FHFA OIG – Negligent & Complicit

In March 2012, FHFA OIG published a White Paper entitled: FHFA-OIG’s Current Assessment of FHFA’s Conservatorships of Fannie Mae and Freddie Mac. In the paper, OIG makes an error in their assessment that Fannie Mae and Freddie Mac will not return to profitability — they did. However, more importantly OIG makes it clear they believed that Fannie and Freddie possessed the ability to repay the money that the Treasury Department injected into them.

Notice that OIG cavalierly dismisses Fan and Fred’s ability to end the conservatorships via repayment. In an audacious comment that is well beyond their scope and expertise, OIG states “the model on which they were built is broken beyond repair.”  This statement makes it clear that OIG has no intention to fulfill its mandate, which is to make certain all laws are being followed.  No, OIG has declared that the model is broken, so any illegal action taken by FHFA, Treasury or anyone related is inconsequential… because FHFA OIG declared Fannie and Freddie broken…

If FHFA OIG did indeed believe that Fan and Fred had the ability to repay the debt in March 2012 then they clearly should have objected to the third amendment (sweep) just five months later in August 2012.

FHFA OIG was negligent in 2012, which points to their ongoing complicity today.  This example is just one of many that proves the third amendment was not “to end circular draws,” rather it was to prevent Fannie and Freddie from repaying the money that Treasury injected into them.

Below is the entire passage:

D. An Uncertain Future

The Fannie Mae and Freddie Mac conservatorships were intended to be temporary solutions to a larger problem. Indeed, FHFA has emphasized that the conservatorships “cannot be a permanent state for the Enterprises.”47 The lack of guidance about the outcome of the conservatorships has been difficult for the Agency and becomes harder with each passing day. As reflected above, the Agency has found it increasingly difficult to make investments in organizational infrastructure and to make human resources decisions without knowledge as to when – or, indeed, if – the conservatorships can be concluded.

According to the Agency, a conservator’s goal “is to continue the operations of a regulated entity, rehabilitate it and return it to a safe, sound and solvent condition.” Once this has been accomplished, “the Director will issue an order terminating the conservatorship.”48 HERA does not limit the duration of the conservatorships, but the statute indicates that Congress intended the conservatorships to be finite. Specifically, the statues states:

The Agency may, at the discretion of the Director, be appointed conservator or receiver for the purpose of reorganizing, rehabilitating, or winding up the affairs of a regulated entity.49

As a practical matter, however, the Enterprises’ future solvency – and, thus, emergence from the conservatorships – is unlikely without legislative action. FHFA officials have stated that the PSPAs have made it virtually impossible for the Enterprises to emerge from the conservatorships. For example, the Enterprises currently owe Treasury $183 billion, and are required to pay 10% dividends on Treasury’s outstanding investment. Merely paying the 10% annual dividend (i.e., $18.3 billion, presently) would not reduce Treasury’s outstanding investment. Moreover, the Enterprises have had to borrow from Treasury at least part of their dividend payments to Treasury, thus increasing the value of their outstanding debt. As a result, it would appear highly unlikely – if not mathematically impossible – for the Enterprises to buy themselves out of the conservatorships. FHFA’s Acting Director has stated that:

[T]he Enterprises will not be able to earn their way back to a condition that allows them to emerge from conservatorship. In any event, the model on which they were built is broken beyond repair. Conservatorship allows the Enterprises to continue serving their public purpose while lawmakers determine the ultimate resolution of the conservatorships and the future legal structure for housing finance.50

Despite the uncertain future, and pending a long-term congressional resolution, FHFA has created a three-part strategic plan for the conservatorships. FHFA’s goals are to: (1) build a new infrastructure for the secondary mortgage market; (2) gradually contract the Enterprises’ dominant presence in the marketplace while simplifying and shrinking their operations; and (3) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. FHFA believes that this plan “leav[es] open all options for Congress and the Administration regarding the resolution of the conservatorships.”51

http://www.fhfaoig.gov/Content/Files/WPR-2012-001.pdf

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2 thoughts on “FHFA OIG – Negligent & Complicit

  1. If we start making the list of all those who were part of the complicity, then the list will be mind-boggling.

    During 2008 crisis congress ignored its oversight functions due to misinformation and overblown picture of the crisis. The crisis was very well archestrated by those who were very well aware of the the situation created by all pervasive fraudulent behavior of investment/mortgage bankers and traders. In fact they were part of it and had shorted stocks/bonds/MBS to the maximum extent possible.

    Congress gave all the powers and authorities to foxes to not only guard the henhouse but also to fix the henhouse. Then the press/media which were supposed to be the fourth estate, became the tools in the hands of these foxes to provide appropriate cover for the misdeeds by saturating the news with false propaganda. Many officials believed that FnF were the cause because of the misinformation.

    The plans for FnF were to sink them in deep waters leaving no trace behind. But FnF were financially rock solid companies with sound business model. Despite all the efforts to sink them, FnF not only survived but became most profitable companies in the world. Otherwise how can companies that were written off beyond any redemption can payback all the loans with usury interests within few years and become most profitable companies in the world?

    FnF come back posed insurmountable problems for these people. They had already used all creative options in HERA. There was no time left for them to get new legislation passed or congress would not have passed new legislation. Then the only option left was to trump the law and then try for new legislation.

    They were successful in trumping the law but have failed in getting new legislation passed to sink FnF. Now these people do not have the cover they used to have to mislead the public.
    Thus Many officials have unwittingly become part of the complicity.

    Like

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