Original posting on Freddie Mac and Fannie Mae Investor Discussion / Message Board by Bryndon Fisher
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