Glen Brandford posted a piece on Seeking Alpha on July 19, 2015 titled: “FHFA Writedowns Continue To Be Greatest Threat To GSE Investment Thesis.”
Glen’s piece was informative, as usual. However, if you’re like me, you find just as much value in the comments that people post after the article. Here is such a comment that I enjoyed reading from “Poor Dude”…
Bang the drum, Glen. Hopefully, someone of importance is listening. Viewed from a high-level perspective, I’m convinced that the government siezed Fannie and Freddie in 2008 for no other reason than to give them the financial might and world-wide influence to save large teetering banks and re-instill confidence in our financial markets during a major market panic.
The fact that a special law was passed (in advance) to allow it tells you that is was planned well before it actually happened.
As soon as they were seized, the companies were instructed to start buying up Alt-A and subprime mortgage securities from the marketplace to the tune of $40 billion per month. That’s hardly something that “distressed” companies would do of their own volition (which is why their boards were replaced and new “bosses” installed who would do as instructed without question).
The “line of credit” issued to them (at an exhorbitant interest rate, by comparison to the rates charged to any other distressed company at the time – other than AIG, of course) was used for no purpose other than to increase their “firepower” in sucking up bad assets from the large banks and marketplace in general. It was called a “rescue” of Fannie and Freddie in the press, although Fannie and Freddie were never in financial trouble and would never HAVE been, except POSSIBLY in the worst-case scenario that the market panic wasn’t averted and the entire western financial system collapsed and the entire world entered a “Greatest Depression”. In that case, Fannie and Freddie may have actually gotten into trouble and needed “rescuing”. But absent the realization of that worst-case scenario, or prior to its occurrence, their seizure was nothing more than another back-door bailout of the large banks and investment firms (just as AIG was used at the time).
The companies were forced to “mark-to-market” their trillion-dollar portfolios, at 30 cents on the dollar or so (the market-panic low), then account for those reduced valuations as “losses” – despite the fact that their top-tier portfolios (and they handled little else) continued to perform and generate income with only very minimal or no degradation at all. Those “losses”, although existing on paper only and not in any real sense, provided justification for the government’s actions.
And it worked. Mission accomplished. The companies’ continuing profits, their significant positive cash flow, and their new line of “credit” from the US Treasury was put to good use. The market collapse ended, the panic faded, and things slowly began to return to normal.
Fast-forward to 2012, and all the accountants and financial experts and lawyers are informing the government that the charade of “distress” can no longer be continued. Market valuations are returning to normal, and the loss reserves must be reversed. No two ways about it. And that’s going to result in the companies showing HUGE profits and possibly even buying their way out of their rescue without being “wound down” as Paulson and others expected because it would do two things: 1) It would cover their backsides for their actions, and 2) it would align with their basic philosophical objections to the companies’ existence to begin with (at least, in their present form). Paulson et al wanted the GSEs gone, done away with.
The fix for this new problem? A third amendment to the SPSPA, wherein the companies would just send all their profits forever to the US Treasury. Screw the shareholders, who they never cared about to begin with. So long as the change was made before the companies announced the reversals of their loss reserves, the change could be justified as “necessary to end an endless cycle of borrowing to repay debt”. Just explain it as necessary to end the “Greek Method” (and I would argue “American Method”) of operation. Problem solved, as far as “public perception” is concerned!
But that still left one huge issue to be dealt with: The fact that the companies held on their balance sheets roughly $1.5 trillion in real, tangible assets in their “retained portfolios”. That represented most of the companies’ (and shareholder) wealth which had been slowly accumulated over nearly a century of successful operation in the case of Fannie Mae and a somewhat shorter period in the case of Freddie Mac. And with loss reserves reversing, that number was growing rapidly (aside from the fact that it consisted mostly of 100% title to property which had been financed on a 30-year fixed-price basis and would allow (in an adverse scenario where people defaulted on their loans after 20 or 25 years of payments) a recovery AT LEAST equal to – and more likely far exceeding – the “book value” of the assets). $1.5 trillion understated the true wealth held there by a large sum, and there was no way in Hell the companies could be put into Receivership or otherwise liquidated until that “asset” was first removed.
How to fix this problem? Easy. Order the companies to start selling off their retained portfolios at a rate of 10-15% per year, until they are gone and the shareholder “equity” in the firms has been slowly reduced to zero (with any and all gains going directly to the US Treasury instead of remaining on the companies’ books). My guess is that they’d have ordered it done faster, but calculated the maximum amount the private markets could absorb in a given year was somewhere between 10 and 15% of the retained portfolios. $1.5 trillion is a LOT of money to “pawn off”, and it takes time to get rid of that much property.
Being suspicious by nature, I’m guessing that a “deep dive” into the assets being sold off, and to whom they are being sold (and at what price), would disclose all manner of insider dealings between politicians, bureaucrats, and their “favored” constituents. I have no proof of that, of course, but wouldn’t doubt it in the least should someone come forward with facts or evidence to support the contention.
I think the whole thing, from start to finish, has been a sham designed to “redistribute” wealth from average investors and pensioners into the hands of those “more in favor” with those who run our government. And it truly sickens me.