This post continues a review of the circumstances in 2008 regarding the imposition of the conservatorships on Fannie and Freddie.

According to the Financial Crisis Inquiry report:

“…conservatorship was not a foregone conclusion. Paulson, Lockhart, and Bernanke met with Mudd, Syron, and their boards to persuade them to cede control. Essentially the GSEs faced a Hobson’s choice: take the horse offered or none at all.

“They had to voluntarily agree to a consent agreement,” Lockhart told the FCIC. The alternative, a hostile action, invited trouble and “nasty lawsuits,” he noted.

“So we made a . . . very strong case so the board of directors did not have a choice.” Paulson reminded the GSEs that he had authority to inject capital, but he would not do so unless they were in conservatorship.

Mudd was “stunned and angry,” according to Paulson.

Tom Lund, who ran Fannie Mae’s single-family business, told the FCIC that conservatorship came as a surprise to everyone. Levin told the FCIC that he never saw a government seizure coming. He never imagined, he said, that Fannie Mae was or might become insolvent.

Interviewed in 2010, Mudd told the FCIC: “I did not think in any way it was fair for the government to have been in a position of being in the chorus for the company to add capital, and then to inject itself in the capital structure.”

So, how did Paulson and Lockhart convince the Board Members to not fight the conservatorships?

Paulson had the following passage inserted into HERA offering proof that his actions were premeditated (versus attempting to save the world from financial ruin):

‘‘(6) DIRECTORS NOT LIABLE FOR ACQUIESCING IN APPOINTMENT OF CONSERVATOR OR RECEIVER. The members of the board of directors of a regulated entity shall not be liable to the shareholders or creditors of the regulated entity for acquiescing in or consenting in good faith to the appointment of the Agency as conservator or receiver for that regulated entity.”

As I’ve concluded in an earlier post, Fan and Fred’s boards did not explicitly consent to conservatorship. Their bylaws outlined the procedures to call a board meeting, have a necessary quorum, vote taking, etc. My claim is there was no consent.

But it’s curious why Paulson added “acquiesce” into that passage. The definition of acquiesce is “to assent tacitly; submit or comply silently or without protest.”

Paulson would have had to have foresight into a scenario where a board of directors would not have actually consented (voted) for conservatorship but rather not fight against one that was imposed. That scenario seems unlikely unless of course the take-over was being planned when HERA was written. Look again at the title of that section “Directors not liable for acquiescing”… doesn’t mention consent (the more likely scenario). It suggests Paulson was planning a surprise take-over and he had devised a way out for the directors to not fight…which is what their fiduciary duty called for them to do.

Further, shouldn’t “in good faith” be interpreted as not being coerced, intimidated or agreeing under duress?

Why was there no communication from the board of directors to shareholders regarding why they did not protest or fight the conservatorship?  Perhaps because it wasn’t done in good faith (for a legitimate, legal reason)?

I plan a follow-up post that explores further how Paulson got the Boards to remain silent.

In wrapping up this post, however, there is one more passage in HERA to consider:


Require the regulated entity to dismiss from office any director or executive officer who had held office for more than 180 days immediately before the date on which the regulated entity became undercapitalized.”

What’s the big deal here? All of the directors were dismissed, right?


Brenda Gaines has been a Fannie Mae Board Member since 2006 and continues as a director today. This fact proves that Fannie Mae was not undercapitalized on September 6, 2008 …and six months before then.

Why did Ms. Gaines acquiesce?

5 thoughts on “Acquiescing

  1. Click to access R42635.pdf

    This article discusses congress interfering with existing contracts. I believe that the bylaws are a contract between management and shareholders. Congress can’t waive parts that are inconvenient. Paulson should have indemnified the BoDs, but the it would have been obvious to congress that the was financial legal exposure.


  2. Pingback: Happy Labor Day America! | thetruthaboutfannieandfreddie

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