps to hedge against a serious downturn in the U.S. housing market.

The key moment came in December 2006. After “10 straight days of losses” in Goldman’s mortgage business, Chief Financial Officer David Viniar called a meeting of key Goldman personnel.

Vanity Fair described the results of that meeting this way….

After a now famous meeting in David Viniar’s office on December 14, 2006, Goldman’s traders began to protect the firm against further declines in the market. Just as you can short the S&P 500, the traders took short positions in an index that tracked the price of mortgage-backed securities. They also either sold assets they owned to others at losses or dramatically marked down the price on their own books. In the aftermath of the crisis, criticism erupted that Goldman had continued to sell mortgage-backed securities to its clients while betting against those very securities for its own account. Clearly, in the simplest terms possible, this is true: while Goldman was never the biggest underwriter of C.D.O.’s (collateralized debt obligations—Wall Street’s vehicle of choice for mortgage-backed securities), the firm did remain in the top five until the summer of 2007, when the market crashed to a halt.

So Goldman Sachs proceeded to sell approxmiately $39 billion of its own mortgage securities in 2006 and 2007 and they sold at least $17 billion more mortgage securities for others, but they never told the buyers of those securities that Goldman was secretly betting that a significant drop in U.S. housing prices would send the value of those mortgage securities plummeting.

These sales and the massive clandestine wagers placed by Goldman enabled the firm to pass most of its potential losses on to others prior to the collapse of the U.S. housing market.

But many of the investors who got the short end of the stick were not pleased. When they discovered that what Goldman had promoted as triple-A rated investments were actually a bunch of garbage, many of them were absolutely furious.

“The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion,” said Boston University economics professor Laurence Kotlikoff. “This is fraud and should be prosecuted.”

One of the victims of this fraud was the state of Mississippi….

Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it invested in Goldman’s subprime mortgage-backed bonds in 2006, said the state’s funds are likely to lose “hundreds of millions of dollars” on those and similar bonds.

Another one of the victims of this fraud was California’s retirement system for public employees….

California’s huge public employees’ retirement system, known as CALPERS, purchased $64.4 million in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny percentage of the fund’s holdings, in July CALPERS listed the bonds’ value at $16.6 million, a drop of nearly 75 percent, according to documents obtained through a state public records request.

So who is left holding the bag in cases such as these?

The taxpayers.

And that is just fine with Goldman Sachs. Just as long as they keep raking in huge profits.

Vanity Fair was even more blunt regarding this injustice….

“Goldman’s management team was almost flawless in its execution. But how many people needed government help because of the things Goldman sold them?”

The truth is that a lot of people needed help because of the things Goldman sold them, but up until now Goldman has completely gotten away with it.

Step 2: Bet against those same mortgage-related securities and make massive bets against the U.S. housing market so that your firm will make massive profits when the U.S. economy collapses.

Not only did Goldman sell mortgage-related securities that were absolute junk to investors at vastly overinflated prices, they also placed massive bets that the U.S. housing market would absolutely collapse.

The New York Times recently described how Goldman used a new index known as the ABX to make many of these bets….

A handful of investors and Wall Street traders, however, anticipated the crisis. In 2006, Wall Street had introduced a new index, called the ABX, that became a way to invest in the direction of mortgage securities. The index allowed traders to bet on or against pools of mortgages with different risk characteristics, just as stock indexes enable traders to bet on whether the overall stock market, or technology stocks or bank stocks, will go up or down.

Goldman, among others on Wall Street, has said since the collapse that it made big money by using the ABX to bet against the housing market. Worried about a housing bubble, top Goldman executives decided in December 2006 to change the firm’s overall stance on the mortgage market, from positive to negative, though it did not disclose that publicly.

These bets would only make money for Goldman Sachs if the U.S. housing market declined.

So if the biggest giant on Wall Street has a huge financial incentive to see the U.S. housing market fail, what do you think the odds are that they are going to do anything to support it?

Step 3: Have ex-Goldman executives in key positions of power in the U.S. government so that bailout money can be funneled to entities such as AIG that Goldman has made these bets with so that they could get paid.

For years, Goldman Sachs has encouraged executives to serve in U.S. government positions. Now they are world famous for the amount of influence their former employees have over government policy.

For example, according to the New York Times, Treasury Secretary Hank Paulson (also a former Goldman CEO) spoke with the current CEO of Goldman Sachs about two dozen times during the week of the bailout, although Paulson says that he obtained an “ethics waiver” before doing so.

So does an “ethics waiver” make everything okay?

But the sad thing is that is not an isolated example.

It turns out that Goldman benefited greatly from a number of decisions made by their former CEO while he was Treasury Secretary….

*Goldman greatly benefited when Paulson elected not to save rival Lehman Brothers from collapse. Paulson certainly stepped in to help Fannie Mae, Freddie Mac and AIG, but apparently had no problem with letting Lehman Brothers fall apart.

*Under Paulson’s direction, Goldman ended up receiving bailout money (which they may or may not have needed) from the U.S. government and has since paid back much of that money with interest. So why didn’t Bear Stearns or Lehman Brothers get the bailout funds that they needed?

*Goldman greatly benefitted when Paulson organized a massive rescue of American International Group while in constant telephone contact with Goldman CEO Blankfein. AIG ultimately ended up using $12.9 billion taxpayer dollars to pay off every single penny that it owed to Goldman.

But it is not just Paulson who has had significant influence in Washington.

On October 16th, Adam Storch, a Goldman Sachs vice president, was named managing executive of the SEC’s enforcement division. What do you think the odds are that he will crack down hard on Goldman?

In addition, former Goldman Sachs lobbyist Mark Patterson is the chief of staff for current Treasury Secretary Timothy Geithner.

In fact, ex-Goldman employees are seemingly everywhere. According to Vanity Fair, at one G-7 meeting an anonymous source identified at least 24 out of 32 finance officials in attendance as ex-Goldman employees.

The influence of Goldman Sachs even reaches to the White House. Goldman was Barack Obama’s number one campaign donor, and its employees gave $981,000 to his campaign.

If you don’t think that kind of money does not buy influence then you are delusional.

Goldman used some of that powerful influence to get the U.S. government to bail out AIG so that AIG could pay off the bets that Goldman had made with them. In a recent article, Vanity Fair described part of what went down….

After the government bailout of A.I.G., in order to end the collateral calls on the insurance giant, the New York Federal Reserve—whose chairman at the time was former Goldman chairman Steve Friedman—decided to purchase a slew of the securities that A.I.G. had insured, including $14 billion of those on which Goldman had purchased insurance. The government—meaning taxpayers—did so at full price, although according to a recent Bloomberg story, there had been negotiations with A.I.G. to do so at a 40 percent discount. Goldman says that the New York Fed broached the topic of a discount only once. The firm’s response: a flat no. While no one will ever know what would have happened had A.I.G. gone under, the essence of what did happen is perfectly clear. As a recent report by the Office of the Special Inspector General for tarpput it, the decision to pay full price “effectively transferred tens of billions of dollars of cash from the Government to A.I.G.’s counterparties.” Or to put it another way: because Goldman felt it was owed its billions by A.I.G., the firm took it from taxpayers instead.

So what about all of the thousands of small businesses that are failing and what about the millions of Americans that are losing their jobs and homes?

Do they get bailouts?

Of course not.

But the U.S. government definitely made sure that AIG and Goldman were taken care of.

Step 4: Collect the profits – Goldman Sachs is having their “most successful year” and will end up reporting approximately $50 billion in revenue for 2009.

Goldman Sachs ranks #1 in annual net income when compared with 86 peers in the investment services sector. They are on course for their best year ever.

Yes, they are having a really good “crisis”.

Goldman Sachs is on course to surpass $50 billion in revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.

20 billion just in bonuses?

That would mean that the average bonus for all Goldman employees would be over $700,000.

No wonder everyone wants to work for them.

It’s good to be on the winning side.

So just how are they making so much money?

In their recent article, Vanity Fair described it this way….

But because so many of Goldman’s competitors were gone or disabled, spreads—the difference between the price at which you sell and buy a variety of securities—were wider than they had been in years, meaning that Goldman could practically mint money. By acting at the moment it did, with Lehman out and Merrill Lynch down for the count, the government enabled this situation.

The other reason for Goldman’s profits is that the government has flooded the system with money, not just the money it used to rescue the financial system but hundreds of billions more in stimulus, in support of the housing market, and in the Federal Reserve’s purchases of securities.

But all of this success has not come without controversy. In fact, Goldman executives are very much aware of the growing backlash against the firm.

Senior officials at Goldman Sachs have reportedly loaded up on firearms and are now equipped to defend themselves if there is a “populist uprising” against the bank.

In addition, Goldman Sachs employees are now not allowed to gather in groups of 12 or more outside the office. The firm very much discouraged “holiday parties” as they most definitely did not want to be seen as celebrating the downfall of the U.S. economy.

But the truth is that Goldman Sachs won because so many others lost.

In his very revealing article on Goldman Sachs in Rolling Stone, Matt Taibbi described how Goldman keeps making money from the bursting of these economic bubbles….

They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They’ve been pulling this same stunt over and over since the 1920s — and now they’re preparing to do it again, creating what may be the biggest and most audacious bubble yet.

The truth is that in this latest economic collapse there were millions of losers and just a few winners.

Goldman Sachs was one of those winners.

So will they lose next time?

Not likely.

In their recent article, Vanity Fair quoted an anonymous source in the financial industry as saying the following….

“Are they the Yankees? No, the Yankees actually lose! Goldman never loses.”

Bryndon Fisher: “FHFA Director will issue order terminating conservatorship”

Original posting on Freddie Mac and Fannie Mae Investor Discussion / Message Board  by Bryndon Fisher!topic/freddienfannie/W6f-2sBP-9U

Dear Mr. Carney:

Bill Maloni was kind enough to include me in this email exchange, for which I am grateful.  I very much appreciate your perspective on our Fannie Mae and Freddie Mac quagmire, and since I have some interest in, and experience with the topic, I am hoping that you may be amenable to hear my perspective as well.  I am a shareholder in both Fannie Mae and Freddie Mac, as well as a lead plaintiff in two of the many cases pending in the U.S. Court of Federal Claims.

When I purchased common and preferred shares in these two companies, beginning in March 2009, I did so with the full and complete understanding that, ifeconomic conditions allowed, their conservator, the Federal Housing Finance Agency (FHFA), would see to ferrying these two entities to financial safety.  How did I know this?  Because the Housing and Economic Recovery Act of 2008 (HERA) mandated it, and the FHFA was thoughtful enough in September 2008 to promulgate a fact sheet, summarizing its responsibilities and goals as conservator under this new law:

“The purpose of appointing the Conservator is to preserve and conserve [Fannie Mae’s and Freddie Mac’s] assets and property and to put the [two companies] in a sound and solvent condition.”  Moreover, the FHFA is “to keep the [two companies] in a safe and solvent financial condition.”  And, “upon the [FHFA] Director’s determination that the Conservator’s plan to restore [Fannie Mae and Freddie Mac] to a safe and solvent condition has been completed successfully, the Director will issue an order terminating the conservatorship.” (obtained from the FHFA Fact Sheet, attached)

I, along with many others, relied on these covenants when I entered into my ownership interest with the GSEs.  By the same token, I also recognized the primary risk involved in holding shares of these two companies.  If the economy didn’t recover quickly enough or substantially enough, the conservator would have no choice but to recommend receivership for either or both firms, and thereby begin the formal liquidation process.

Yet, I remained confident in my investment because the United States economy is a powerful machine – second to none – and the services that Fannie Mae and Freddie Mac provide to a growing housing market are essential and valuable.  And guess what?  My investment thesis was vindicated. The economy did recover, and beginning in 2012 my companies turned the corner to begin their final journey through conservatorship by repaying the U.S. Treasury (or the American taxpayer, if you wish) and rebuilding their capital structures.

Unfortunately, the U.S. Treasury and the FHFA had a different agenda, one comprising ideas and actions that were not authorized under HERA, or any other American law.  As you may have come to realize, the FHFA forgot that it was the conservator for the companies, and decided in August 2012 to begin surrendering to the U.S. Treasury all future profits (assets, really) of these two enterprises.  And they did this through an amendment to the Senior Preferred Stock Purchase Agreement (SPSPA).  This action essentially imprisoned the two GSEs in perpetual conservatorship.

So, where are we now after almost three years since this inauspicious act?  Arguing over whether my fellow shareholders and I deserve to have our companies returned to us as prescribed by law, and have them returned before, dare I say it, Congress has reformed them.  Setting aside the legal arguments for a moment, let’s discuss reform.

Fannie Mae and Freddie Mac, our nation’s most prominent government-sponsored enterprises, were already reformed by Congress through the enactment of HERA.  This law not only provided a more robust regulator, the FHFA, but the law gave the GSEs more specificity when it came to capital standards.  Today, as was the case when HERA was enacted, Fannie Mae and Freddie Mac have been reformed.  But what about the government guarantee?  As one would assume, it applies to every major systemically-important American company in case of catastrophic economic collapse.  But, proper capital requirements and effective regulatory oversight can reduce the frequency of this tumultuous intervention, considerably.

And with regards to the duopoly argument, the FHFA’s regulatory mandate has the ability to create a public utility-like environment for Fannie Mae and Freddie Mac that will protect taxpayers and investors alike, all the while delivering cost effective mortgage rates and safe investment instruments.

So, do I deserve to reap the benefits of this extraordinary financial rescue through my ownership of common and preferred shares in these two rehabilitated GSEs?  You bet I do, for the same exact reasons why I reaped great rewards from my post-bailout investments in Citigroup, AIG, Bank of America, and General Electric.  I purchased the stock certificates, and I took the risk that the economy may not recover quickly enough or substantially enough for those firms to survive.  But guess what?  They did.  And guess what else?  I was able to retire a few years ago due, in part, to these great investments.  I did what every other red-blooded, American investor has done since before America became a country.  I capitalized on an opportunity, an opportunity born from economic turmoil and backed by the law of the land, for my benefit.

But this perspective wouldn’t be complete unless I advocated for the obvious.  It is time for the most important and powerful person within this whole drama to finally come forward, and do the right thing.  Of course I’m talking about Mr. Mel Watt, the Director of the FHFA.  As conservator for the two entities with a well-inked pen, and the power of HERA behind him, he can unilaterally 1) strike down the third amendment to the SPSPA as contrary to the FHFA’s mandate to put the entities in a sound and solvent condition, 2) declare the U.S. Treasury and the American taxpayer repaid with the March 2014 “dividend” payment and, thus, the senior preferred stock fully redeemed, 3) extinguish the warrants issued to the U.S. Treasury as unnecessary for repayment, 4) permit the GSEs to relist their securities on the NYSE, 5) allow the entities to recapitalize through a prudent mix of debt, equity, earnings, and overpayments made to the U.S. Treasury since March 2014, and 6) release the entities from conservatorship, and back, not to the American people, but to this American shareholder and his fellow owners – the ones who hold the stock certificates.

I do so hope you will consider what I have written here.  Although we may not agree on all aspects, I do value your opinion and insight very much.  And the next time Mr. Lew or Mr. Watt tells Congress that they need to pass a law to solve the problem of Fannie Mae and Freddie Mac, you can tell them through The Wall Street Journal that Congress did pass a law, and guess what, they’re not following it.


Bryndon D. Fisher

Lockhart’s statement on Fannie, Freddie: September 7, 2008

Head of new oversight agency details steps to oversee mortgage finance companies.

NEW YORK ( — The following is the statement by James Lockhart, director of the Office of Federal Housing Enterprise Oversight, who will head the Federal Housing Finance Agency being created to oversee mortgage backers Fannie Mae and Freddie Mac:

Good morning.

Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) share the critical mission of providing stability and liquidity to the housing market. Between them, the Enterprises have $5.4 trillion of guaranteed mortgage-backed securities (MBS) and debt outstanding, which is equal to the publicly held debt of the United States. Their market share of all new mortgages reached over 80 percent earlier this year, but it is now falling. During the turmoil last year, they played a very important role in providing liquidity to the conforming mortgage market. That has required a very careful and delicate balance of mission and safety and soundness. A key component of this balance has been their ability to raise and maintain capital. Given recent market conditions, the balance has been lost. Unfortunately, as house prices, earnings and capital have continued to deteriorate, their ability to fulfill their mission has deteriorated. In particular, the capacity of their capital to absorb further losses while supporting new business activity is in doubt.

Today’s action addresses safety and soundness concerns. FHFA’s rating system is called GSE Enterprise Risk or G-Seer. It stands for Governance, Solvency, Earnings and Enterprise Risk which includes credit, market and operational risk. There are pervasive weaknesses across the board, which have been getting worse in this market.

Over the last three years OFHEO, and now FHFA, have worked hard to encourage the Enterprises to rectify their accounting, systems, controls and risk management issues. They have made good progress in many areas, but market conditions have overwhelmed that progress.

The result has been that they have been unable to provide needed stability to the market. They also find themselves unable to meet their affordable housing mission. Rather than letting these conditions fester and worsen and put our markets in jeopardy, FHFA, after painstaking review, has decided to take action now.

Key events over the past six months have demonstrated the increasing challenge faced by the companies in striving to balance mission and safety and soundness, and the ultimate disruption of that balance that led to today’s announcements. In the first few months of this year, the secondary market showed significant deterioration, with buyers demanding much higher prices for mortgage backed securities.

In February, in recognition of the remediation progress in financial reporting, we removed the portfolio caps on each company, but they did not have the capital to use that flexibility.

In March, we announced with the Enterprises an initiative to increase mortgage market liquidity and market confidence. We reduced the OFHEO-directed capital requirements in return for their commitments to raise significant capital and to maintain overall capital levels well in excess of requirements.

In April, we released our Annual Report to Congress, identifying each company as a significant supervisory concern and noting, in particular, the deteriorating mortgage credit environment and the risks it posed to the companies.

In May OFHEO lifted its 2006 Consent Order with Fannie Mae after the company completed the terms of that order. Subsequently, Fannie Mae successfully raised $7.4 billion of new capital, but Freddie Mac never completed the capital raise promised in March.

Since then credit conditions in the mortgage market continued to deteriorate, with home prices continuing to decline and mortgage delinquency rates reaching alarming levels. FHFA intensified its reviews of each company’s capital planning and capital position, their earnings forecasts and the effect of falling house prices and increasing delinquencies on the credit quality of their mortgage book.

In getting to today, the supervision team has spent countless hours reviewing with each company various forecasts, stress tests, and projections, and has evaluated the performance of their internal models in these analyses. We have had many meetings with each company’s management teams, and have had frank exchanges regarding loss projections, asset valuations, and capital adequacy. More recently, we have gone the extra step of inviting the Federal Reserve and the OCC to have some of their senior mortgage credit experts join our team in these assessments.

The conclusions we reach today, while our own, have had the added benefit of their insight and perspective.

After this exhaustive review, I have determined that the companies cannot continue to operate safely and soundly and fulfill their critical public mission, without significant action to address our concerns, which are:

• the safety and soundness issues I mentioned, including current capitalization;

• current market conditions;

• the financial performance and condition of each company;

• the inability of the companies to fund themselves according to normal practices and prices; and

• the critical importance each company has in supporting the residential mortgage market in this country.

Therefore, in order to restore the balance between safety and soundness and mission, FHFA has placed Fannie Mae and Freddie Mac into conservatorship. That is a statutory process designed to stabilize a troubled institution with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate the Enterprises until they are stabilized.

The Boards of both companies consented yesterday to the conservatorship. I appreciate the cooperation we have received from the boards and the management of both Enterprises. These individuals did not create the inherent conflict and flawed business model embedded in the Enterprises’ structure.

The goal of these actions is to help restore confidence in Fannie Mae and Freddie Mac, enhance their capacity to fulfill their mission, and mitigate the systemic risk that has contributed directly to the instability in the current market. The lack of confidence has resulted in continuing spread widening of their MBS, which means that virtually none of the large drop in interest rates over the past year has been passed on to the mortgage markets. On top of that, Freddie Mac and Fannie Mae, in order to try to build capital, have continued to raise prices and tighten credit standards.

FHFA has not undertaken this action lightly. We have consulted with the Chairman of the Board of Governors of the Federal Reserve System, Ben Bernanke, who was appointed a consultant to FHFA under the new legislation. We 6 have also consulted with the Secretary of the Treasury, not only as an FHFA Oversight Board member, but also in his duties under the law to provide financing to the GSEs. They both concurred with me that conservatorship needed to be undertaken now.

There are several key components of this conservatorship:

First, Monday morning the businesses will open as normal, only with stronger backing for the holders of MBS, senior debt and subordinated debt.

Second, the Enterprises will be allowed to grow their guarantee MBS books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per month without capital constraints.

Third, as the conservator, FHFA will assume the power of the Board and management.

Fourth, the present CEOs will be leaving, but we have asked them to stay on to help with the transition.

Fifth, I am announcing today I have selected Herb Allison to be the new CEO of Fannie Mae and David Moffett the CEO of Freddie Mac. Herb has been the Vice Chairman of Merrill Lynch (MER,Fortune 500) and for the last eight years chairman of TIAA-CREF. David was the Vice Chairman and CFO of US Bancorp (USB, Fortune 500). I appreciate the willingness of these two men to take on these tough jobs during these challenging times. Their compensation will be significantly lower than the outgoing CEOs. They will be joined by equally strong non-executive chairmen.

Sixth, at this time any other management action will be very limited. In fact, the new CEOs have agreed with me that it is very important to work with the current management teams and employees to encourage them to stay and to continue to make important improvements to the Enterprises.

Seventh, in order to conserve over $2 billion in capital every year, the common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will continue to remain outstanding. Subordinated debt interest and principal payments will continue to be made.

Eighth, all political activities — including all lobbying — will be halted immediately. We will review the charitable activities.

Lastly and very importantly, there will be the financing and investing relationship with the U.S. Treasury, which Secretary Paulson will be discussing. We believe that these facilities will provide the critically needed support to Freddie Mac and Fannie Mae and importantly the liquidity of the mortgage market.

One of the three facilities he will be mentioning is a secured liquidity facility which will be not only for Fannie Mae and Freddie Mac, but also for the 12 Federal Home Loan Banks that FHFA also regulates. The Federal Home Loan Banks have performed remarkably well over the last year as they have a different business model than Fannie Mae and Freddie Mac and a different capital structure that grows as their lending activity grows. They are joint and severally liable for the Bank System’s debt obligations and all but one of the 12 are profitable. Therefore, it is very unlikely that they will use the facility.

During the conservatorship period, FHFA will continue to work expeditiously on the many regulations needed to implement the new law. Some of the key regulations will be minimum capital standards, prudential safety and soundness standards and portfolio limits. It is critical to complete these regulations so that any new investor will understand the investment proposition.

This decision was a tough one for the FHFA team as they have worked so hard to help the Enterprises remain strong suppliers of support to the secondary mortgage markets. Unfortunately, the antiquated capital requirements and the turmoil in housing markets over-whelmed all the good and hard work put in by the FHFA teams and the Enterprises’ managers and employees. Conservatorship will give the Enterprises the time to restore the balances between safety and soundness and provide affordable housing and stability and liquidity to the mortgage markets. I want to thank the FHFA employees for their work during this intense regulatory process. They represent the best in public service. I would also like to thank the employees of Fannie Mae and Freddie Mac for all their hard work. Working together we can finish the job of restoring confidence in the Enterprises and with the new legislation build a stronger and safer future for the mortgage markets, homeowners and renters in America.

Paulson’s announcement on Fannie, Freddie: September 7, 2008

Treasury Secretary unveils plan to bolster mortgage backers.

NEW YORK ( — Here is the statement by Treasury Secretary Henry Paulson on Treasury and Federal Housing Finance Agency action to protect financial markets and taxpayers:

Good morning. I’m joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.

In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500). Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action.

Since this difficult period for the GSEs began, I have clearly stated three critical objectives: providing stability to financial markets, supporting the availability of mortgage finance, and protecting taxpayers — both by minimizing the near term costs to the taxpayer and by setting policymakers on a course to resolve the systemic risk created by the inherent conflict in the GSE structure.

Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

The four steps we are announcing today are the result of detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve.

We examined all options available, and determined that this comprehensive and complementary set of actions best meets our three objectives of market stability, mortgage availability and taxpayer protection.

Throughout this process we have been in close communication with the GSEs themselves. I have also consulted with Members of Congress from both parties and I appreciate their support as FHFA, the Federal Reserve and the Treasury have moved to address this difficult issue.

Before I turn to Jim to discuss the action he is taking today, let me make clear that these two institutions are unique. They operate solely in the mortgage market and are therefore more exposed than other financial institutions to the housing correction. Their statutory capital requirements are thin and poorly defined as compared to other institutions. Nothing about our actions today in any way reflects a changed view of the housing correction or of the strength of other U.S. financial institutions.

I support the Director’s decision as necessary and appropriate and had advised him that conservatorship was the only form in which I would commit taxpayer money to the GSEs.

I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition.

I have long said that the housing correction poses the biggest risk to our economy. It is a drag on our economic growth, and at the heart of the turmoil and stress for our financial markets and financial institutions. Our economy and our markets will not recover until the bulk of this housing correction is behind us. Fannie Mae and Freddie Mac are critical to turning the corner on housing. Therefore, the primary mission of these enterprises now will be to proactively work to increase the availability of mortgage finance, including by examining the guaranty fee structure with an eye toward mortgage affordability.

To promote stability in the secondary mortgage market and lower the cost of funding, the GSEs will modestly increase their MBS portfolios through the end of 2009. Then, to address systemic risk, in 2010 their portfolios will begin to be gradually reduced at the rate of 10 percent per year, largely through natural run off, eventually stabilizing at a lower, less risky size.

Treasury has taken three additional steps to complement FHFA’s decision to place both enterprises in conservatorship. First, Treasury and FHFA have established Preferred Stock Purchase Agreements, contractual agreements between the Treasury and the conserved entities. Under these agreements, Treasury will ensure that each company maintains a positive net worth. These agreements support market stability by providing additional security and clarity to GSE debt holders – senior and subordinated – and support mortgage availability by providing additional confidence to investors in GSE mortgage backed securities. This commitment will eliminate any mandatory triggering of receivership and will ensure that the conserved entities have the ability to fulfill their financial obligations. It is more efficient than a one-time equity injection, because it will be used only as needed and on terms that Treasury has set. With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares.

These Preferred Stock Purchase Agreements were made necessary by the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed MBS. Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.

Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise.

Similarly, conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses. The federal banking agencies are assessing the exposures of banks and thrifts to Fannie Mae and Freddie Mac. The agencies believe that, while many institutions hold common or preferred shares of these two GSEs, only a limited number of smaller institutions have holdings that are significant compared to their capital.

The agencies encourage depository institutions to contact their primary federal regulator if they believe that losses on their holdings of Fannie Mae or Freddie Mac common or preferred shares, whether realized or unrealized, are likely to reduce their regulatory capital below “well capitalized.” The banking agencies are prepared to work with the affected institutions to develop capital restoration plans consistent with the capital regulations. Preferred stock investors should recognize that the GSEs are unlike any other financial institutions and consequently GSE preferred stocks are not a good proxy for financial institution preferred stock more broadly. By stabilizing the GSEs so they can better perform their mission, today’s action should accelerate stabilization in the housing market, ultimately benefiting financial institutions. The broader market for preferred stock issuance should continue to remain available for well-capitalized institutions.

The second step Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Given the combination of actions we are taking, including the Preferred Share Purchase Agreements, we expect the GSEs to be in a stronger position to fund their regular business activities in the capital markets. This facility is intended to serve as an ultimate liquidity backstop, in essence, implementing the temporary liquidity backstop authority granted by Congress in July, and will be available until those authorities expire in December 2009.

Finally, to further support the availability of mortgage financing for millions of Americans, Treasury is initiating a temporary program to purchase GSE MBS. During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we’ve seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers. While the GSEs are expected to moderately increase the size of their portfolios over the next 15 months through prudent mortgage purchases, complementary government efforts can aid mortgage affordability. Treasury will begin this new program later this month, investing in new GSE MBS. Additional purchases will be made as deemed appropriate. Given that Treasury can hold these securities to maturity, the spreads between Treasury issuances and GSE MBS indicate that there is no reason to expect taxpayer losses from this program, and, in fact, it could produce gains. This program will also expire with the Treasury’s temporary authorities in December 2009.

Together, this four part program is the best means of protecting our markets and the taxpayers from the systemic risk posed by the current financial condition of the GSEs. Because the GSEs are in conservatorship, they will no longer be managed with a strategy to maximize common shareholder returns, a strategy which historically encouraged risk-taking. The Preferred Stock Purchase Agreements minimize current cash outlays, and give taxpayers a large stake in the future value of these entities. In the end, the ultimate cost to the taxpayer will depend on the business results of the GSEs going forward. To that end, the steps we have taken to support the GSE debt and to support the mortgage market will together improve the housing market, the US economy and the GSEs’ business outlook.

Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.

And let me make clear what today’s actions mean for Americans and their families. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today.

While we expect these four steps to provide greater stability and certainty to market participants and provide long-term clarity to investors in GSE debt and MBS securities, our collective work is not complete. At the end of next year, the Treasury temporary authorities will expire, the GSE portfolios will begin to gradually run off, and the GSEs will begin to pay the government a fee to compensate taxpayers for the on-going support provided by the Preferred Stock Purchase Agreements. Together, these factors should give momentum and urgency to the reform cause. Policymakers must view this next period as a “time out” where we have stabilized the GSEs while we decide their future role and structure.

Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market. There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form. Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes. And policymakers must address the issue of systemic risk. I recognize that there are strong differences of opinion over the role of government in supporting housing, but under any course policymakers choose, there are ways to structure these entities in order to address market stability in the transition and limit systemic risk and conflict of purposes for the long-term. We will make a grave error if we don’t use this time out to permanently address the structural issues presented by the GSEs.

In the weeks to come, I will describe my views on long term reform. I look forward to engaging in that timely and necessary debate.

Hank Paulson: July 13, 2008

July 13 (Bloomberg) — Following is the text of a statement issued today by Treasury Secretary Henry Paulson:

Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.

GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure. In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer. Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards.

I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.

Matt Hill Poses Questions on Twitter @hill_matt

Hey @JCarneysBeard, hypothetical question. If I told you that:

  1. A top gov official secretly told a group of oligarchs that he was setting up a sneak attack on you to stop the housing genocide bleeding
  2. Then actually went ahead and cut off your head
  3. Announced to public that due to excessive “bleeding”, your head had to be lopped off
  4. Wrote a book about the sneak attack in which your head was lopped off

What would you make of it?… Wait don’t answer yet, there’s more… What if then:

  1. It turned out that he actually only lopped off 80% of the head
  2. You and JC were then rushed into the conservator (let’s call them FHFA) so that they could save you
  3. Somehow you & JC were able to be saved, in return you saved America by doing the job you were sworn to do by birthrite.

Then what would you think? Quite an imagination, eh? Hold that answer please. What if then:

  1. While in his control, FHFA along with the Treasury tried to slow bleed you to death so that no one would notice.
  2. Congress, Whitehouse, TBTF, Treasury & FHFA waged a smear campaign & along with willing public, decried your actions and refused to
  3. release you from their control. They said your original “bleeding” was detrimental to the taxpayer and you are susceptible in genocides
  4. and even though your debts had been paid with interest, you are to be held forever in a life debt to the US Treasury.
  5. Good Samaritans in the form of hedge funds then came to your aid in a battle with the supreme court over your freedom.
  6. For some reason, the court is asking for proof of Treasury and FHFA fraud, even though the only thing you want is your freedom back.

@JCarneysBeard Well, that’s where my story stops for now. Is that too far-fetched to pitch to Hollywood? Maybe I gotta go Bollywood?

Treasury Official Philip Swagel in 2009: Paulson coerced GSE’s into Conservatorship

Phillip Swagel was Assistant Secretary of the Treasury for Economic Policy from 2006 to 2009. Mr. Swagel wrote for the Bookings Institution in 2009 that provided insight on the US Department of the Treasury’s takeover of Fannie Mae and Freddie Mac.

A few highlights on the section that discusses the GSEs are as follows:

“…the GSEs could have fought (Conservatorship) and might well have won, since their regulator had said as recently as July that the two firms were adequately capitalized.”

“…many people expressed to me directly their misgivings about what looked like a bailout, in which GSE bondholders and shareholders won and taxpayers lost. It was hard to disagree. It turned out that Secretary Paulson had the same misgivings.”

“It was also necessary to convince the management of Fannie and Freddie to acquiesce without a legal fight. …Ultimately, Secretary Paulson had a trump card: he could say in public that he could not in good conscience invest taxpayer money in these firms, and that would doubtless spark their demise. But in the end he did not have to play this card. In well-publicized meetings with Secretary Paulson, Chairman Bernanke, and FHFA Director James Lockhart, both firms acceded to conservatorship, which was announced on Sunday, September 7, 2008.”

“The U.S. government ended up as 79.9 percent owner of the GSEs, receiving preferred stock on terms that essentially crushed the existing shareholders.”

Brookings Papers on Economic Activity, Spring 2009

PHILLIP SWAGEL Georgetown University

The Financial Crisis: An Inside View

VII. Rescuing the GSEs

The relative quiet was to hold until early summer, when the effects of the housing collapse manifested themselves in the collapse of IndyMac and severe pressures on the GSEs, in the form of declining stock prices and widening spreads on Fannie and Freddie securities, and thus on mortgage interest rates for potential homebuyers. The FDIC took over IndyMac and turned the firm into a laboratory for its foreclosure prevention ideas, but the problems of the GSEs fell squarely in the Treasury’s court. The Treasury was in a difficult position. GSE debt and MBSs with GSE guarantees were held throughout the financial system, and a failure of the firms would have meant chaos in financial markets. As commentators such as Peter Wallison of the American Enterprise Institute had long warned, (see, for example, Wallison, Stanton, and Ely 2004), the GSEs were holding the financial system and taxpayers hostage—and in mid-July 2008 it seemed they would win the standoff.

The options were all unpleasant, and all required congressional action:

to provide the GSEs with more liquidity by raising their line of credit with the Treasury from $2.25 billion each to something much larger; to inject capital; or to ask Congress to put the two firms into conservatorship, with the government running the companies on behalf of their shareholders (which would eventually be mainly the government). This last option could be done under existing legislative authority but still required congressional approval, and the GSEs could have fought this and might well have won, since their regulator had said as recently as July that the two firms were adequately capitalized. (This statement referred to statutory definitions of capital, which included tax assets that could only be monetized in the future when the firms became profitable again, but it nonetheless carried weight.) Moreover, even putting the GSEs into conservatorship raised questions about whether their $5 trillion in liabilities would be added to the public balance sheet. This did not seem to Treasury economists to be a meaningful issue, since the liabilities had always been implicitly on the balance sheet—and in any case were matched by about the same amount of assets. But the prospect that rating agencies might respond by downgrading U.S. sovereign debt was unappealing. A fourth option, receivership, would involve liquidating the companies and was deemed off the table because it would have required winding down the GSE portfolios.

These portfolios were the source of the systemic risk arising from the GSEs’ activities, but the GSEs’ purchases of MBSs were important for ensuring the availability of financing to potential homebuyers. Addressing the portfolios would have to wait for a longer-term reform. In the end, Secretary Paulson went to the steps of the Treasury building on Sunday, July 13, and proposed “all of the above”: the power to give the GSEs both liquidity and capital in amounts that would make clear to market participants that the U.S. government stood behind the obligations of these companies. He asked Congress to raise the GSEs’ lines of credit; to authorize unlimited (subject to the statutory debt ceiling) direct Treasury purchases of GSE securities, including both their MBSs and their common stock, through the end of 2009, to ensure that the firms could fulfill their missions with respect to housing markets; and to give their regulator, OFHEO, the power of conservatorship and other authorities that the administration had long sought. The Treasury would insist on terms and conditions to protect the taxpayer if public money were ever put into the firms. These powers were requested with the idea that the firms’ liquidity crunch reflected a lack of market confidence that a show of Treasury support could assuage—that standing behind the firms would calm market fears and avoid the need for a bailout. (The secretary’s unfortunate phrasing, at a July 15 congressional hearing, about having a “bazooka” in terms of the financial ability to stand behind the firms was to be repeated constantly in the media in the months to come.)

The Fed authorized bridge lending to Fannie and Freddie while Congress worked on the legislation, which was enacted on July 30, 2008 (and which included the Hope for Homeowners program). Some market participants complained that the rescue did not distinguish between senior and subordinated debt but instead made both of them whole, whereas many participants had expected the subordinated debt not to be included within the rubric of a guarantee. However, the view at the Treasury was that simplicity and clarity were paramount (although, of course, clarity is sometimes in the eye of the beholder).

This effective hardening of the heretofore-implicit guarantee of the GSEs left mixed feelings among Treasury staff. A crisis had been forestalled with a flurry of weekend activity (soon to become a regular part of the Treasury workweek), but the outcome seemed to cement in place the awkward status of the GSEs and their ability to privatize gains and socialize risk by borrowing at advantageous terms under the shelter of a now-explicit government guarantee. Past Treasury departments across administrations had sought to remove the implicit guarantee, not to harden it. At a dinner in Cambridge, Massachusetts, on Thursday, July 24, 2008, to honor Martin Feldstein, outgoing president of the National Bureau of Economic Research, many people expressed to me directly their misgivings about what looked like a bailout, in which GSE bondholders and shareholders won and taxpayers lost. It was hard to disagree. It turned out that Secretary Paulson had the same misgivings. The following Monday, July 28, he instructed Treasury staff to analyze the capital situations of the GSEs. To protect taxpayers in the case that an actual investment was needed in the future, he wanted to know first if these firms were solvent. The Treasury’s Office of Domestic Finance engaged a topnotch team from Morgan Stanley to dig into Fannie and Freddie’s books and assess their financial condition. While this was happening, it became apparent that the July 13 announcement and subsequent legislation had left markets uncertain about the status of the enterprises. The GSEs had access to private sector debt funding, although with increased costs, as the spreads on five-year Fannie benchmark agency debt above Treasuries rose from about 65 basis points in early June to 94 basis points on September 5, just before the firms were put into conservatorship. But the common stocks of the two firms continued to decline. Market participants were in effect saying that they (mostly) believed that the government stood behind the debt and guarantees on the MBSs, but were not confident that the firms were solvent. This was not Secretary Paulson’s intent—he did not deliberately set up the GSEs to fail and get them into conservatorship. The weeks in July and August were tense ones within the Treasury, as markets deteriorated while waiting for more clarity on Fannie and Freddie. It looked to market participants as if there was no guidance, but this was because we were busy working—and Secretary Paulson was willing to suffer for a few weeks in order to have his next step come out right. The Morgan Stanley team came back several weeks later in August with a bleak analysis: both Fannie and Freddie looked to be deeply insolvent, with Freddie the worse of the two. In light of the firms’ well-publicized accounting irregularities of previous years, Treasury staff were especially amazed that the GSEs appeared to have made accounting decisions that obscured their problems. With receivership still an undesirable outcome because it would imply prematurely winding down the retained portfolio, the Treasury worked with the GSEs’ regulator (formerly OFHEO, the July legislation having merged it with the Federal Housing Finance Board to create the Federal Housing Finance Agency, or FHFA) to set out an airtight case of insolvency that warranted putting the firms into conservatorship. The July legislation allowed FHFA to do this without consulting Congress, although no one had contemplated actually using that power so rapidly. Even though the analysis from Morgan Stanley was clear, it took some time to bring the FHFA examiners on board—it seemed difficult for them to acknowledge that the firms they had long overseen had gone so wrong, and it would have been awkward for the head of FHFA to decide on the conservatorship over the objection of his senior career staff. It was also necessary to convince the management of Fannie and Freddie to acquiesce without a legal fight. There was no expectation of a problem with Freddie’s management—the CEO had publicly expressed his fatigue with the whole situation—but Fannie appeared then to be in somewhat better financial shape and might reasonably have expected to be treated differently than Freddie. Ultimately, Secretary Paulson had a trump card: he could say in public that he could not in good conscience invest taxpayer money in these firms, and that would doubtless spark their demise. But in the end he did not have to play this card. In well-publicized meetings with Secretary Paulson, Chairman Bernanke, and FHFA Director James Lockhart, both firms acceded to conservatorship, which was announced on Sunday, September 7, 2008.

The Treasury announced three measures jointly with the conservatorship decision: so-called keepwells, under which the Treasury committed to inject up to $100 billion of capital each into Fannie and Freddie as needed to ensure their positive net worth; a Treasury lending facility if needed; and a program under which the Treasury would purchase the GSEs’ MBSs in the open market. This last program was mainly symbolic—a demonstration by the Treasury that the obligations of the GSEs were “good enough for us” and should be seen as secure by the rest of the world. The U.S. government ended up as 79.9 percent owner of the GSEs, receiving preferred stock on terms that essentially crushed the existing shareholders. (The precise level of ownership was chosen in light of accounting rules that would have brought GSE assets and liabilities onto the government balance sheet at 80 percent ownership.)

The real action here was the two $100 billion keepwells, which were meant to effectuate the now-explicit guarantee of GSE debt and MBS coverage—they would provide just-in-time capital injections as losses were realized and ensure that Fannie and Freddie had the financial ability to service their debt and insurance obligations. The Treasury could not by law make GSE debts full-faith-and-credit obligations of the U.S. government—this could only happen through an act of Congress that changed the GSE charters. Unfortunately, the keepwells were not well explained by the Treasury, and it took some time for market participants to understand that they were the explicit guarantee—and even then, some observers questioned whether $100 billion was enough to cover possible losses at either firm. As with many decisions made quickly at the Treasury in this period, the figure of $100 billion did not receive considered discussion across the building and was eventually revised upward by the Obama administration. The conservatorship arrangement left unanswered the question of the long-term status of Fannie and Freddie. This was by necessity, since any such decision required congressional action to amend the firms’ charters. An unfortunate consequence, however, was that borrowing costs for the GSEs remained above those for Treasury debt. Even though the public balance sheet was effectively behind the firms, this could change in the future, and the spread over Treasuries seemed to reflect this uncertainty. The confusion over what the Treasury could and could not do was evident in the writings of outside observers. In his blog on November 25, 2008, for example, New York Times columnist Paul Krugman wrote, “the Bush administration, weirdly, has refused to declare that GSE debt is backed by the full faith and credit of the US government.” Krugman wondered whether this reflected politics. No politics were involved: the Treasury did not do this because it was not legal. Although the criticism of the Bush administration was off target, the Treasury had not explained the situation clearly. The long-term status of the GSEs remains at this writing to be decided by Congress. Each of the GSEs before conservatorship could be thought of as two related entities under one roof: a securitizer and monoline insurer that packaged and guaranteed mortgages with relatively good underwriting standards, and a hedge fund that leveraged the funding advantage from its implicit guarantee. Their retained portfolios were the embodiment of this positive carry and the source of the systemic risk, since scaling up the balance sheet with MBS purchases had driven the GSEs’ massive borrowing.

It was clear that the desired long-term outcome for the GSEs was to wind down the portfolios. Indeed, the agreements struck at the time of the conservatorship explicitly committed the firms to do so over time, starting in 2010. In the meantime, however, the portfolios were a tool with which to support the housing market, and the Treasury wanted there to be upward room for more MBS purchases so that homebuyers would not face higher interest rates. As a result, Treasury officials, including the secretary, did not talk directly about winding down the portfolios, out of fear that this would fluster markets and cause a spike in interest rates paid by the GSEs. This tension was not resolved until later in the year, with the November 25, 2008, announcement by the Fed that it would fund the GSEs directly by purchasing their debt and MBSs.

Treasury staff did draw up sketches of long-run plans for the GSEs, and Secretary Paulson spoke publicly on this topic in early January 2009. He favored turning the GSEs into a utility-like company, with private shareholders but government regulation. This preference seemed to be driven by a view that there would be substantial waste from the duplication involved with multiple GSEs, which was an approach favored by some at the Fed. A possible alternative would combine the two, with one or two GSEs running the automated networks by which banks originating mortgages sold conforming loans to the GSEs, and then a multitude of financial institutions competing with each other to securitize those loans into MBSs that would receive a government-backed guarantee. Such a restructuring would be along the lines of the present credit card market, which consists of a few large networks such as Visa and MasterCard but many credit card issuers in fierce competition.

The agreements struck with the GSEs took one small step in the direction of fostering future competition, in that the companies would have to pay a fee to the government for the explicit backing of the securities they issued starting in 2009. The details remain to be determined, but one could imagine over time allowing banks to pay such a fee and receive government backing on their securitizations of conforming loans. This would allow entry, which, one hopes, would drive innovation for the benefit of American homebuyers. Eventually the GSEs could become boutique financial firms rather than behemoths, or they might even one day acquire banks and become normal financial services firms. All of this, however, is for the future.