Seems like “expert opinion” can be swayed by the highest bidder.

Yesterday, William Isaac, former chairman of the Federal Deposit Insurance Corporation, teamed with Richard Kovacevich, a retired chairman and CEO of Wells Fargo & Co.

The two penned an OpEd that ran in the Wall Street Journal: Winding Down Fannie and Freddie Is Easier Than It Seems.

In the piece, the former bank regulator and former banker state:

“No other country has the equivalent of the private-public model of Fannie Mae and Freddie Mac—crony capitalism at its best.

The solution is straightforward: The public-private hybrid of Fannie and Freddie—“government-sponsored entities”—should be abolished, their existing business sold or liquidated, and the mortgage market privatized. This can be done in a few easy steps.

The current $686,000 cap on new mortgages guaranteed by Fannie and Freddie should be reduced by $100,000 a year. This would put the companies out of originating new mortgages within seven years.”

Messrs. Isaac and Kovacevich are evidently calling for the elimination of Fannie Mae and Freddie Mac. This recommendation from Mr. K is not at all surprising because the TBTF banks have been circling Fan/Fred like crazed vultures ever since the US Government seized the two companies.

However, Mr. Isaac seems to have a new — and completely different — outlook on Fannie and Freddie. Perhaps, FTI Consulting (Isaac’s employer) has a new client that wants to see the demise of Fan/Fred.

What’s odd is the 180 degree, about-face…

In April 2015, Mr. Isaac co-wrote with former senator Bob Kerrey, How The Fannie Mae, Freddie Mac Conservatorship Has Undermined The Resolution Process.

In this article they state:

“By diverting all profits away from the GSEs, FHFA effectively precluded any ability of the companies to boost their capital levels and over time “earn” their way out of conservatorship. Moreover, the profit sweep contradicts FHFA’s mandate to “preserve and protect” enterprise assets and property.

Such public-private partnerships at times of crisis require consistency in the federal government’s respect for, and protection of, private property rights. No private party will put capital at risk if they think the government can take it away from them in conservatorship or bankruptcy, however noble the underlying policy goals or inspiring the associated political rhetoric.

But the conservatorships have left the enterprises in a state of suspended animation; neither private nor public entity and yet their business must continue. The government’s decision to violate HERA in 2012 by invoking the so-called “profit sweep” has deprived the GSEs of their ability to rebuild capital and has put taxpayers at greater risk. It also undermines the government’s role in times of future crisis. If private capital can’t count on the rule of law, it won’t participate in the future and taxpayers will have to pick up the pieces of what’s left of the financial system.”

Earlier this year in February, Mr. Isaac wrote, U.S. Government Must Make a Decision on Freddie, Fannie.

Comments include:

“This action by the Administration created the worst of all worlds. Instead of trying to restore the companies to health, as HERA requires, the government’s actions stripped Fannie and Freddie of all their capital. The result: They again pose a substantial risk to taxpayers.

When faced with litigation and demands from the public to know why it took this action, the government initially told the courts that the profit giveaway was intended to save the companies and avoid an upcoming “death spiral.” But documents released in litigation have proven that assertion to be false. The truth, it seems, is that the profit giveaway was intended to facilitate the companies’ demise while providing windfall profits for the Treasury. As former Treasury Secretary Geithner colorfully testified, the government actually wanted to dismember the companies.

Even to a layperson, dismemberment does not heed the mandate of a conservator to restore the companies to sound condition and preserve their assets.

By the FHFA’s own admission and the government’s newly concocted litigation rationale, the government’s goal in stripping the companies of future profits was to fill the government’s coffers while ushering in the demise of Fannie and Freddie. But despite its supposed intent to wind the companies down, the government is keeping them alive and stripping them of all of their capital. This is incompatible with both current law and millennia of conservatorship history.

While taxpayer protection may sound good, it does not relieve the FHFA of its legal obligations to place the companies in sound condition, preserve their assets, and restore them to normal operations.”

$omething must have happened between February and December that Mr. I$aac would go from saying, “restore them to normal operations” to “should be abolished.”

One wonder$ what motivate$ $omeone to change their “expert opinion” so dra$tically, so $wiftly…


“If you don’t read the newspaper…

…you’re uninformed. If you read the newspaper, you’re misinformed.” Mark Twain

If you’ve followed Fanniegate for some time, you’re well aware that any time anything positive happens relating to Fannie and Freddie there will invariably be a negative article or response by a) a “journalist,” b) an “industry expert” or c) by a paid-for politician.

All of these folks have one thing in common; they do not want to see Fannie and Freddie succeed.

The “journalists” either work for a company that has taken a political/financial position (advocacy journalism) or some of these reporters are motivated by their ability to gain access to high government officials to interview for their articles… providing the reporters write the news (spin) in the officials’ favor (access journalism).

Oftentimes the “industry experts” are merely promoting the position for their clients…plain and simple.

Bought politicians are even easier to understand…

For those of you that are relatively new to Fanniegate, it is important to know that there are credible, respected people on the other side of the discussion.

One of these people is Gretchen Morgenson, Pulitzer Prize-winning financial reporter from the New York Times. Gretchen was the first mainstream media reporter to write an unbiased article on Fanniegate.

In February 2014, Gretchen wrote “The Untouchable Profits of Fannie Mae and Freddie Mac” which effectively broke the silence with major media. In this article, she highlighted the discovery of a secret government memorandum that outlined their plan to undermine shareholders:

“Furthermore, nationalization would have required the government to provide compensation to shareholders for what it took. Now the government gets the benefits of the companies’ profits while avoiding any compensation payments.”

Gretchen even made news when she addressed the issue of access journalism in a presentation at the 2015 Page One Awards:

“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.”

Gretchen’s presentation at this awards ceremony even addressed Fanniegate with her acknowledgement of unusual circumstances of the government secrecy:

“In response to the lawsuit, the government has demanded an extreme level of secrecy surrounding documents the judge has ordered it to produce. Those documents would shed light on how the decision to divert the profits was made, an important question given that the 2008 law written by Congress to handle the company’s problems was supposed to stabilize them and let them build up capital after the crisis receded.”

Gretchen is the lead, major journalist that has written the most articles regarding the saga involving Fannie Mae and Freddie Mac. Highlights of Gretchen’s articles are as follows:

December 2015: “Fannie and Freddie’s Government Rescue Has Come With Claws:”

“The August 2012 profit sweep surprised investors, but documents show that it came long after Treasury officials had indicated privately that they wanted to ensure Fannie and Freddie shareholders would receive none of the companies’ future profits.”

April 2016, “Documents Undercut U.S. Case for Taking Mortgage Giant Fannie Mae’s Profits:”

“Further testimony unsealed on Monday came from Mario Ugoletti, a former Treasury official who was a former special adviser to the director of the Federal Housing Finance Agency, the conservator overseeing Fannie and Freddie.

In December 2013, Mr. Ugoletti signed an affidavit for the case stating unequivocally that neither the Treasury nor the Federal Housing Finance Agency envisioned that the companies’ deferred tax assets were about to be reversed in the months leading up to the profit sweep, generating huge profits. He also said that the move was not intended to “increase compensation to Treasury.”

 But in the deposition in May, Mr. Ugoletti said he did not know whether the Treasury or the Federal Housing Finance Agency officials knew about the potential for the profits at Fannie and Freddie at the time of the sweep.

Mr. Ugoletti, who left government in the fall could not be reached for comment”.

May 2016, “Fannie, Freddie and the Secrets of a Bailout With No Exit:”

“An email from Jim Parrott, then a top White House official on housing finance, was sent the day the so-called profit sweep was announced. It said the change was structured to ensure that the companies couldn’t “repay their debt and escape as it were.”

The documents also show the Treasury moving to modify the terms of the mortgage finance giants’ $187.5 billion bailout shortly after a July 2012 meeting when the Federal Housing Finance Agency, Fannie’s and Freddie’s regulator, learned that they were about to enter “the golden years” of profitability.

October 2016, “Fannie and Freddie Investors Win Round in Suit Against U.S.:”

“The government initially argued that it acted to protect taxpayers from future losses because the companies were in a death spiral, but the decision to funnel the profits into the Treasury’s general fund came just before Fannie and Freddie returned to profitability.”

December 2016, “Trump Treasury May Mean Independence for Fannie and Freddie:”

“When the government changed the terms of their bailouts in the summer of 2012 and began expropriating all of Fannie’s and Freddie’s profits every quarter, it seemed as if that unsatisfactory setup would go on forever. After all, it is hard for the government to give up a honey pot that has returned over $60 billion more to the Treasury than the companies received from taxpayers during their troubles.” 

If Judge Sweeney were to order the release of more documents, the current administration would probably appeal. It is not as clear that a Trump administration would do so, however. This opens the possibility that all those materials that the Obama administration has fought so hard to keep secret might just emerge.

That would be a huge service for anyone interested in holding government officials accountable for their actions.”

The following articles and highlights were also written by credible journalists:

Matt Taibbi, Rolling Stone magazine, “Why Is the Obama Administration Trying to Keep 11,000 Documents Sealed?”

“Are the gory details of that plan what the government is working so hard to keep under seal?

We may never know. Judge Sweeney has yet to rule on the vast majority of the documents, and there’s no guarantee that she will ultimately unseal the remainder of the material. We may never find out what the government was so keen on keeping secret.

The only thing that is clear is that there’s something odd going on, with the Obama administration asserting privilege over a volume of papers so large, it would make Nixon blush.”

Roger Parloff, Fortune Magazine: “How Uncle Sam Nationalized Two Fortune 50 Companies:”

“Yet on Aug. 17, 2012—about 10 days after the terrific second-quarter results were announced—something singular happened. For reasons that remain shrouded in secrecy to this day, the Treasury Department and the companies’ conservator, the Federal Housing Finance Agency (FHFA)—two arms of the same government—agreed to radically change the terms of what the GSEs would owe in exchange for the moneys they had already received.

If this strikes you as, well, un-American, you’re not alone.”

Bethany McLean, “Mend, Don’t End, Fannie and Freddie:”

“Rhetoric aside, conservatorship is supposed to be governed by the law, which in essence says that the conservator must either “preserve and conserve” the GSEs and release them back, or throw them into receivership, in which case their assets would be distributed to shareholders. The investors argue that even a few years after the crisis, there were sufficient assets that the preferred stockholders would have gotten all the money they were owed.

But then on August 17, 2012, a sleepy summer Friday, Treasury and the FHFA changed the rules of the game. Going forward, instead of paying a 10 percent dividend, Fannie and Freddie would be required to send every penny they made to Treasury. If everything went to the government, then there was no value left for investors. Both the common and the preferred shares plunged in price.

The official explanation for this change is that the administration had no idea that the GSEs were about to become so wildly profitable, and so they executed the sweep of profits to prevent the GSEs from owing money they couldn’t pay. The sheer amount of money the GSEs started making immediately following the sweep makes it hard to believe this.”

Attorneys that specialize in these issues have also commented:

Richard Epstein, NYU School of Law, has written several articles on the subject including:

“Untangling the GSE Foolishness: The D.C. Circuit Should Upend Treasury’s Net Worth:”

“But no matter which route the transaction takes, the private shareholders are entitled to have a hearing to determine the size of their residual interest under the most elementary principles that insist that no property can be taken without the hearing required as a basic matter of procedural due process.

So the deal is really simple. Treasury took all residual shares for a zero price, and now pleads its own poverty as a defense.”

In a previous blog post here, I highlighted the many articles by Tara Helfman, Yale Law School graduate and Associate Professor at Syracuse University College of Law.

Logan Beirne, Fulbright Scholar and Yale Law School graduate: “Have FHFA and the Treasury Exceeded Their Limited Authority under HERA?”

“However, rather than work as conservator to benefit Fannie Mae and Freddie Mac’s shareholders, as is its obligation under traditional conservatorship law, the FHFA acted for the benefit of the U.S. government – and to the detriment of those private shareholders. In a surprise deal, the FHFA effectively wiped out the private shareholders and essentially turned the proceeds of Freddie and Fannie to the U.S. Treasury.”

Additional industry specialists wrote several articles including the following by Glen Corso and Josh Rosner:  “Why it’s Time for True GSE Reform:”

“A growing chorus of small lenders, affordable housing advocates, civil rights groups and capital market participants have asked that the GSEs’ regulator and conservator exercise the authorities provided him under HERA, and permit the GSEs to build adequate levels of capital so that they do not pose a risk to the public. 

These same groups have also asked that once the conservator is satisfied the GSEs are adequately capitalized, the GSEs regulator then begin the process of releasing the GSEs – as required by HERA — from direct government control.”

Lastly, David Fiderer, “How the $187 Billion GSE ‘Bailout’ Went Awry:”

“None of it seems to make any sense. Under federal statute, the FHFA, as conservator, must, “take such action as may be necessary to put the regulated entity in a sound and solvent condition.” No one has ever given a cogent explanation as to how the original cash drawdowns, and the subsequent cash distributions, including a 100% dividend sweep, serves that goal.”

Again, if your goal is to understand all of the issues related to Fanniegate, you should read as much as possible. Fortunately, there is recent, increased interest and debate over Fannie and Freddie, predominately since the presidential election. Read much and form your own, independent opinion!

Keefe Bruyette & Woods

Which Keefe Bruyette & Woods (KBW) analysis are you going to believe?

Months before the Government seized Fannie Mae and Freddie Mac, KBW upgraded their analysis to “Outperform” with a price target of $48 for Fan and $46 for Fred.  KBW did not just keep their analysis to “Market Perform” they upgraded their analysis — right before the Government placed the companies into conservatorship.

Seems like they were off on their analysis in 2008!

KBW has had mixed analysis since the conservatorship.

In October 2009 KBW stated the shares of Fannie and Freddie was worthless. At the time, Bose George, KBW real estate analyst, said “in this scenario, both the common and preferred equity of the GSEs should be worthless.”

Seems like KBW was off on this analysis in 2009, too. The preferred and common shares are currently trading far from a $0 valuation.

On Friday, Mr. George said:

“Shares of Fannie Mae (FNMA) and Freddie Mac (FMCC) have rallied sharply over the past two days following comments from Steven Mnuchin, the incoming Treasury Secretary, stating that the new administration wants to get the GSEs out of government hands. He also noted that resolving the GSE issue was a top 10 priority for the new administration. While it remains unclear how any privatization would work, we believe that even in the best case scenario, where the shares are privatized with a 2.5% capital requirement, the capital need will meaningfully dilute the value of the common shares, suggesting little upside from current levels. We continue to believe that the most likely scenario is one in which the common shares have no value. We reiterate our Underperform ratings and $1 price targets for both companies.”

Apparently now the preferred shares are a safe bet according to KBW, while the common shares are worth $1. If you are going to trade on this analysis you need to convince yourself that KBW is right this time. If you followed their advice in the past you likely would have lost a lot of money. Good luck to you this time if you believe them now.

Here’s what KBW said in 2014:

“Inertia is a powerful ally of Fannie Mae and Freddie Mac. The longer Congress avoids acting on mortgage-finance legislation, the greater the chances the two companies survive.”

Reminds me of the old saying, “even a broken clock is right twice a day.”

KBW’s thesis for the common stock only being worth $1.00 is centered around the companies’ lack of capital. The terms of the conservatorship reduces the companies’ capital to $0 by the end of next year. These terms were established and followed by the Federal Housing Finance Agency (FHFA) whose mission was supposed to be to preserve and conserve the assets of Fan/Fred as their conservator.

Steven Mnuchin has made it clear that he wants to move quickly in removing Fannie and Freddie from conservatorship stating:

“It makes no sense that these are owned by the government and have been controlled by the government for as long as they have. In many cases this displaces private lending in the mortgage markets and we need these entities that will be safe. So let me just be clear— we’ll make sure that when they’re restructured they’re absolutely safe and they don’t get taken over again. But we gotta get them out of government control.We’ll get it done reasonably fast.”

The new Administration believes that the conservatorship is a farce and plans to resolve the issues as quickly as possible. The quickest way to solve the issue is to unwind the conservatorship and return the capital that the current Administration robbed from the companies.

End the conservatorship, end the net worth sweep, cancel the senior preferred stock, cancel the warrants and return Fannie and Freddie’s capital…

If these things happen then the common stock is worth more than the $1.00 target placed by KBW. I’ve seen people speculate that the stock could be worth $100 – 150 if the senior preferred and warrants are cancelled. I’ve seen other projections that the common stock is worth $10 – 30 even if the warrants are exercised.

Anyone interested in investing in the common stock of Fannie and Freddie should certainly conduct thorough due diligence and arrive at their own conclusion. Your research will likely discover there are just as many folks claiming doom and gloom for the common stocks as there are people claiming an astronomical return potential.

Just realize that KBW is just one analyst — one whose analysis has been all over the board.


Disclaimer: I own common and preferred shares in both Fannie Mae and Freddie Mac.