Be Mine: Happy Valentine’s Day!

February 14…

Besides being my birthday (please, no gifts — donate to your favorite anti-corrupt government advocacy group instead), it’s a day best known for Valentine’s Day. We share our love, friendship and general kindness to others in our lives.

Indeed a special day. But for those of us who have followed the Fanniegate saga over all of these years, Valentine’s Day holds a special place in our hearts.

On February 15, 2014 (ok, technically the day after V-day, but stay with me…) Gretchen Morgenson, then with the New York Times, broke the long-held silence from the main stream media regarding the details of the government takeover of Fannie and Freddie. Gretchen wrote, The Untouchable Profits of Fannie Mae and Freddie Mac, stating:

“Siphoning off the entities’ profits is the opposite of conserving their assets and property, the plaintiffs contend.

Do the Treasury’s actions amount to a backdoor nationalization of the companies? A full-fledged takeover would have required Treasury to put all the companies’ obligations — $4.9 trillion at the time — on the government’s balance sheet. A nonstarter.

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.”

The MSM generally remained silent for the next year, when Gretchen followed up exactly one year later with another Valentine’s piece.

On February 14, 2015 Gretchen wrote, After the Housing Crisis, a Cash Flood and Silence stating:

“Whatever the case, it is disturbing that the government goes to such lengths to shroud the details of the profit-sweep decision. It reminds me of a comment made by Ferdinand Pecora, the hard-driving prosecutor who investigated Wall Street’s role in the crash of 1929. In his memoir, “Wall Street Under Oath,” he wrote: “Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism.”

I highlighted this Valentine’s Day coincidence in a February 2015 blog post, Fantastic February for Fans of Fannie and Freddie.

So, this year Valentine’s Day is just two days away and we have another great day ahead!

The first events will be simultaneous releases of 4th Quarter, 2018 earnings for both Fannie and Freddie. I believe this will be the first time during conservatorship that both companies are releasing earnings on the same day. Is this just another Valentine’s Day coincidence or is new information contained in the financial statements that require them to be released on the same day?  We’ll find out… As Forrest Gump says, “Life is like a box of chocolate…you never know what you’re gonna get!”

One would assume that if the earnings reports have a material change to retained earnings and/or the net worth sweep, an official announcement from FHFA, Treasury or the White House would precede Fan/Freds’ releases. Therefore, an Admin announcement would likely come out tomorrow or early Thursday.

I try to stay away from predicting events in the Fanniegate saga while reminding myself of another Gumpism, “Stupid is as stupid does…”

Also on Valentine’s Day, Mark Calabria will visit the Senate Committee on Banking, Housing and Urban Affairs for his confirmation hearing which can be viewed live on their website starting at 10:00 AM. Mark is listed last on the witness list, but it’s unknown at this point when Mark’s session will take place.

It will be interesting to learn how much Mark shares about his visions for FHFA. Remember, that agency is designed to be independent from other administrative agencies, to include the US Treasury and even the White House.

However, recall that Joe Otting, acting FHFA Director and Treasury employee, recently advised FHFA staff that the Administration has a plan to deal with the never-ending conservatorships, which according to Joe is due out any day now… Will Mark reveal details of this plan? Will he endorse the greater Administration plan? Or will he do what a lot of officials do during their confirmation hearing — bob, weave, duck and answer in vague, abstract terms?

Equally interesting will be the Senators’ views on the 10+ year conservatorships. At this point it seems obvious Congress needs to rely on the Administration’s leadership to resolve the stalemate. Does anyone expect the Rs and Ds in the R-led Senate to all agree on a Senate plan? AND THEN have the Rs and Ds all agree on a plan from the D-led House… AND THEN reconcile the two plans into one? After waiting for more than 10 years?

There have been calls over the past several years for the Administration to take the lead on resolving the conservatorship impasse. Highlighted in a January 2015 Hill article, “Why the Obama administration should revive Fannie and Freddie on its own:”

“Senator Tim Johnson (D.-S.D.), urged Mel Watt the head of the Federal Housing Finance Agency, which oversees Fannie and Freddie, to work with Treasury to end conservatorship without Congress.   Watt, however, has long said it’s up to his former colleagues in the Senate to resolve the issue. After Johnson’s comments, Treasury let it be known that fixing Fannie and Freddie was a job for our elected representatives. So it’s back to gridlock.”

2019 seems to be the year to finally end the Fan/Fred gridlock!!

Sure, I’ll celebrate Valentine’s Day in the traditional sense with my wife… flowers, chocolate, dinner (no it won’t be at Bubba Gumps!)… I hope everyone else enjoys the special day, too!

But before that celebration, I’ll be tuned into Fanniegate to watch the latest developments unfold. I’m sure most of you will be, as well!


I was looking for a sweet Valentine’s song to play here, but I came across this one instead, “Be Mine” by Ofenbach. Eerie similarities to our Fan/Fred situation. Two individuals held captive. The captor uses the two, gets want she wants and then they are finally freed. (warning R rated!) Cool song…



WaPo Editorial Board states time is now!

I was excited to see the WaPo Editorial Board weigh in on the current, intensified interest in Fannie and Freddie with an Op Ed piece titled, It’s time for a Fannie-Freddie fix.  

I was cautiously optimistic before reading it given the Editorial Board’s past vitriol toward the current shareholders of Fannie and Freddie seeking a return on their investment.

The Board keeps criticizing “rich hedge funds” trying to cash in big from their investment. It seems hypocritical that a company owned by Jeff Bezos, the richest person in the world, would attack others who seek to make a return on their investments. Many, many shareholders are predominately concerned with taking care of their families and saving for retirement. It’s not in most shareholders’ dreams to get rich off this investment so they can go out and buy a major grocery company and a major newspaper.

If the WaPo stopped being lazy by not repeating the “greedy hedge fund” meme every time they comment on Fannie and Freddie shareholders, they might learn something… and so might their readers. Isn’t that what a newspaper is supposed to do!?

Perhaps one of their reporters could investigate who the shareholders actually are beyond the blood sucking hedge funds. And perhaps they could look into hedge funds in general to see who actually invests in those investment vehicles. At that point they may end their attack against people who invest money in an attempt to make more money…like perhaps Jeff Bezos.

It was good to see many people — including the WaPo Ed Board — jumping on the fast-moving bandwagon to finally deal with the 10+ year old, one-piece-of-unfinished-business from the the 2008 crisis.

The events in January and February 1 were extremely encouraging. Let’s list them here:

  • Mel Watt left office (finally!)
  • Joe Otting was named Acting FHFA Director
  • Mark Calabria was nominated for FHFA Director (great!) [had several posts featuring Mark including these two here and here.]
  • Otting meets with FHFA staff and informs them the Admin is moving toward a plan to address the 10+ year long conservatorships
  • Senator Brown, Ranking Member of the Senate Banking Committee and Maxine Waters, Chair of the House Financial Committee send a letter to Otting asking for details of the Admin’s plan
  • The White House confirmed the Admin is working on a plan. Uses different words than Otting …that’s how Washington works.
  • Otting responds to Brown/Waters thanking them for the interest and asking for recommendations, but doesn’t offer details of Admin plan
  • Senator Crapo, Chair of the Banking Committee, rushes out an “outline” of reform as if it was due by the end of the week, Feb 1. Seems like Crapo did not want to receive an “Incomplete” on the assignment. (obviously final bill that gets through Senate and House will be drastically different than this draft, incomplete outline)
  • Ranking Member Brown releases a statement that came out quickly stating the Democrats would fight for their priorities in Housing Reform (first priority – Affordable Housing, which was not coincidentally the last point on Crapo’s outline. We’re starting to see where the horse-trading will focus …plus the whole ginnie mae thing…!)
  • Treasury Secretary Mnuchin’s office apparently had a prepared remark ready as it came out quickly thanking Crapo for releasing ANYTHING to address the 10 year long quagmire.

I didn’t want to get into the court cases here, but a significant event happened in the Collins case in January. Details of the en banc hearing can be read on Investors Unite site here. Thanks to Tim Pagliara and Investors Unite for their tireless efforts!

And how can I resist adding this tweet exchange!? No blue checkmark on Phillips account but reported to be authentic. Good one, Glen!

Screen Shot 2019-02-02 at 6.50.12 AM

The pace of events this past month — especially everything that happened yesterday — appears quite obvious that these events are coordinated in advance. We perhaps only see 5% of what’s happening in Washington. But what we do know is the Fan/Fred debacle is finally being addressed…and unfolding quickly!

The media and pundits weighed in all day yesterday, most repeating in zombie-like fashion – “Fan/Fred caused the 2008 crisis” (they didn’t) and with the aforementioned greedy hedge fund meme.

There are many excellent reporters in the industry who have been reporting the actual facts and revealing the truth about the situation many whose articles are posted on this blog.

February seems like it will provide even greater thrills than last month in the Fannie/Freddie realm. Congress has been stalemated for years on the issue largely due to lack of leadership from the Administration. That all changed in 2009…!

Back to the WaPo editorial… I’ll post the editorial here (until I’m threatened to take it down), but I will first post the first comment the WaPo Ed Board received on its editorial:

8 hours ago

“It would hand a windfall to speculators while resurrecting the old, failed business model that enabled Fannie and Freddie to gamble for maximum private profits, with taxpayers on the hook for losses.” So what? All stock ownership is speculation. If me, a private investor, or a hedge fund, or anyone else buys stock anticipating a windfall, what difference does that make to anyone else?

Fannie and Freddie did not “gamble.” They were not even bankrupt. Shareholders were wiped out, and taxpayers have made more than $100 billion off of Fannie and Freddie, two public, shareholder-owned companies.

The GSEs’ regulator, James Lockhart, claimed the GSEs were adequately capitalized three weeks before Paulson nationalized them (nationalized being Paulson’s own words). Paulson changed the accounting rules regarding capitalization, then declared them undercapitalized. He ordered them to borrow enough money from the government to “restore” an adequate capital cushion.

But the numbers were bogus. There was never a serious capitalization problem until Paulson changed the rules to require more capital. If the GSEs had been given a line of credit, instead of a forced “bailout” they would never have had to borrow a single dollar. In the 2008 third quarter, when the companies were taken over by the government, Fannie Mae reported $1.1 BILLION IN POSITIVE EARNINGS.

At the absolute peak of the financial crisis, the GSEs were generating positive earnings. Their losses were all “paper” losses due to unnecessary write-downs and new capitalization requirements. None of this was “real” losses, as became clear when all of these losses were “reversed” in 2013.

The government stole these private, shareholder-owned companies from their shareholders. It was the greatest financial heist in the history of our country, and the first steps on the road to socialism. Hopefully the courts will prevent that and return Fannie and Freddie to their shareholders.

And the editorial:
It’s time for a Fannie-Freddie fix

February 1 at 7:04 PM

HAVING FULLY recovered from the crash of 2007-2008, the U.S. housing market is cooling a bit. Prices rose at a 5.2 percent annual rate in November, down from 5.3 percent in October. Economists generally expect further deceleration this year, and a recent Goldman Sachs report identifies three main causes: an uptick in mortgage rates, the failure of wage growth to keep pace with housing price growth and the 2017 tax law, which reduced the mortgage interest deduction.

Is this good or bad news? A lot depends on whether you’re buying or selling. For the U.S. economy as a whole, the prospect of a smoothing out in the boom-bust cycle could be a positive sign — evidence that the various regulatory reforms enacted after the Great Recession are working. The last piece of unfinished business is, however, housing-related: resolving the status of Fannie Mae and Freddie Mac, the two giant entities that provide mortgage liquidity by packaging home loans into securities and selling them to investors. Taken over by the federal government in 2008, they remain there still, despite repeated legislative attempts at reform. The lack of a Fannie-Freddie fix creates nagging uncertainty for would-be investors in all aspects of the housing business.

The politics of reform have proved intractable, however, with discord among affected interest groups so sharp that they have prevented even a unified Republican government from pushing through a bill over the past two years. The latest stir was caused by leaked remarks last month from Joseph Otting, Fannie and Freddie’s acting regulator, who suggested at an internal agency meeting that the Trump administration was about to propose a plan to end government control. Some on Wall Street interpreted that to mean the administration would return Fannie and Freddie to their existing shareholders, who are now mostly hedge funds that purchased the entities’ beaten-down stock after the crash and have been agitating for this form of “privatization” ever since. This is the one proposal that policymakers should rule out once and for all: It would hand a windfall to speculators while resurrecting the old, failed business model that enabled Fannie and Freddie to gamble for maximum private profits, with taxpayers on the hook for losses.

The White House quickly denied that “decisions have been made on any reform plan” and promised to work with Congress — which now means working with a Democratic House, and its financial services committee chair, Rep. Maxine Waters (D-Calif.). Perhaps the liberal Ms. Waters and the Trump administration’s proposed point man for housing, Mark A. Calabria, can have a Nixon-goes-to-China moment. Sen. Mike Crapo (R-Idaho) weighed in Friday with a revised version of a compromise plan he offered previously that would assign more responsibility for funding 30-year mortgages to the private sector, while preserving a government backstop for truly catastrophic losses. The sooner the politicians get to yes, the sooner the housing market can complete its healing process.

A View on Affordable Housing

By J. Timothy Howard   May 3, 2018

Posted on “Howard on Mortgage Finance”

Last month the head of a Washington D.C.-based affordable housing organization asked me to attend a meeting in the Hart Senate Office Building to give my views on “Corker-Warner 2.0” and its potential effect on low- and moderate-income mortgage borrowers. As I presented my perspective and arguments, a Senator with whom I had not met before seemed interested in and intrigued by them, and asked me if I could write them up. I did, and sent the resulting paper to the Senator’s staff. Since affordable housing has been a key sticking point for reform legislation in Congress, I thought readers of this blog would be interested in the text of the paper, which I’ve reproduced below.

* * *

The need for reform

For the past several decades the U.S. has had two general sources of financing for conventional (i.e., non-government guaranteed) home mortgages: depository institutions and the international capital markets. Depository institutions finance home mortgages using consumer deposits and purchased funds; capital markets investors finance them by purchasing mortgage-backed securities (or MBS).

In the mid-1970s three-quarters of all home mortgages were made and held by depositories, mainly thrift institutions. Two successive thrift crises—the first in the late 1970s triggered by deposit deregulation and the second in the late 1980s triggered by asset deregulation—caused that system to collapse. Thrifts’ share of home mortgages financed plunged from 57 percent in 1975 to just 17 percent in 1995. Financing by Fannie Mae and Freddie Mac, sourced from the international capital markets, filled almost the entire gap. At the end of the 1990s, Fannie and Freddie either owned or guaranteed more than 40 percent of all home mortgages, up from less than 5 percent 25 years earlier.

In the early 2000s, during a time when the Federal Reserve and Treasury were embracing free market principles and declining to regulate new lending practices or mechanisms, private-label securities (PLS) emerged as an alternative to mortgage securitization by Fannie and Freddie. PLS placed few limits on the riskiness of the loans they would accept, and as a consequence issuance of PLS increased rapidly. In 2004, more new mortgages were being financed by PLS than by Fannie, Freddie and Ginnie Mae MBS combined. Easy, ample and low-cost borrower access to mortgages through unregulated PLS issuance fueled an unsustainable housing boom that continued until the fall of 2007, when the PLS market finally collapsed amidst an avalanche of delinquencies and defaults.

We now have nearly ten years’ worth of performance data on mortgages financed just prior to the crisis by PLS, FDIC-insured depository institutions, and Fannie and Freddie. These data leave no doubt as to where the flaws in the mortgage finance system were. Cumulative loss rates on the PLS that were outstanding at the end of 2007 exceed 25 percent, and loss rates on home loans made and held by depository institutions as of the same date exceed 12 percent. In contrast, loss rates on year-end 2007 loans held or guaranteed by Fannie and Freddie barely exceed 4 percent.

Capital markets investors and Congress understood what had happened in the PLS market—where an absence of regulation allowed both primary market lenders and Wall Street securities issuers with no capital at risk to make money off mortgages that had little chance of being repaid—and they reacted accordingly. Congress responded with the 2010 Dodd-Frank Act, which required lenders to apply an “ability to repay” rule to mortgage borrowers and, through the “qualified mortgage” (QM) standard, effectively prohibited the most risky mortgage products and loan features that proliferated during the PLS bubble. Investors simply abandoned the PLS market due to its inherent conflicts of interest, and they have not come back

From 2004 through 2006, the PLS market had been financing nearly two of every five new home mortgages in the country. When it suddenly imploded, that left the commercial banks, Fannie and Freddie, and the FHA to pick up the slack. All were under stress because of the overheated housing market, calling into question how, and even whether, the mortgage market could continue to function.

What happened at this point is disputed, but compelling evidence supports the notion that Treasury Secretary Henry Paulson made a policy decision to use what he termed “the awesome power of the government” to force Fannie and Freddie into conservatorship—without statutory authority, against their will, and while they remained in compliance with their regulatory capital requirements—because, as he told the Financial Crisis Inquiry Commission, “[Fannie and Freddie] were the only game in town,” and with mortgage credit drying up, they “more than anyone, were the engine we needed to get through the problem.”

At the same time, Treasury seems to have found in the turmoil of the financial crisis a unique opportunity to strengthen the competitive position in the $10 trillion home mortgage market of the commercial banks it regulates, at the expense of Fannie and Freddie and the capital markets investors to whom they sell their securities.

As soon as the companies were put in conservatorship, Treasury required them to shrink their combined $1.6 trillion mortgage portfolios by 10 percent per year (later increased to 15 percent per year), even though the spread income from those portfolios helped offset their credit losses. Shortly afterwards, Treasury and the companies’ conservator, the Federal Housing Finance Agency (FHFA), used highly pessimistic estimates of future losses to justify recording $320 billion in non-cash expenses that exhausted the companies’ capital and caused them to draw $187 billion in senior preferred stock they did not need and were not allowed to repay. Then, just as the artificial losses that caused this alleged “bailout” were about to reverse (as they did, in only 18 months), Treasury and FHFA agreed to a “net worth sweep” that required Fannie and Freddie to pay all of their net income to Treasury in perpetuity, ensuring that they would remain in conservatorship until Treasury and advocates for the banking industry could come up with a plan to replace them.

Affordable housing borrowers are critically dependent on a low-cost and efficiently functioning secondary market. Prior to the 2008 financial crisis, Fannie and Freddie had been able to support these borrowers by using cross-subsidization to price their credit guarantees more advantageously, and by purchasing nonstandard affordable housing loans for portfolio. Today, Fannie and Freddie’s portfolios are less than one- third their former size—because of Treasury’s directive to shrink them—and they operate with guaranty fees set artificially high by their conservator, FHFA, not based on the riskiness of the loans they guarantee but instead, in the words of the agency, to “reduce their market share,” and “encourage more private sector participation.”

Since the mid-1990s more funding for mortgages has been provided by capital markets investors than by depository institutions, so primary market lenders use the cost of selling into the secondary market to determine their quoted mortgage rates. Increases in the cost of the credit guaranty process, i.e., MBS guaranty fees, therefore get passed on to all borrowers, whether their loans are sold or not.

Dodd-Frank reformed both the PLS market and primary market mortgage lenders through the QM standard and the ability-to-repay rule, and regulators have raised banks’ capital requirements. Only Fannie and Freddie remain unreformed, because advocates for the banking industry insist not on reform that benefits the financial system and homebuyers but on reform that benefits the competitive position of primary market lenders. With the PLS market dormant, Fannie and Freddie are virtually the sole means of tapping the capital markets for money to finance conventional mortgages. Holding this financing channel hostage to banks’ demands that it be restructured in a way that makes it more costly and less efficient—for the patently false reason that its current structure is a “failed business model” that caused the financial crisis—has had severe negative consequences for the mortgage system as a whole, and for affordable housing borrowers in particular. Congress and Treasury are the only entities that can remedy this situation.

Support for affordable housing

The government can increase the availability and lower the cost of mortgages for affordable housing in three ways: (a) fostering the development of a secondary market system that provides the lowest-cost mortgages to the widest range of borrower types, consistent with an agreed-upon standard of taxpayer protection; (b) setting mandatory affordable housing goals, and (c) devising and implementing subsidy programs that assist underserved populations. Taking each in turn:

A credit guaranty mechanism that expands borrower access

Advocates for commercial banks have sought legislative replacements for Fannie and Freddie for nearly a decade. Their idea in the 2013 Corker-Warner bill was a cumbersome bureaucracy called the Federal Mortgage Insurance Corporation; today the new version of Corker-Warner calls for multiple credit guarantors with explicit government guarantees on the securities they issue. Both versions, however, offer self-serving solutions to invented problems, and fail because Fannie and Freddie’s business model, with its proven track record of providing efficient and low-cost access to capital markets funding, works far better than the proposed alternatives.

Yet as the 2008 financial crisis revealed, there are weaknesses in this model that can and should be remedied. The companies need a new and more effective capital standard; they need better (and less adversarial) regulation, and they perhaps also should have utility-like limits on their returns, as a risk-control measure. These reforms can be done either in legislation or administratively. Whichever course is followed, however, the most critical aspect of Fannie and Freddie reform for access and affordability will be the capital standard.

The capital standard imposed upon Fannie and Freddie, or any credit guarantor, must strike a careful and deliberate balance between a very high level of taxpayer protection on the one hand and the cost and breadth of access to mortgages on the other. Too little capital will expose the taxpayer to potential losses; too much capital, or a standard that does not tie capital to credit risk, will distort guaranty fee pricing and impede the flow of capital market funds into mortgages, for affordable housing borrowers in particular.

Fortunately, Congress already has addressed the issue of credit guarantor capital, and come up with the right answer. Section 1110 of the Housing and Economic Recovery Act (HERA) of 2008 states, “The Director [of FHFA] shall, by regulation, establish risk-based capital requirements for the enterprises to ensure that the enterprises operate in a safe and sound manner, maintaining sufficient capital and reserves to support the risks that arise in the operations and management of the enterprises.” A true risk-based capital standard for Fannie and Freddie, consistent with HERA, will result in the least amount of unnecessary capital, the lowest average guaranty fees, and the greatest flexibility to use cross-subsidization to support the affordable housing community, while still providing an extremely high level of taxpayer protection.

FHFA has not yet implemented the capital provision in HERA, likely because it and Treasury have chosen to manage Fannie and Freddie in conservatorship in a manner consistent with ultimately winding them down and replacing them. That is a serious policy mistake that needs to be corrected by Congress, or by Treasury itself.

To implement the risk-based standard in HERA, Congress or Treasury first would pick the stress environment it wants the guarantors to be able to protect against. (The 25 percent nationwide decline in home prices used in the Dodd-Frank stress tests for banks would be a likely candidate). FHFA then would use Fannie and Freddie’s historical data to project default rates and loss severities during this environment, by risk category—at a minimum, combinations of loan-to-value ratios and credit scores—and the resulting stress loss amounts would be the basis for setting the companies’ new capital requirements, at the risk-category level.

Fannie and Freddie’s experience during and after the 2008 financial crisis suggests how they would have to capitalize against a future 25 percent home price decline. With their loans and MBS at the end of 2007, and the (low) guaranty fees they then were charging, 2 percent capital would have been more than enough to absorb all of the credit losses on those books of business. FHFA of course will set the actual stress capital levels. It also should impose a minimum capital ratio, which will benefit affordable housing borrowers by making it impossible for Fannie or Freddie to drive their required capital below that minimum by unduly favoring pristine credits.

A true risk-based capital standard for Fannie and Freddie, endorsed by Treasury as meeting a rigorous stress standard for taxpayer protection, would obviate the need for an explicit government guaranty on their mortgage-backed securities. Moreover, if catastrophic loss insurance were necessary to enhance Fannie and Freddie’s credit quality (to hold down their MBS yields), private insurers could provide it; with true risk-based capital, insurers would know the precise thresholds, by risk category, at which their loss coverage would kick in, and could price for it accordingly.

Mandatory affordable housing goals

The potential impact of mandatory affordable housing goals for Fannie and Freddie, or any credit guarantor, is limited by the fact that these companies do not originate mortgages; they only can guarantee the loans primary market lenders make. Even so, housing goals can be used to create incentives for secondary market companies to channel the benefits of capital markets financing to subcategories of underserved borrower. A regulator should have the authority to impose penalties on a credit guarantor if, in any year, its percentage of affordable housing business—either overall or in an underserved subcategory designated by Congress—falls short of the percentage originated in the primary market that year.

Housing goals also can be used to promote cooperative initiatives with state and local governments, nonprofit institutions and community housing groups to create custom-tailored products for targeted housing needs on a smaller scale, although for this to be effective a credit guarantor will need to be able to hold some number of these loans on its balance sheet, since many will not be eligible for securitization.

HERA contains a robust set of housing goals for Fannie and Freddie, which would be maintained in administrative reform of the companies. Mandatory credit guarantor housing goals may be more difficult to include in new legislation, given the political disagreements over their appropriate role.

Subsidy programs that support underserved populations

The bank-promoted bill currently being drafted in the Senate Banking Committee relies almost exclusively on direct subsidy programs to assist affordable housing borrowers, funding these programs with a ten basis point Mortgage Access Fee.

Supporters of this mechanism are correct that direct subsidy programs are more efficient, on a dollar-for-dollar basis, than the cross-subsidies historically done in the secondary market through charging lower-risk borrowers higher guaranty fees so that guaranty fees for higher-risk borrowers can be reduced. But the draft Senate bill errs in presenting direct subsidies as an alternative to cross-subsidies, rather than as a complement to them. The two are independent; direct subsidy programs do not in any way lessen the importance of doing as much as possible to support affordable housing through an efficient credit guaranty mechanism.

The draft Senate bill also proposes to assess the Mortgage Access Fee only on loans that have secondary market credit guarantees. This creates two problems, both of which can be fixed by assessing the fee on all new mortgages. The first is transmittal leakage. Because a credit guarantor’s ten basis point Mortgage Access Fee will be added to its guaranty fee, the same amount also will be added to the mortgage rates quoted by primary market lenders, for the reason noted earlier. But these ten basis points paid by the borrower only will enter the affordable housing subsidy pool if the loan receives a credit guaranty; a lender that keeps a loan in portfolio also keeps the borrower’s ten basis points. A Mortgage Access Fee on all new mortgages will avoid this leakage (and windfall for primary market portfolio lenders), and ensure that all monies collected from the fee go to their intended beneficiaries.

The second problem with a Mortgage Access Fee charged only on loans financed in the secondary market is that it unnecessarily ties the subsidy programs that benefit from such a fee to legislative mortgage reform, which will be challenging to enact. A Mortgage Access Fee on all new mortgages would be less controversial as a stand-alone measure, and thus more likely to be implemented.

* * *

How best to address the needs of the affordable housing community in mortgage reform is no mystery. But that hasn’t been the goal of secondary mortgage market reformers—it’s dominance of the $10 trillion residential mortgage market by large primary market banks. With Fannie and Freddie banned from political activities, these banks have been free to distort the record, define the objectives of secondary market reform, and put forth reform proposals that benefit themselves. Advocates for affordable housing, as well as community banks, realize this, and are responding with fact-based rebuttals and alternatives of their own. That’s a very good thing. If large primary market lenders are allowed to dictate how the capital markets-based financing channel is structured and operates, homebuyers in general, and affordable housing borrowers in particular, will pay a steep price in both cost and access.


Timothy Howard served as Chief Financial Officer and Executive Vice President of Fannie Mae (formerly, Federal National Mortgage Association Fannie Mae) from February 1990 to December 21, 2004. Mr. Howard also served as Vice Chairman of the Board of Fannie Mae from May 20, 2003 to December 21, 2004.

Howard also wrote “The Mortgage Wars: Inside Fannie Mae, Big-Money Politics, and the Collapse of the American Dream”


Stevie Wonder

As (I’ll Be Loving You Always)

As around the sun the earth knows she’s revolving
And the rosebuds know to bloom in early May
Just as hate knows love’s the cure
You can rest your mind assure
That I’ll be loving you always
As now can’t reveal the mystery of tomorrow
But in passing will grow older every day
Just as all is born is new
Do know what I say is true
That I’ll be loving you always

Until the rainbow burns the stars out in the sky—ALWAYS
Until the ocean covers every mountain high—ALWAYS
Until the dolphin flies and parrots live at sea—ALWAYS
Until we dream of life and life becomes a dream

Did you know that true love asks for nothing
Her acceptance is the way we pay
Did you know that life has given love a guarantee
To last through forever and another day
Just as time knew to move on since the beginning
And the seasons know exactly when to change
Just as kindness knows no shame
Know through all your joy and pain
That I’ll be loving you always
As today I know I’m living but tomorrow
Could make me the past but that I mustn’t fear
For I’ll know deep in my mind
The love of me I’ve left behind Cause I’ll be loving you always

Until the day is night and night becomes the day—ALWAYS
Until the trees and seas just up and fly away—ALWAYS
Until the day that 8x8x8 is 4—ALWAYS
Until the day that is the day that are no more
Did you know that you’re loved by somebody?
Until the day the earth starts turning right to left—ALWAYS
Until the earth just for the sun denies itself
I’ll be loving you forever
Until dear Mother Nature says her work is through—ALWAYS
Until the day that you are me and I am you—AL~~~~~~WA~~
Until the rainbow burns the stars out in the sky~~~~~AA~~~~

We all know sometimes lifes hates and troubles
Can make you wish you were born in another time and space
But you can bet you life times that and twice its double
That God knew exactly where he wanted you to be placed
so make sure when you say you’re in it but not of it
You’re not helping to make this earth a place sometimes called Hell
Change your words into truths and then change that truth into love
And maybe our children’s grandchildren
And their great-great grandchildren will tell
I’ll be loving you

Until the rainbow burns the stars out in the sky–Loving you
Until the ocean covers every mountain high–Loving you
Until the dolphin flies and parrots live at sea–Loving you
Until we dream of life and life becomes a dream–Be loving you
Until the day is night and night becomes the day–Loving you
Until the trees and seas up, up and fly away–Loving you
Until the day that 8x8x8x8 is 4–Loving you
Until the day that is the day that are no more–Loving you
Until the day the earth starts turning right to left–Be loving you
Until the earth just for the sun denies itself–Loving you
Until dear Mother Nature says her work is through–Loving you
Until the day that you are me and I am you–
Now ain’t that loving you
Until the rainbow burns the stars out in the sky
Ain’t that loving you
Until the ocean covers every mountain high
And I’ve got to say always
Until the dolphin flies and parrots live at sea~~AL~~~WA~~~AYS
Until we dream of life and life becomes a dream-Um AL~~WA~~AYS
Until the day is night and night becomes the day-AL~~~~WA~~AYS
Until the trees and seas just up and fly away-AL~~WA~~~AA~~~~~
Until the day that 8x8x8 is 4~~~~~AA~~~~~~~AA~~~~~~~AA
Until the day that is the day that are no more-AA~~~~AA~~AA~~~AYS
Until the day the earth starts turning right to left-AL~~~WA~~~A~~~AA
Until the earth just for the sun denies itself-~~AA~~~AA~~~AA~~~AYS
Until dear Mother Nature says her work is through-AL~~~WAYS
Until the day that you are me and I am you
Until the rainbow burns the stars out in the sky
Until the ocean covers every mountain high
Until the dolphin flies and parrots live at sea
Until we dream of life and life becomes a dream
Until the day is night and night becomes the day
Until the trees and seas just up and fly away
Until the day that 8x8x8 is 4
Until the day that is the day that are no more
Until the day the earth starts turning right to left
Until the earth just for the sun denies itself
Until dear Mother Nature says her work is through
Until the day that you are me and I am you

4th Amendment

Riddle: When is a contract amendment not an amendment?

Answer: When the parties are being sued under a previous amendment to said contract.

On December 21, 2017 the Treasury Department and FHFA entered into an agreement to change the terms of the SPSPA. In this “letter agreement” it states:

“For the avoidance of doubt, following the amendment of the Certificate as provided in this Letter Agreement…” (emphasis mine)

So, our long-awaited 4th Amendment will not be called the 4th Amendment (which it is) – it is dubbed the “letter agreement.”

By calling this latest amendment a “letter agreement” it sends the signal that the intent of the 3rd Amendment – the Net Worth Sweep – is still in full force.

There are number of reasons the Administration needs to cling onto the spirit of the 3rd Amendment. First, the Administration is fighting numerous lawsuits pertaining to the legality of the 3rd Agreement. Making any changes that would alter the terms of the 3rd Amendment could jeopardize the court cases.

Plus, the optics of the terminology signals to Congress that the Administration has not initiated a recapitalization program. The “letter agreement” merely winds the clock back to the beginning days of the 3rd Amendment.

The Treasury Department put this amendment into “letter format” versus the previously utilized “amendment format” in order to colloquially refer to it as “a letter agreement.”

In simple terms, this amendment reverts the retained capital of the companies from $0 (set to take place on December 31, 2017) to $3,000,000,000. It’s clear that $3 billion was chosen as the capital buffer as it is the maximum amount allowed under the 3rd Amendment.

The 3rd Amendment went into effect on September 30, 2012 (dated August 17, 2012) calling for a reduction of the capital reserve starting on January 1, 2013 in equal amounts ending at $0 on December 31, 2017 or by $600,000,000 each year:

“Applicable Capital Reserve Amount” means, as of any date of determination, for each Dividend Period from January 1, 2013, through and including December 31, 2013, $3,000,000,000; and for each Dividend Period occurring within each 12-month period thereafter, $3,000,000,000 reduced by an equal amount for each such 12-month period through and including December 31, 2017, so that for each Dividend Period from January 1, 2018, the Applicable Capital Reserve Amount shall be zero.

Perhaps if the Administration did not have to consider the ramifications of the 3rd Amendment, it likely would have increased the capital reserve in excess of $3 billion. But, it clearly wanted to stay within the guardrails of the 3rd Amendment.

Another interesting observation regarding the “letter agreement” is the following:

Section 2(a) of the Certificate provides that Treasury, as the holder of outstanding shares of Senior Preferred Stock of the Enterprise, shall be entitled to receive, when, as, and if declared by the Board of Directors, in its sole discretion, cumulative cash dividends quarterly on each Dividend Payment Date. The Enterprise agrees to declare and pay the dividend payable to Treasury for the Dividend Period that ends on December 31, 2017 in an amount equal to the Dividend Amount minus $2,400,000,000 (the Q4 Dividend).

The first sentence above states the Board of Directors can only declare a dividend, i.e. “when, as and if” and “in its sole discretion.” However, the second sentence nullifies the Board’s independence by stating that the companies “agree to declare and pay the dividend.” How’s that for legal doublespeak?

Of course under dictatorship – err, rather conservatorship – FHFA assumes the power of the Boards.

(note: the reason the amount above states $2.4 billion and not $3 billion is because the companies currently have $600 million in reserve which would have been included in the 4Q17 dividend payment, resulting in a $0 reserve amount)

The “letter agreement” also provides a history or background of the other amendments. For instance, it makes note of the original term of the SPSPA with a 10% dividend.

The paragraph in the “letter agreement” that discusses the 10% dividend is taken verbatim from the 3rd Amendment and is only used as historical reference, i.e. the 10% dividend has no bearing on the new $3 billion or the total liquidation amount on the senior preferred stock.

Our wait continues for the resolution of the conservatorships…

However, we are inching closer as Treasury Secretary Mnuchin has from day one said this Administration would resolve the fate of Fannie and Freddie but that Tax Reform needed to pass through Congress first.

This “letter agreement” was only to avoid $0 capital reserve. Real change finally seems attainable in the first half of 2018!


September 6, 2017

By Gary Hindes

We were all snookered.


Henry Paulson turns a smoldering fire into a worldwide conflagration.

Nine years ago today, the government seized Fannie Mae and Freddie Mac. Angry shareholders filed lawsuits, but the government’s lawyers convinced a federal judge no one should be allowed to see over 11,000 documents relating to its decision. Making them public, it told the court, might set off another financial crisis and affect national security.

But now the cat is out of the bag. Judge Margaret Sweeney of the U.S. Court of Federal Claims has lifted the seal on the first 3,000. As Richard Bove, the dean of Wall Street banking analysts, asserts in this 5-minute CNBC interview, the government has been lying to us all along. With each turn of the page, it becomes clear the September 6, 2008 takeover wasn’t a bailout, it was a stick-up. A heist. Billed at the time as a ‘rescue’, it was anything but.

The storyline put out was the two mortgage insurers were undercapitalized. (Yes, even Yours Truly fell for it at the time.) They weren’t. It was only after the government took control and ordered their accounting staffs to start booking massive non-cash paper losses that they appeared to be. But when the housing market turned around four years later and those accounting sleights-of-hand had to be reversed, the 2008 machinations were exposed for the accounting fraud they were. No longer burdened by the concrete life-preserver of ‘cookie jar’ accounting gimmicks, Fannie and Freddie became massively profitable in 2012 and were on the verge of rebuilding their capital bases and exiting the Conservatorships into which they had been forced. To ensure that didn’t happen, however, the Treasury Department stepped in and changed the rules. (As other documents prove, they lied about the reasons for that as well;  see The Cover-Up Unravels- HINDESightTM July 25, 2017.)

Tossing them another ‘concrete life preserver’ to replace the one which – despite Treasury’s best efforts – hadn’t lived up to its name, the 10 percent dividend which the government had been collecting for four years was cancelled and replaced with a new ‘dividend’: 100 percent of the companies’ net worths whatever the amount. No matter how much the companies wind up paying the government in ‘dividends’ (at this writing, it’s already over $100 billion more than it would have otherwise received), not a penny counts towards principal. Like the restaurant owner who borrowed from the Mob, Fannie and Freddie have found themselves in an unseverable relationship. Even though they are two of the most profitable companies in the world, as things currently stand, they will continue to owe Uncle Sam $187 billion in perpetuity. [1]

Securities fraud?

The government secretly plans to seize the companies – while allowing them to keep selling stock to an unsuspecting public. Despite the government’s line that the takeovers were hastily put together in the ‘fog of war’, newly-released documents reveal that at least six months earlier, nationalizing the companies was under active consideration. On March 8, 2008, a derogatory article about Fannie appeared in Barron’s Magazine with the front-page headline “Is Fannie Mae the Next Government Bailout?” The article appears to have been written almost verbatim from a confidential memo written by Jason Thomas, then a special assistant to President George W. Bush. The memo (and article) described a litany of Fannie’s perceived failings; both were riddled with seriously flawed assumptions. Proof the White House deliberately planted the smear piece is confirmed by an email sent by Mr. Thomas to then-Under Secretary of the Treasury Robert K. Steel on the day it was published:
“Attached is the document used as the sourcing for today’s Barron’s article on the potential collapse of Fannie Mae. This is for your eyes only. I send it…to help inform…discussions about the potential costs and benefits of nationalization. Thank you for your discretion.”

If Treasury’s goal was to trash the stock, it worked – but not for long. As investors read through the article and started questioning its assumptions, many realized the emperor had no clothes. It was a “hit job” based on wildly inaccurate premises. In the months to follow, Fannie and Freddie would, at the urging of their regulator, the Federal Housing Finance Agency (“FHFA”), raise billions of fresh capital, culminating on May 13, when Fannie sold more than $2 billion of preferred shares bearing an 8¼ percent dividend and a AA- rating. The offering was oversubscribed, an indication that investors (and the rating services) had done their own analysis and concluded the companies were not even remotely close to bankruptcy. Nonetheless, Mr. Thomas’ memo would be used just weeks later as the accounting blueprint justifying their seizure. That so many sophisticated investors had read the government’s analysis of the situation and not only didn’t believe it, but instead purchased more shares means either they were all idiots – or the folks at Treasury were determined to grab Fannie and Freddie, the facts be damned. As Professor Richard Epstein later put it, if, instead of the government, it had been private parties involved, “they all would have gone to jail.”

It wasn’t Lehman Brothers.

Conventional wisdom is that then-Secretary of the Treasury Henry Paulson’s decision to stand by idly as Lehman teetered on bankruptcy on September 15, 2008 triggered the meltdown of the world financial system. A careful review of the timeline, however, reveals it was the seizure of Fannie and Freddie a week earlier which spooked the markets and plunged the world financial system into the abyss.

Earlier that summer, Mr. Paulson and the Bush Administration pushed Congress to enact the Housing and Economic Recovery Act (“HERA”), which, among other things, gave FHFA the authority to place either or both GSEs into Conservatorship if one of 12 conditions were met. [2]

The first 11 are what you might expect: being significantly undercapitalized; operating in an unsafe and unsound manner; fraud; money laundering, etc. As it turns out, all were inapplicable; neither company was in danger of insolvency and both had more than sufficient liquidity and billions in high-quality assets which could be pledged as collateral should they need more. Indeed, just two weeks prior to the seizure – on August 22 – James Lockhart, the head of FHFA, confirmed in a letter to the CEOs of both companies that they were operating with “adequate” levels of capital (“adequate” being the regulator’s highest rating). [3]
With 11 of the 12 conditions being nonstarters, Treasury had only one card left to play. As it turns out, the Companies could be placed into Conservatorship if their boards “acquiesced” or “consented”. The issue for Treasury thus became: what would it take to obtain that acquiescence or consent?

In hastily-convened, back-to-back meetings on Saturday, September 6, 2008 (with Federal Reserve Chairman Ben Bernanke seated alongside him), Mr. Paulson acquainted the directors with “the awesome powers of the government” – inferring armed personnel were at the ready. [4,5]

But he also offered a consolation prize, a ‘get-out-of-jail-free’ card, if you will, directing their attention to a provision of HERA which, were they to cooperate, absolved the directors from liability from shareholder lawsuits. [Think about that for a moment: the legislation actually included an inducement for the boards to abandon their responsibilities to shareholders who had been paying them hundreds of thousands of dollars each year in director fees to act in their best interest.] For his part, if we are to believe Mr. Paulson’s version of events, Mr. Bernanke basically urged the directors to ‘take-one-for-the-team’. [6]

With two of the most powerful people in the
world confronting them across the table, the
directors caved. [7]

In the chapter of his memoirs dealing with the Fannie/Freddie situation, Mr. Paulson ends by telling the reader: “. . . that Sunday afternoon in my office, placing calls all around the world, I couldn’t help but feel a bit relieved. We had just pulled off perhaps the biggest financial rescue in history. Fannie and Freddie had not been able to stop us, Congress was supportive, and the market looked sure to accept our moves . . . we had, I thought, just saved the country – and the world – from financial catastrophe. The next day, Lehman Brothers began to collapse.” (Emphasis added.)

In retrospect, it should have come as no surprise. That Mr. Paulson expected the markets to overlook the fact he’d just incinerated over $80 billion of shareholder equity shows an astonishing level of naïveté from someone who had spent his entire career in investment banking and the capital markets – and who was also the former chairman of Goldman
Sachs. Also of no small import, the affected shareholders included foreign central banks which had purchased shares in the May 13th stock offering. [8]

As noted British economist Anatole Kaletsky describes in Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis (PublicAffairs/Perseus Books Group) [9], by the time the Asian markets opened on Sunday evening, investors around the globe were forced to confront a terrifying new reality: if the U.S. Government could seize two of the world’s largest shareholder-owned public companies – which were in full compliance with their regulatory capital requirements (and had recently reported the highest capital levels in their histories) – they could do the same to any financial institution: no one was safe. As the expression goes, the s—t had hit the fan. Monday morning, U.S. banks immediately stopped lending and trading, fearful of counter-party risk. Loans were called in and lines of credit cancelled.

The contagion spread quickly: the bond market froze up and stock markets plunged. From that point forward, any company with even the slightest whiff of financial difficulty could no longer hope to raise capital. (Even GE was having trouble rolling over its commercial paper.) As Dr. Kaletsky puts it, “the (seizure of Fannie and Freddie) thus raised a Sword of Damocles over every U.S. financial institution that might conceivably need to raise any new capital in the foreseeable future…the almost inevitable result was a run on every major bank and financial institution, first in America and then around the world.” (Emphasis added.)

Within the week, Lehman filed for bankruptcy. The day after, Merrill Lynch, AIG, Morgan Stanley, Citigroup, Washington Mutual, Wachovia, and Bank of America (all highly leveraged) were under attack by short sellers, for – as Dr. Kaletsky puts it – Mr. Paulson had created a financial “doomsday machine…whose mechanism began its inexorable grind within 24 hours of the…seizure (of Fannie and Freddie).” Lloyd Blankfein, chairman of Goldman Sachs, predicted his firm would be bankrupt “in 15 minutes” were its then-teetering major competitor, Morgan Stanley, to succumb to the rapidly-escalating panic. As Dr. Kaletsky concludes, Secretary Paulson’s “punitive treatment of the Fannie and Freddie shareholders had started a chain reaction that was going to blow up the entire U.S. financial system…”

At the risk of sounding inflammatory (no pun  intended), pouring gasoline on a fire is not an inapt analogy here. Had Treasury truly wanted to help Fannie and Freddie get through the crisis (even though, as has been demonstrated, neither needed it), [10] both it and the Federal Reserve had programs available that would have allowed either to make repayable loans, fully collateralized by their ample holdings of Mortgage Backed Securities, at absolutely no risk to the taxpayer. After all, that’s what they did for AIG, Goldman Sachs, and all the banks to which it gave TARP money. But as the unsealed court documents now make clear, Treasury’s goal wasn’t to help Fannie and Freddie; it was to put an end to them for once and for all and turn their lucrative businesses over to the Big Banks which had long coveted them.

In their zeal to accomplish that end, Mr. Paulson and his colleagues had run up against the ‘law of unintended consequences’. Instead of “saving the country – and the world – from financial catastrophe,” their weekend exploits had plunged the world into an abyss from which many investors were never able to recover. [11, 12]

Nine years and counting.

In August 2012, when Treasury decided to change the terms of the 2008 ‘bailout’, a battle in Congress to extend the debt ceiling limit and avoid a government shutdown was fast approaching. It was utilizing what it called “extraordinary measures” to manage the government’s cash flow. Whether by happenstance or design, the extra money from the GSEs came in very handy: it extended the runway.

The longest Conservatorship of an FDIC insured commercial bank reportedly lasted 18 months. However, despite their being two of the most profitable companies in the world (or perhaps because of it) – and the fact they also happen to be the government’s most lucrative venture since the Louisiana Purchase – Fannie and Freddie are about to enter their 10th year as wards of the state. With the current Treasury secretary, Stephen Mnuchin, projecting September 29 as the latest deadline for extending the debt-ceiling limit, Treasury is again using their profits to keep the lights on (with another $5 billion ‘dividend’ payment expected to be paid shortly). Enough is enough. The looting has gone on for far too long. The only countries which seize private property without compensating their owners are Cuba, Iran, North Korea, Russia, Venezuela and Zimbabwe. It is time to stop using Fannie and Freddie as piggy banks and return them to their rightful owners.

Gary E. Hindes
September 6, 2017


1 “They (aren’t going to be allowed to) repay their debt and escape, as it were.” — Jim Parrott, senior advisor to President Obama in an August 18, 2012 email to Tim Bowler, deputy assistant secretary of the Treasury.

2 In July, Mr. Paulson famously told a Congressional panel considering the HERA legislation “if you’ve got a squirt gun in your pocket, you may have to take it out. If you’ve got a bazooka, and people know you’ve got it…you’re not likely to take it out.”

3 Treasury subsequently demanded that the letter be withdrawn because it was inconsistent with its soon-to-be-announced position the GSEs were in such dire financial straits that placing them into Conservatorships was the only option.

4 “We preferred that they voluntarily acquiesce. But if they did not, we would seize them . . . I explained that we had teams of lawyers, bank examiners, computer specialists, and others on standby, ready to roll into (their) offices and secure their premises, trading floors, books and records, and so forth.” Henry M. Paulson Jr: On the Brink © 2010 Hachette,
excerpted at (Emphasis added).

5 Mr. Paulson refers to it as an “ambush”. “‘Do they know it’s coming, Hank?’ President Bush asked me. ‘Mr. President,’ I said, ‘we’re going to move quickly and take them by surprise. The first sound they’ll hear is their heads hitting the floor’.” (Ibid.)

6 “Ben Bernanke followed and made a very strong speech. He said he was very supportive of the proposed actions. Because of the capital deficiency, the safety and soundness of Fannie Mae was at risk, and that in turn imperiled the stability of the financial system. It was in the best interests of the country to do this, he concluded.” (Emphasis added.)

7 To this day it is unclear whether the boards “acquiesced” or “consented”. Attempts by shareholders to obtain minutes of the meetings have been stonewalled by the government and the courts. The (former) directors have refused to comment. However, I spoke with a person who was in the room during the Fannie Mae meeting. He also clammed up, but walking away and shaking his head bitterly, told me “it was done at the point of a gun with six bullets in the chambers”.

8 Treasury had snookered some of the most sophisticated investors and research analysts in the world – along with a “Who’s Who” of Wall Street investment banks which had underwritten the issue: Merrill Lynch; Citibank; Morgan Stanley; UBS; Bank of America; Barclays; Wells Fargo, and Wachovia.

9 Available at; I draw the reader’s attention to Chapter 10: The Economic Consequences of Mr. Paulson.

10 With FHFA’s prior approval, they were still paying dividends on their common stock!

11 To this day, the anti-GSE crowd claims Fannie and Freddie needed a bailout because they were running out of liquidity and were unable to tap the capital markets. Nonsense. “Fannie Mae, Freddie Mac Debt Funding Smooth . . . drew solid demand for $5 billion of new securities today”, Reuters reported on September 3. That was Wednesday. On Saturday, Mr. Paulson showed up with his bazooka.

12 Among other victims, 15 FDIC-insured banks failed after being forced to write off their Fannie and Freddie holdings. (Their shareholders were wiped out.)


The views and opinions expressed herein are solely those of the author, and not necessarily those of The Delaware Bay Company, LLC, Arcadia Securities, LLC and/or their principals and/or affiliates, which may, from time to time, have long or short positions in the securities of companies mentioned herein. We make no representations or warranties as to the accuracy of any of the facts contained herein and investors are warned that past performance is no guarantee of future results. Investors are also urged to consult their own legal, accounting, and other financial professionals before acting upon any of the recommendations made herein. Invest at your own risk. The author is a co-plaintiff in Jacobs, et al. v. the United States, which challenges the legality of the Net Worth Sweep under Delaware law.

Sen. Corker’s relationship with real estate industry highlighted in voting record

Bethany McLean
Yahoo Finance December 2, 2015

Bethany McLean is a contributing editor at Vanity Fair and bestselling author. Her recent book is “Shaky Ground: The Strange Saga of the U.S. Mortgage Giants,” published by Columbia Global Reports.

As you may have seen, the Campaign for Accountability (CFA), a D.C. watchdog group, has called for an SEC and ethics investigation of Sen. Bob Corker (R-TN) for insider trading. Between 2008 and 2015, Corker, his wife and daughters made approximately 70 (70!) opportune and very profitable trades in the stock of a company called CBL & Associates Properties (CBL), which is one of the country’s largest shopping mall REITs. (Just FYI, investors usually own REITS for their dividends, not as trading vehicles. It’s also worth noting that the senator told Yahoo Finance several years ago that he had a Bloomberg terminal.) Nor was the full extent of Corker’s trading disclosed until very recently, after the Wall Street Journal began asking questions. Corker has blamed his accountants for a technical mistake involving the use of a methodology that didn’t require disclosure of the date of purchase. His spokesperson downplayed the CFA complaint and added that “these baseless accusations from a political special interest group are categorically false and nothing more than a smear campaign.”

It’s true that the picture is far from complete, but there’s another element worth noting. In its complaint, the CFA suggests UBS was a likely source of tips. But if Corker has benefited from buying and selling CBL, there’s an argument that the company has also benefited from its relationship with the senator. To wit: Corker has voted in favor of at least several pieces of legislation for which CBL, via its membership in several trade groups, has lobbied. Right now, there’s legislation in need of reauthorization, for which Corker’s real estate constituents are pushing hard. To complicate matters, it involves a controversial industry for which Corker’s fundraising consultant works.

Some may say this messy state of affairs is business as usual in today’s Washington. They might be right. Members of Congress simply don’t want to have to behave in transparent, conflict-free ways that they themselves would probably mandate for everyone else. But remember that old-fashioned thing about public office being a public trust?

A long relationship

As the complaint—filed with the SEC and the Senate Select Committee on Ethics—details, Corker and CBL go way back. Corker began his career at a company whose primary business was subcontracting for CBL and which is now substantially owned by CBL. CBL executives were Corker’s “first and most generous donors,” as the complaint put it, when Corker filed to run for Congress in 2006. CBL is run by the Lebovitz family, whose members are also involved in several real estate trade groups. Stephen Lebovitz, the CEO of CBL, is currently the chair of the International Council of Shopping Centers, or the ICSC. He is also a member of the advisory board of governors of the National Association for Real Estate Investment Trusts, or NAREIT. (CBL did not return an email requesting comment.)

Both directly and indirectly, CBL have given generously to Corker. According to the complaint, CBL’s executives, directors and their spouses rank among the senator’s top campaign donors, contributing $88,706 to his campaign committee and PAC since his 2006 run. Since Corker’s arrival in the Senate, CBL executives have contributed more than $50,000 each to NAREIT and ICSC—which, in turn, were part of a nine-PAC consortium that held a fundraiser for Corker in Washington in 2011. NAREIT and ICSC also donated $15,000 directly to his campaign committee since his arrival in the Senate.

There are at least several examples where Corker has supported or co-sponsored legislation that the ICSC and NAREIT have wanted.

A few years ago, the Environmental Protection Agency and the Army Corps of Engineers issued a rule called “Waters of the United States,” which would have expanded the EPA’s jurisdiction. In announcing the implementation of the rule, President Obama called it “another step towards protecting the waters that belong to all of us.”

Both the ICSC and NAREIT were among the many who fought against it. “If the rule is enacted in its current form, developers can expect major project permitting delays, costly resource outlays,” the ICSC wrote in June 2014. Along with NAREIT, the ICSC was also part of a coalition that wrote to the EPA in August 2014 to “express their opposition to most of the rule,” as NAREIT put it in an update. Using a rarely used tool called a Congressional Review Act, the Senate passed a resolution last month by a vote of 53 to 44 to rescind the rule. Corker’s vote in favor of rescinding the rule was celebrated on Twitter.

Taxing Internet sales

Then there’s the long, vicious fight over online retailers not charging sales tax, because states are barred from collecting sales tax from out-of-state companies. This has been an area of particular concern to companies like CBL, which own shopping malls, and which stand to lose out if consumers choose to buy online.

Back in 2013, a measure called the Marketplace Fairness Act, which would have required online retailers to collect sales taxes, failed in part because some top Republicans opposed it. Corker supported it. Just this spring though, a bipartisan group of senators including Corker reintroduced the measure. The ICSC applauded Corker, along with the others, for his support; a blog post notes that if supporters “remind elected officials on Capitol Hill just how important this legislation is to American shoppers, businesses and communities,” that support would “go a long way to supplementing the current efforts of the International Council of Shopping Centers, Marketplace Fairness Coalition, NAREIT” and others.

Time will tell what happens to the 2015 version of the bill.

In addition, the CFA’s complaint notes that CBL would be a beneficiary of another bill sponsored by Corker. This one, which passed the Senate Banking Committee—where Corker serves—in the spring of 2014, would lead to the demise of Fannie Mae and Freddie Mac. One firm that probably would have benefited from that bill is Wells Fargo (WFC), because without Fannie and Freddie, the big banks would be able to capture more of the mortgage industry’s profits. Wells Fargo is CBL’s chief bank. (As CBL’s CFO noted on a 2009 conference call, Wells “has been our lead bank since 1978… it’s totally a relationship driven business.” The retired head of Wells Fargo’s commercial real estate business, A. Larry Chapman, joined CBL’s board in August 2013.)

It is probably a coincidence — and this is not in the complaint — but on July 11, 2014, Corker personally invested in a shopping center called McGowin Park that is being developed by the Hutton Company in Mobile, Ala. Several top executives at the Hutton Company, including its president, joined Hutton after stints at CBL. According to Corker’s disclosure form, his investment is worth between $1 million and $5 million. His investment came six days before Wells Fargo filed its financing statement with the Alabama secretary of state. Wells Fargo declined to comment. Hutton’s CEO says “that assessment of the timing is inaccurate,” that investors “are not involved with the banks,” and that Hutton “interviewed and worked with several lenders and was working with several banks to select the best fit.” She adds that there are limited options in Chattanooga for people to move between commercial real estate developers.

Visa program controversy

Although CFL didn’t highlight this, there’s also an interesting nexus between Corker’s campaign finance manager and a program that is a favored child of the real estate industry. The so-called EB-5 visa program was started some 20 years to enable foreigners who wanted to start businesses in the United States to get lawful permanent residence here as long as they invest a minimum of $500,000 to $1 million, and create jobs for U.S. workers.

This has morphed into a convenient source of cheap capital for the real estate industry (one industry publication calls it a “vital capital source”). But a key part of it, which allows foreign investors to pool their capital into things like real estate projects, was due to expire this fall, and at least some are desperate to hang onto it. The ICSC has held panels about how to use EB-5 funds. The Real Estate Roundtable, which has highlighted “the urgent need to reauthorize the EB-5 investment program by December 11, 2015,” and also describes itself as a “founding member” of a “broad-based EB-5 coalition that seeks to reform and reauthorize the program.” Stephen Lebovitz, the CEO of CBL, is a member of the Real Estate Roundtable’s FY 2016 board of directors.

The program is highly controversial. At the end of 2014, Corker, who chairs the Senate Committee on Foreign Relations, along with Sen. Chuck Grassley (R-Iowa) and then-Sen. Tom Coburn (R-OK), called upon the GAO to investigate. “I’ve had too many whistleblowers coming forward expressing concerns…to not have some trepidation,” said Grassley. The resulting report, which was issued in August, highlighted a number of problems with the program, including “unique fraud risks,” like “uncertainties in verifying that the funds invested were obtained lawfully.” But do these senators want to kill the program? Actually, no. Grassley and ranking member Sen. Patrick J. Leahy (D-VT.) are now pushing a reauthorization bill that would reform, but preserve, the key part of the program. The Washington Post wrote in an editorial that “even if it were reformed…the EB-5 would still be a bad idea. It’s corporate welfare, enabling certain businesses to attract capital more cheaply than others based on a government-conferred sweetener — namely, a visa.”

Meanwhile, Corker’s campaign finance chair, Kim Kaegi, is also the managing director of investor relations for a firm called LCR Capital Partners. According to its website, LCR “sources its capital from global high net worth investors seeking permanent U.S. residency through the EB-5 investment visa program.” (In 2010, Kaegi caused a bit of a dust-up, when during the height of negotiations over Dodd Frank financial reform, she sent an email offering prospective donors the opportunity to dine with Corker. “We are hoping for $10,000 for meal events or $5,000 for small meetings,” she wrote. Kaegi still serves as a fundraising consultant for Corker, according to her biography.)

LCR is also listed as part of the coalition to protect the EB-5 program. Last summer, a coalition member named Jeff Campion wrote in a post that he had “been fortunate to meet with Senators Grassley, Cornyn and Corker,” among others.

Congress has extended the deadline for reauthorization until mid-December.

In its complaint, the CFA notes that the Senate Ethics manual says that “the public has a right to expect members, officers and employees to exercise impartial judgment…the receipt of gifts…may interfere with this impartial judgment, or may create an appearance of impropriety that may undermine the public’s faith in government.” In Corker’s case, they argue that “the receipt of stock tips from company insiders creates exactly the sort of appearance of impropriety that the Gift Rule was designed to address.” That’s all the more true if there’s even a hint of the appearance of a quid pro quo.

A spokesperson for Corker says that “Sen. Corker supports legislation based on what he believes is the best thing for Tennesseans and our country. She notes that 31 states have filed suits against “Waters of the U.S.,” while 26 governors, along with 348 organizations, support the Marketplace Fairness Act. That’s very fair: Each of these pieces of legislation are broad-based enough that it’s hard to argue beyond a reasonable doubt that he was doing a specific favor for one constituent, or even a group of constituents. On the EB-5 program, she notes that Corker has been very clear that the program needs to be reformed, and says that “while it is unclear at this time how EB-5 may be reauthorized (whether through a standalone bill or attached to other legislation), the senator would oppose a straight reauthorization if it were to be considered as a standalone bill.” She adds that Corker had nothing to do with the financing for McGowin Park.

It’s probably naïve to want the behavior of our elected officials to be above even this type of questioning. But according to a new report from the Pew Research Center, only 19% of Americans say they can trust the government always or most of the time, among the lowest levels in the past half-century. Maybe if we knew elected officials were devoted to legislating, instead of to investing and trading, we’d have a little more faith.

What’s up with this Blog!?

March 18, 2017

I started this blog in November 2014 as a result of writing my first blog post — “You Can’t Handle the Truth!”  I actually wrote that piece without the desire to start a blog. I had been reading and participating on the timhoward717 blog up until that point, but the piece I wrote was too big to post there (admittedly it is a bit long).

I started this blog mainly to post that piece, but one thing led to another and now have exceeded 200 posts. Granted, some of those posts are frivolous (music videos, song lyrics, etc.). However, some posts required intense research and took several hours to write…many consumed an entire weekend…

About the Blog

Why did you write so many blog posts?  At the time, the truth needed to be told.

Why have you slowed down on the postings?  The truth is out. It’s clear there are people on both sides of the truth, but for the most part, the top line elements of the Bush and Obama Administration actions – along with the assistance of their external contributors (journalists, congressmen, lobbyists, etc. etc.) – have been publicized.

How much money do you make from the ads on this blog?  Nothing! Hopefully, the ads are just a slight annoyance to readers. I operate a free site, so WordPress makes money on posting ads on bloggers’ free accounts like mine.

Why are you anonymous?  Because I don’t want people to know my identity! Seriously though, I felt I could go further with my accusations, speculations and commentary if I didn’t have to worry about it affecting my personal and business relationships. One may have assumed because I work to expose government malfeasance that I don’t want Big Bro to know who I am. I have no delusion of being able to hide my identity from the US government… (my wife frequently asks why there is a red laser dot in the middle of my forehead — I tell her to just ignore it…ha!)

That’s it for the Q&A

As you can see, I am not in this to make money on the blog. However, with full disclosure, I am a shareholder of both Fan and Fred; both common and preferred.  I don’t try compete with anyone else. In fact, I have posted work by others on this blog — journalists, other bloggers, etc. I have no affiliation to any group or person…a completely independent, average joe…

My background is irrelevant. If you like what you read – keep reading. If not, that’s cool, too!

I’m motivated by the truth…  I’ve fought — and won — wrongdoing on many other occasions, but obviously Fanniegate has been the biggest nut to crack!  …we’re getting closer by the day!

Even though it is time consuming to keep a blog current, I will try to get back into posting more pieces. There is interest in Fanniegate and all that remotely goes into it. The story has many, many angles… And there is recent, new interest in Fanniegate.  After Donald Trump was elected and after Steven Mnuchin made references to Fan/Fred immediately after his nomination, there have been many new people attracted to the story…trying to figure it all out for themselves.

By no means do I have it all figured out…there are people much smarter than me that can be consulted to learn more about specific details on Fanniegate. But I do appreciate the interest in my blog. I’ve had readers from over half the countries in the world — 110 out of 196. Besides the US, the top five countries are Canada, Germany, Singapore, Switzerland and Argentina.

One request I’ve received a few times is to update my post FANNIEGATE FOR BEGINNERS. I wrote that one in September 2015, so much has happened since. I will work on that update this weekend. It’s also been recommended to condense that piece into a one-page, bullet point summary…which I’ll try to get that one done, too.

Again, thanks for your interest in the blog.  If interested, below is a screenshot of the top blog hits by views (I personally don’t think those represent the best posts, they just receive the most views for whatever reason – timing of post, Google searches, etc.).

The blog has a search function that is easily seen on the right side of the page if viewed on a computer. On a tablet, you need to view in landscape (sideways) vs. portrait (up & down) mode. I can’t get the search bar to pop up when viewing this blog on my phone (there’s probably a way, but I can’t figure it out…).

Reach me on twitter @fanofred_ or email if you want to chat.


Top Blog Views:

top blog hits

What to look for: Budget 2018

Accompanying every administration’s budget each year is a supplement titled, “Analytical Perspectives” which provides additional detail to support the overall budget.

The Obama 2017 Analytical Perspectives can be found here.

There are numerous references to Fannie Mae and Freddie Mac in the 2017 document including the following passage:

Future of the GSEs To finish addressing the weaknesses exposed by the financial crisis, the housing finance system must be reformed, and Fannie Mae and Freddie Mac should be wound down. The bipartisan progress in the Senate in the previous session was a meaningful step towards securing a system that aligns with many of the Administration’s principles for reform, including ensuring that private capital is at the center of the housing finance system so that taxpayer assistance is never again required, and that the new system supports broad access to credit and affordable rental housing through programs like the Housing Trust and Capital Magnet Funds.

Further, the Consolidated Appropriations Act, 2016, included a provision that prohibits Treasury from selling or otherwise disposing of the preferred stock it holds in Fannie Mae or Freddie Mac until January 1, 2018, unless legislation instructing Treasury on how to do so is enacted into law. Further, this provision recommends that legislation regarding the future of Fannie Mae and Freddie Mac be enacted and, notwithstanding the previous limitation, suggests that Treasury should not sell or dispose of its stock until such legislation is enacted.

The Administration will continue to work with Congress to pass comprehensive reform, centered on several core principles: require more private capital in the system; end the Fannie Mae/Freddie Mac duopoly business model in order to improve system stability and better protect taxpayers; ensure broad access for all creditworthy families to sustainable products like the 30-year fixed rate mortgage in good times and bad; and help ensure sustainable rental options are widely available.

The above language was repeated for years throughout the Obama Administration. However, the Trump Administration has indicated many times that it will take a different approach to Fannie and Freddie vs. the previous administration.

The 2018 Analytical Perspectives is likely being drafted as we speak and is due out in May. In President Obama’s first term, the Fiscal 2010 Analytical Perspectives was published May 11, 2009. In subsequent administrative years the documents are published in February due to the team already in place.

Therefore, we should look forward to receiving Trump’s 2018 Analytical Perspectives this May. That document should provide the Administration’s intentions regarding how they plan to deal with Fannie and Freddie, if they have not already provided detail ahead of this publication.



The Time is Now

It was clear the Obama’s administration never wanted to deal directly with Fannie and Freddie, instead deferring to Congress. Obama happily received and spent Fan/Fred’s profits while “waiting for Congress.”

Even when it was clear Congress was unable or unwilling to pass legislation dealing with Fan/Fred, Obama’s team was comfortable “kicking the can” to the next Administration despite knowing that Fan/Fred’s capital reserves would go to $0 by the end of their first calendar year in office – 2017.

There have been a number of indicators from the Trump Administration stating they will deal with the situation sooner than later. Both Steven Mnuchin and Gary Cohn have publicly stated the need to address Fan and Fred as one of the Administration’s important agenda items.

Yesterday, an Executive Summary for Trump’s 2018 Budget was released. It was more or less a top line summary of a more detailed budget due out in May. In the detailed budget, we will look for items involving the Net Worth Sweep. But, in the mean time we can consider what Mick Mulvaney wrote in the Exec Summary regarding Fan/Fred.

There is one passage that seems to directly or indirectly reference Fannie and Freddie:

“Empowers the Treasury Secretary, as Chairperson of the Financial Stability Oversight Council to end taxpayer bailouts and foster economic growth by advancing regulatory reforms that promote market discipline and ensure the accountability of financial regulators.”

Ending Taxpayer Bailouts: for a  fiscal 2018 budget, the only “bailout” still on the Administration’s books is Fannie and Freddie (after a record 8 years and 6 months in conservatorship).

Foster Economic Growth: ending the uncertainty of Fannie/Freddie will inject life into the housing industry – roughly 20% of our economy.

Promote Market Disciplineput to rest the notion of private gain/public loss. Recapitalize Fan/Fred and allow them to compete in the free market without an explicit or implicit government backing.

Ensure Accountability of Financial Regulators: FHFA, under Obama-appointee Mel Watt, has refused to deal (at least publicly) with the Net Worth Sweep – after 4 years and 7 months! Again, this reference is in a fiscal 2018 budget…which other financial regulator needs to be held accountable more than Fan/Fred’s regulator — who has been doing the opposite of what is required by law from a conservator. This summary was written by Mulvaney, who as a Congressman, challenged Watt during a Banking Committee hearing asking why FHFA was ignoring the law regarding the conservatorship and the net worth sweep. He famously asked, “How can an agreement between two agencies trump the law!?”

Video clip of that exchange can be seen here:

So, again, we’ll need to wait until May for the details of the budget to realize what this means for Fannie and Freddie in 2017.

However, in addition to the budget details, it will certainly be instructive to see if the quarterly dividends on the senior preferred stock are paid at the end of the month… a short two weeks away.

Another indicator of timing may be in the recent executive order on the financial system. President Trump stated he wanted action within 120 days (from February 3) on items that might involve Fan/Fred… or by the beginning of June.

We’ve waited long enough… now is the time for action…!!

Here is the Executive Order:

Presidential Executive Order on Core Principles for Regulating the United States Financial System


– – – – – – –


By the power vested in me as President by the Constitution and the laws of the United States of America, it is hereby ordered as follows:

Section 1. Policy. It shall be the policy of my Administration to regulate the United States financial system in a manner consistent with the following principles of regulation, which shall be known as the Core Principles:

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

(b) prevent taxpayer-funded bailouts;

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;

(e) advance American interests in international financial regulatory negotiations and meetings;

(f) make regulation efficient, effective, and appropriately tailored; and

(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

Sec. 2. Directive to the Secretary of the Treasury. The Secretary of the Treasury shall consult with the heads of the member agencies of the Financial Stability Oversight Council and shall report to the President within 120 days of the date of this order (and periodically thereafter) on the extent to which existing laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies promote the Core Principles and what actions have been taken, and are currently being taken, to promote and support the Core Principles. That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.

Sec. 3. General Provisions. (a) Nothing in this order shall be construed to impair or otherwise affect:

(i) the authority granted by law to an executive department or agency, or the head thereof; or

(ii) the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b) This order shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c) This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.


February 3, 2017.