Motive?

Before reading this blog post it is recommended to read Matt Taibbi’s January 2013 Rolling Stone piece: Secrets and Lies of the Bailout

The Rolling Stone article is lengthy, but informative by offering a scathing rebuke on how the past and current Administrations managed the financial crisis. The article identifies government lying, accounting trickery, and the implicit guarantee of TBTF, among other topics.

For those that choose to skip the recommended reading, highlights are as follows:

It was all a lie – one of the biggest and most elaborate falsehoods ever sold to the American people.

But the most appalling part is the lying. The public has been lied to so shamelessly and so often in the course of the past four years that the failure to tell the truth to the general populace has become a kind of baked-in, official feature of the financial rescue.

“It is the ultimate bait-and-switch,” says former bailout Inspector General Neil Barofsky.

The bailout deceptions came early, late and in between. There were lies told in the first moments of their inception, and others still being told four years later. The lies, in fact, were the most important mechanisms of the bailout. The only reason investors haven’t run screaming from an obviously corrupt financial marketplace is because the government has gone to such extraordinary lengths to sell the narrative that the problems of 2008 have been fixed. Investors may not actually believe the lie, but they are impressed by how totally committed the government has been, from the very beginning, to selling it.

…the bailouts were pushed through Congress with a series of threats and promises that ranged from the merely ridiculous to the outright deceptive. At one meeting to discuss the original bailout bill – at 11 a.m. on September 18th, 2008 – Paulson actually told members of Congress that $5.5 trillion in wealth would disappear by 2 p.m. that day unless the government took immediate action, and that the world economy would collapse “within 24 hours.”

So Paulson came up with a more convincing lie. On paper, the Emergency Economic Stabilization Act of 2008 was simple: Treasury would buy $700 billion of troubled mortgages from the banks and then modify them to help struggling homeowners. Section 109 of the act, in fact, specifically empowered the Treasury secretary to “facilitate loan modifications to prevent avoidable foreclosures.” With that promise on the table, wary Democrats finally approved the bailout on October 3rd, 2008. “That provision,” says Barofsky, “is what got the bill passed.”

But within days of passage, the Fed and the Treasury unilaterally decided to abandon the planned purchase of toxic assets in favor of direct injections of billions in cash into companies like Goldman and Citigroup.

Barofsky, the TARP inspector, asked Treasury to include a requirement forcing recipients to explain what they did with the taxpayer money. He was stunned when TARP administrator Kashkari rejected his proposal, telling him lenders would walk away from the program if they had to deal with too many conditions. “The banks won’t participate,” Kashkari said. Barofsky, a former high-level drug prosecutor who was one of the only bailout officials who didn’t come from Wall Street, didn’t buy that cash-desperate banks would somehow turn down billions in aid. “It was like they were trembling with fear that the banks wouldn’t take the money,” he says. “I never found that terribly convincing.”

This announcement marked the beginning of the legend that certain Wall Street banks only took the bailout money because they were forced to – they didn’t need all those billions, you understand, they just did it for the good of the country.

And in November 2009, Bernanke gave a closed-door interview to the Financial Crisis Inquiry Commission, the body charged with investigating the causes of the economic meltdown, in which he admitted that 12 of the 13 most prominent financial companies in America were on the brink of failure during the time of the initial bailouts.

This early episode would prove to be a crucial moment in the history of the bailout. It set the precedent of the government allowing unhealthy banks to not only call themselves healthy, but to get the government to endorse their claims. Projecting an image of soundness was, to the government, more important than disclosing the truth. Officials like Geithner and Paulson seemed to genuinely believe that the market’s fears about corruption in the banking system was a bigger problem than the corruption itself. Time and again, they justified TARP as a move needed to “bolster confidence” in the system – and a key to that effort was keeping the banks’ insolvency a secret.

What’s most amazing about this isn’t that Citi got so much money, but that government-endorsed, fraudulent health ratings magically became part of its bailout.

The article does mention Fannie and Freddie:

In one of the worst episodes, the notorious lenders Fannie Mae and Freddie Mac paid out more than $200 million in bonuses­ between 2008 and 2010, even though the firms (a) lost more than $100 billion in 2008 alone, and (b) required nearly $400 billion in federal assistance during the bailout period.

After Mr. Taibbi wrote his article in 2013, details about the government take-over of Fan and Fred came to light. Taibbi evidently conducted additional research and in April 2016 offered a different perspective in Why Is the Obama Administration Trying to Keep 11,000 Documents Sealed?

So consider, if the Government would lie by claiming that TBTF were healthy when in fact many banks were on the verge of collapse, then it is not too much of a stretch to assume the Government would do the opposite with Fannie and Freddie.  

Here’s what former FNMA CFO Tim Howard said in his Jacobs Amicus Curiae:

The takeover of Fannie and Freddie was not a rescue. Unlike all commercial or investment bank interventions during the crisis, Treasury’s decision to force the Companies into conservatorship was not a response to any imminent threat of failure. Rather, it was a calculated policy decision by Treasury, made at a time of Treasury’s choosing and with ample advance planning. That decision—which resulted in the effective nationalization of Fannie and Freddie— was made without statutory authority and after Treasury overrode the Companies’ own regulator, the Federal Housing Finance Agency (“FHFA”), which had deemed them to be in compliance with their capital standards and safety and soundness requirements.

Though it’s not always necessary to prove motive when prosecuting a crime, it certainly makes for a stronger case. On the other hand, intent is an important element of any crime, i.e. was the act intentional, reckless or accidental…

It becomes even more important to offer a plausible motive for UST’s illegal actions given their endless spinning of a tangled web of lies, with one lie contradicting another from one lawsuit to the next.

UST’s co-conspirator, the Federal Housing Finance Agency, has always merely followed UST’s directive. So, it is inconsequential to consider motive or intend regarding FHFA’s role in this malfeasance. FHFA’s transgression is that they don’t act independently, as mandated by statute.

One motive for the crimes against Fannie and Freddie is that UST has long wanted to destroy them. Going beyond mere desire, UST has apparently considered for years before the financial crisis on ways to eliminate Fan and Fred according to these theorists.

Close inspection of recently released documents, as well as testimony from Government officials, suggest that UST had been waiting for the right moment to take down Fan and Fred.

Here is how Henry Paulson described his thinking when announcing the conservatorships:

“Our nation has tolerated these ambiguities for too long, and as a result GSE debt and MBS are held by central banks and investors throughout the United States and around the world who believe them to be virtually risk-free. Because the U.S. Government created these ambiguities, we have a responsibility to both avert and ultimately address the systemic risk now posed by the scale and breadth of the holdings of GSE debt and MBS.”

One could argue for or against an ambiguous situation, however it is not the role of the Administration to alter Fannie and Freddie’s role. Only Congress can change the company’s charters.

As with many crimes, there could exist multiple motives for carrying out misdeeds.

Another Consideration: The Debt Ceiling

The following is currently available on UST’s website regarding the debt limit:

The US Government for years has been operating its budget with deficits, i.e. spending exceeding income. Congress sets limits on how much debt the US is legally allowed to carry, but has always been reluctant to do so.

Failing to increase the debt limit would have catastrophic economic consequences. It would cause the government to default on its legal obligations – an unprecedented event in American history. That would precipitate another financial crisis and threaten the jobs and savings of everyday Americans – putting the United States right back in a deep economic hole, just as the country is recovering from the recent recession.  

Congress has always acted when called upon to raise the debt limit. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. In the coming weeks, Congress must act to increase the debt limit. Congressional leaders in both parties have recognized that this is necessary. Recently, however, a number of myths about this issue have begun to surface.

That website page was last updated on January 29, 2016, which needs to be considered when reading the passage.

In order to increase the debt level, UST needs to present its case to Congress and, as we have learned from Taibbi’s piece, it’s clear that Treasury has not always been transparent and honest with their dealings with Congress.

UST practiced evil genius when they convinced Congress to raise the debt limit especially with its dealings associated with the conservatorships and the illegal expropriation of both company’s assets, in addition to the bailouts of TBTF.

UST was able to repeatedly request increases to the debt limit in order to “rescue” Fan and Fred, as well as for other rescue efforts. UST convinced Congress that allowing Fan/Fred to fail would be catastrophic to the US… and world economies. So, Congress provided additional funding to UST to “save” the economy – which required increases in the debt ceiling.

That’s called having your cake and eating it, too. The “rescue” actually profited UST and they received several increases to the debt ceiling along the way! Even though UST has profited from various bailout programs, the corresponding debt level increases were never reversed after the bailout money was returned. Neat trick!

The Congressional act that provided the Government with the ability to place Fannie and Freddie into conservatorship is called the Housing and Economic Recovery Act of 2008.

This Act was requested by Hank Paulson and basically raised the debt limit in the event that Fan and Fred needed to be rescued. At the time, Paulson (as well as James Lockhart, then FHFA Director) declared he was not sure that Fan/Fred would need to be rescued, but that didn’t matter – he got his debt limit increase that he requested. Congress raised the debt limit by $800 million. 

In an interview on September 8, 2008 on CNBC, Steve Liesman unsuccessfully tried a few times to have Paulson state how much the “bailout” was going to cost.

Liesman: Sorry, but I have to come back to this. There must be some analysis in your mind, is it in the tens of billions, in the hundreds of billions, how much are you prepared to pay?

Paulson: I don’t — there is no specific analysis. This was not — we didn’t sit there and figure this out with a calculator. This was about our financial markets, it was about confidence in the financial markets, confidence in our economy, and the validity of the mortgage finance.

Paulson could not provide a figure and instead said that placing Fan/Fred into conservatorship was more about building confidence. Sound familiar?

“It’s not based on any particular data point,” a Treasury spokeswoman told Forbes.com Tuesday. “We just wanted to choose a really large number.”

It sure appears easier to manage the finances of the US Government when Treasury Secretaries are allowed to receive more and more money to pay the bills. The problem never catches up with the Secretaries… they just blame the past Secretary and pass the problem to the next Secretary. Today, the US Government holds over $19 trillion of debt.

At the end of 2008 before President Obama took office, the national debt was approximately $8 trillion. Obama famously blamed his early problems on his predecessor. Obama is now set to return the favor and pass along nearly 250% more in debt to his successor.

It is clear that the “bailout” of Fannie Mae and Freddie Mac did not cost the US Treasury any money, rather they made billions (and counting) on the scheme. Plus, the Administration received additional debt ceiling increases after the one HERA provided in 2008.

Obviously, all of the debt limit increases were not related to the conservatorships of Fan and Fred. Though it does appear likely that “the most transparent Administration ever” does not want the actual facts behind how they conduct business – including their 10 debt limit adjustments (more that one per year!) –  to become public knowledge.

The cover-up can be worse than the crime… perhaps that’s why UST is fighting so hard to delay and conceal!

 

Will FNMA and FMCC Bring Extraordinary Returns to Investors This Summer?

By Katina Stefanova

July 26, 2016

Due to both the unprecedented actions taken by the government following the financial crisis of 2008, and the potential windfall that many private investors and hedge fund’s stand to gain, should a favorable decision be made on the plaintiffs’ case, Fannie Mae (FNMA) and Freddie Mac (FMCC) have been two of the most divisive stocks currently trading. Now, the issue comes to a head with greater urgency and more at stake than ever before as we seem to be inching slowly towards a legal resolution.

Simultaneously, the increased likelihood of a push for legislative reform following presidential elections and the pending earning reports due from the GSEs (August 2nd and 4th for FMCC and FNMA respectively) have drawn increased attention from investors. While there are dozens of cases currently underway across the country, the spotlight has been on the upcoming decision in the Perry Capital et al. v. Jacob J. Lew (the current Treasury Secretary) appeals case before the US Court of Appeals for the District of Columbia Circuit. On September 30, 2014 Judge Lamberth issued a controversial ruling on the case, declaring that while Third

Amendment, which was introduced to the arrangement in 2012, sweeps essentially all GSE profits the Treasury and is understandably controversial, he found the plaintiffs claim for injunctive relief on the grounds that the FHFA breached its fiduciary duties were inadequately supported. Many were surprised by the binary character of Lamberth’s ruling given his reputation as a traditional Republican. The plaintiffs responded to the ruling by appealing the decision, which is now being heard before a panel composed of Justices Ginsburg, Millet, and Brown. This specific appeal is the focus of our analysis as we believe it has the greatest impact on how other related cases still outstanding will be dealt with.

The panel recently surprised many observers by issuing a series of questions directed at the plaintiffs which seems to indicate there are some potential discrepancies between the Lamberth ruling and the panel’s view. Although the legal outlook is the most promising it has been since the Lamberth ruling, investors face other challenges.

The financial health of the two companies poses an additional risk to investors. The consequences of the net worth sweep have left cash reserves at precariously low levels of less than $2.5 billion for both Fannie Mae and Freddie Mac. Fannie and Freddie are also highly exposed to Treasury yield rates as well, 10 year notes hit record low yields this month of 1.35% (albeit before proceeding to rally higher at a record pace), reflecting further cause for due concern over the financial weakness of the two. So, stripped of any capacity to build a capital buffer by the introduction of the Third Amendment to the existing agreement between the GSEs and FHFA on August 17, 2012 and with only a little more than $1 billion remaining of Treasury capital left to cover any losses for each of the GSEs, any substantial Q2 loss for FNMA or FMCC would almost certainly result in another draw from the Treasury. It is difficult to assess the impact of such an event for investors.

Even if both entities post a profit in Q2 it remains likely that the two companies will need an infusion of capital from the Treasury at a date in the near future if the current arrangement persists given their current low cash situation. On the one hand, this could ultimately be to the benefit of investors, as a Q2 draw would likely attract the spotlight of popular political media to the ongoing tug of war for the fate of the GSEs. On the other hand, a further draw on the Treasury by FNMA or FMCC prior to the resolution of the outstanding appeals before the District of Columbia Circuit Court Appeals could also make it much harder for the plaintiffs to justify their case, if not in the eyes of the federal appeals panel, then certainly in the eyes of the public. Traumatic experiences of 2008 still loom large in Main Street’s memory, so regardless of the fact that the net worth sweep authorized by the government is what would most likely lead to the need for a further ‘bailout’ in the first place, a draw would still hurt the public’s perception of the plaintiffs’ case. Given the volatility of the situation and anticipation surrounding the upcoming earnings report, it is clear that this is a race against time. Ideally a legal outcome will be handed down before the capital situation of the GSEs deteriorates further declines– if the GSEs are forced to request additional funds before a legal resolution it would likely complicate the case against GSEs conservatorship greatly. Beyond concerns regarding government takeover of private property, the lack of a capital buffer coupled with the issue posed by the complete absence of meaningful legislative reform for the GSEs also is a threat to the existence of the affordable fixed rate mortgage and therefore the US housing market itself.

Attorney Tom Ogden at Wollmuth Maher and Deutsch LLP, whose dealings with litigation relating to the bailout of the GSEs have given him a familiarity with the issues at hand, provided some insight on the possible legal outcomes for the current appeals case. Mr. Ogden believes that it would be reasonable to expect a decision in this case before years’ end, although due to the volatile political nature and legislative interest, the considerable possibility of a legislative turnover in Congress, and the unusual circumstances surrounding this particular appeals case, the likelihood of any decision being made by the panel before the end of the presidential race is quite low. Whenever a ruling is passed however, there are three clear possible outcomes

An outright affirmation of Judge Lamberth’s ruling:

Given the highly unusual introduction of new evidence in the case before the appellate case by the plaintiffs, and the favorable nature of said evidence, this seems to be a very low probability outcome. Furthermore, considering the traditionally conservative leanings of Justices Ginsberg and Janice Brown, this seems to be the least likely outcome. In this scenario, there is also a possibility that the plaintiffs could successfully bring their case before the Supreme Court, although this would be a bit of a long shot as well.

An outright reversal of Judge Lamberth’s ruling:

This is the second least likely probability. Since this is an appeals case and appeals cases are typically made on previously established facts, the introduction of important information potentially contrary to that which Lamberth’s previous judgment was based on increases the probability of this outcome. The other factors mentioned above indicate that this remains a very low probability outcome however.

A remand back to Judge Lamberth from the Federal appeals panel with stipulations:

The third scenario outcome for the appeal is a remand of the case back to Judge Lamberth with some specific guidance on the law as to how to proceed. Many observers, including Mr. Ogden, see this as the most likely outcome. A partial reversal of some kind may also accompany such a remand, with some specific rulings against what Judge Lamberth did.

If the second scenario were to play out successfully, it would undoubtedly be the most beneficial outcome for investors. In this scenario it is highly like that both stocks could potentially reach a market value of $20, a price frequently cited by Bill Ackman, or more. Many observers have called for a 12-14x return on current share price in the event of a reversal of Lamberth’s ruling that enables recapitalization. The third scenario could potentially boost the twos stock prices as well, rising on the back of speculative buying. The worst case scenario for those long FNMA and FMCC, outcome one, would likely render the stock close to worthless for the foreseeable future.

Fannie Mae and Freddie Mac were originally created with the purpose of “promoting access to mortgage credit through the nation…by increasing the liquidity of mortgage investments and improving the distribution of investment capital available for residential mortgage financing” U.S.C § 1716(3). Fannie Mae and Freddie Mac don’t accomplish this through the origination of loans themselves however; they buy and guarantee loans, then bundle loans with similar characteristics and risk profiles into mortgage backed securities (RMBS), which are then sold to investors in a tranche based system. A particularly unique aspect of the US mortgage system, the fixed-rate mortgage loan, is made possible by the stability and liquidity FNMA and FMCC add to the secondary MBS market through the securitization and guarantee of these vehicles. No other nation offers such a product, instead issuing their mortgage loans on a floating interest rate basis. This arrangement essentially shifts massive amounts of risk from private investors to the US government.

The unique relationship between the GSEs and the private markets is a double-edged sword however; while it enabled rapid growth of home ownership and mortgage origination volume in the US by encouraging private investment and participation in the residential mortgage loan market, it also played a significant role in promoting a riskier market environment which precipitated the eventual meltdown of the US financial markets, leading to the eventual government conservatorship of FNMA and FMCC.

On July 30, 2008, Congress enacted the Housing and Economic Recovery Act (“HERA”), authorizing the Treasury to invest in the GSEs on the basis of the “systematic danger that a Fannie Mae or Freddie Mac collapse posed to the already fragile national economy.” In exchange for the Treasury’s funding commitment, which as of August 8, 2012 amounted to $187.5 billion in total, Fannie and Freddie provided the Treasury with senior preferred stock, entitling the Treasure to four principal contractual rights:

First, the Treasury received “[a] senior liquidation preference of $1 billion for each GSE plus a dollar-for-dollar increase each time the GSEs drew upon Treasury’s funding commitment. Second, [the agreement] entitled Treasury to dividends equivalent to 10% of Treasury’s existing liquidation preference, paid quarterly. Third, Treasury received warrants to acquire up to 79.9% of the GSEs’ common stock at a nominal price. Fourth, beginning on March 31, 2010, Treasury would be entitled to a periodic commitment fee “to fully compensate [Treasury] for the support provided by the ongoing [funding] [c]ommitment”, (12 U.S.C § 1716(3). Under government conservatorship, FNMA and FMCC have respectively paid out dividends of more than $31.5 and $26.9 billion in excess of the principal loan they received to the Treasury over the past few years. While the dividend was initially fixed at 10% for the Treasury’s senior preferred shares, the change in initial terms in 2012 to require a variable rate dividend payout has prevented the improvement of FNMA and FMCC’s balance sheets, despite these past returns. So, for the past 8 years, FNMA and FMCC have been required to give all profits to the government in excess of $3 billion. This has not only prevented common and junior preferred shareholder from seeing any returns on their investment, but the building of capital by either GSE as well, an important step towards profitability for the two in a post-conservatorship scenario.

It is this stipulation which the plaintiffs find to be the most egregious offense of all. From a philosophical standpoint they argue that the rights granted in the arrangement between the FHFA, Treasury, and GSEs effectively amounted to the nationalization of a once private company, a fundamental violation of America capitalist history and democratic values.

Beyond this point, their legal aim is to establish that actions of the FHFA and Treasury constitute a violation of their respective fiduciary duties. The plaintiffs have further argued that the bailout was an unnecessary action, as the losses of the FMCC and FNMA were both largely exaggerated and significantly inflated due to a difference between government accounting methods and standard practices. Investors with interests in the mortgage financing twins also point out that, as newly introduced evidence has indicated, the government only stepped in and took action to provide the GSEs the capital necessary to backup their guarantees on securitized loan products they sold once it had already become clear that the two firms were on the verge of recovery and profitably. On these grounds a number of hedge funds including Perry Capital, Fairholme Funds and Arrowhead Indemnity Company are suing the government in hopes of reversing the net worth sweep and reestablishing the two firms.

While a resolution to FNMA and FMCC investors’ plight will likely come from the courts, a legislative solution is also on the table. Hilary Clinton, who would be unlikely to support calls to recapitalize Fannie and Freddie or to release them, has shared her views on the restructuring of the firms in the past; her plan would likely call for the merging of the twins as well as the implementation of some sort of catastrophic loss backstop which would mean the placement of a large buffer of private capital before government (and therefore taxpayers) would absorb any losses. A plan recently put forward and consistent with previous views offered by Clinton, indicates that this is a likely path to legislative reform under a Hillary Clinton Administration. A paper co-authored by Gene Sperling, who has already been tapped by Hilary Clinton as a top adviser, along with other high profile financial thinkers such as Jim Parrott, Mark Zandi, Barry Zigas and Lew Ranieri, calls for the merging of the GSEs and cites figures upwards of $100 billion for a potential capital buffer. On the whole however, the likelihood of a legislative solution favorable to investors appears to be quite low. Congress is also hugely undecided about what to do with the two firms, making any near term legislative solution even more unlikely, particularly before the conclusion of presidential elections.

Leaving aside probabilities and speculation, for those who bought into the GSEs at fire-sale prices, it has been clear from the beginning that an FNMA/FMCC investment was always destined for a binary outcome – the potential of a 10x return or none at all brought out investors inner daredevil. For those who took the bait, the opening of more than 120 previously sealed documents in the appeals case currently before Justices Ginsberg, Brown, and Millet seems to have significantly increased the prospects of investors realizing a return on their bets (which did not look promising after the Lamberth ruling).

Due to both the content of the supplementary evidence filed by the plaintiffs and the inherently unusual introduction of new evidence in a case such as this one, a key point made by Mr. Ogden, this turn of events is the most positive point supporting hopes for a favorable outcome for the plaintiffs and their proponents since the disappointing ruling by Judge Lamberth. Although some type of judicial resolution will likely happen before the end of the year, the risks remain high and the possibility of a complete loss is still a present danger. As the month of July winds down and we head into another midsummer earnings season, those with an interest in the GSEs as well as observers who are hoping to move in off of the sidelines would be wise to keep an eye out for upcoming earnings reports.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Forbes). I have no business relationship with any company whose stock is mentioned in this article.
Note: I am conducting research on trends and opportunities for disruption in asset management (www.disruptinvesting.com). If you have insight into the topic, feel free to contact me.

Found: Mario Ugoletti

Up until now, finding a current picture of Mario Ugoletti (FHFA, US Treasury) has been a seemingly impossible task.  The only picture produced via a Google search is from Mr. Ugoletti’s high school yearbook.

mario

I recently realized that Ugoletti must have attended Congressional testimony with either Ed DeMarco or Mel Watt.

I came upon this picture of Ed DeMarco testifying with FHFA GC Alfred Pollard to the right of DeMarco and someone I thought might be Ugoletti on the left.

I also realized that Ugoletti attended the Financial Stability Oversight Council on behalf of FHFA with Watt.  So, I searched for a picture of Watt at FSOC meetings and look whose name is in front of the same gentleman from the picture above.

Ugoletti

MU card

So, we’ve finally cracked the “Where’s Mario?” mystery!

Below is the link to the testimony where Ugoletti accompanied DeMarco. This is the testimony where protesters interrupted the proceedings.

Mario looked much happier in high school. Hmm, wonder why…?  Though he did seem amused by the protesters. Pollard looked like he almost had a heart attack…!

http://www.c-span.org/video/standalone/?c4391418

Bright Ideas

Michael Bright and Edward DeMarco released a paper for the Milken Institute in June, Why Housing Reform Still Matters regarding Fannie Mae, Freddie Mac and the future of the US secondary housing market.

Apparently, this paper is the first one in a four-part series. What’s interesting is that Mr. Bright just joined Dr. DeMarco in June at the Milken Institute.

The Milken Institute was founded by Michael Milken, who in March 1989 was indicted by a grand jury on 98 counts of racketeering, fraud, insider trading and tax evasion.

From its website:

The Milken Institute is a nonprofit, nonpartisan think tank determined to increase global prosperity by advancing collaborative solutions that widen access to capital, create jobs and improve health. We do this through independent, data-driven research, action-oriented meetings and meaningful policy initiatives.

The institute is funded through different levels of sponsorship and strategic partnerships. One of Milken’s strategic partners is Citigroup, the company that agreed to a $7 billion settlement in July 2014 for packaging and selling bad mortgages to Fannie Mae and Freddie Mac. These practices, along with those at dozens of other banks, led to the 2008 financial crisis.

Though Milken Institute dubs itself as independent, strategic partners like Citigroup would likely expect a return on their investment. And Citigroup, along with the nation’s other mega-banks, has a vested interest in the outcome of housing reform.

Bright and DeMarco in their recent paper call for the elimination of Fannie and Freddie by merging them and then renaming the new entity where “…it could be folded into a government agency that provides the catastrophic guarantee for MBS (such as a Federal Mortgage Insurance Corp., a National Mortgage Reinsurance Corp., or simply Ginnie Mae).”

Our good friend Joe Light analyzed the plan writing for Bloomberg stating:

“DeMarco and Bright want to see Fannie Mae and Freddie Mac converted into mutual companies, owned by lenders, that would sell insurance against defaults instead of buying and securitizing mortgages. As they do now with Federal Housing Administration loans to less-wealthy borrowers, the lenders would issue mortgage-backed securities under the auspices of Ginnie Mae. As an exception, Fannie Mae and Freddie Mac could still buy loans directly from small lenders, the authors said.”

In other words, big banks, like Milken’s strategic partner Citigroup, will inherit a share of Fannie and Freddie’s business if they are eliminated per Milken’s recommendation.

By now, everyone is aware of the Wall Street-Washington revolving door. Banks support their executives taking on bank regulating roles in government where they can influence laws and regulations that ultimately benefit mega-banks. Those executives then return to Wall Street as heroes.

One WS/DC revolving door executive is none other than Michael Bright.

In the years leading up to the 2008 financial meltdown caused by unethical and illegal practices by mortgage lenders, Bright worked as a top executive at Countrywide and Wachovia from 2002 – 2008. Both of these companies needed to be rescued by larger banks in the wake of the crisis, which the parent banks eventually paid billions of dollars on settlements relating to faulty mortgage practices at Countrywide and Wachovia.

Was Michael Bright charged with wrongdoing while he was an executive at Countrywide or Wachovia?

Of course we know that no executive was ever charged with crimes that brought about the 2008 financial crisis.

Then surely Mr. Bright’s career must have suffered by his involvement with two collapsed mortgage companies?

Well, you likely know that’s not true either.  The following is Bright’s career path as listed on his Linkedin profile:

Countrywide: 2002 – 2006

Wachovia: 2006 – 2008

Office of the Comptroller of the Currency – U.S. Department of Treasury: 2009 – 2010

Senior Advisor to Senator Corker: 2010 – 2014

BlackRock: 2014 – 2015

PennyMac: 2015 – 2016

Milken Institute: June 2016 – Present

So, after his leadership at collapsed Countrywide and Wachovia, Bright went to work for the Treasury. Here’s what it says about the OCC on their website.

“The OCC charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks. The OCC is an independent bureau of the U.S. Department of the Treasury.

Mission: To ensure that national banks and federal savings associations operate in a safe and sound manner, provide fair access to financial services, treat customers fairly, and comply with applicable laws and regulations.”

Apparently, the qualification to become a bank regulator is to first have experience with a collapsed bank. Isn’t that like saying the qualification to become Fire Chief is to first become a master arsonist?

Where does a failed banker turned bank regulator go next with his career? Of course, the next step in the career path would be to join Senator Bob Corker’s office as the Senior Financial Policy Advisor. While working for Corker, Bright was the principal author of “Corker-Warner” and later “Johnson-Crapo” housing finance reform bills that called for the elimination of Fannie and Freddie.

Any good revolving door executive knows when best to revolve from government back to Wall Street. Next up for Bright was his move to BlackRock.

Here’s how Bright’s career path was described in the article: Fannie Mae: Former Staffer Behind FMIC Goes To BlackRock

“You may remember there was a bit of controversy last April when it came out that the Corker-Warner bill to replace (Fannie and Freddie) with a new government agency was largely written by former Countrywide Financial exec Michael Bright, now working as Senator Bob Corker’s senior financial advisor. Corker-Warner has since morphed into Crapo-Johnson, which kept the same basic framework in place, but critics still argue that Crapo-Johnson’s proposed FMIC would benefit Wall Street at the expense of smaller banks and homeowners.

Bright has never been accused of any wrongdoing, but for him to move from the heart of the subprime crisis to an important government position, influencing the future of the US mortgage market is jarring. For him to take a job with BlackRock…who lobbied Senators Corker and Mark Warner during the process, seems to confirm people’s worst fears about the revolving door between Washington D.C. and private interests.”

The Door Keeps Spinning

Bright’s seven month tenure at BlackRock was followed by a Senior Vice President position at PennyMac. For those unfamiliar with PennyMac, the mortgage finance company is basically a reincarnation of Countrywide founded and staffed primarily with former Countrywide executives.

Countrywide: It’s baaack  PennyMac is “…headed by the former executives of the most notorious subprime lender of the era that led to the financial crisis… ‘There’s free money on the table and you don’t have to work that hard to get it, especially if you are the former executives of Countrywide,’ says Michael Widner, an analyst who covers PennyMac at brokerage firm Stifel Nicolaus. ‘You’ve done this before.’”

Bright lasted twice as long at PennyMac than BlackRock clocking in a full 14 month tenure there.

Now onto Milken Institute, the independent think tank. At Milken, Bright is the Director of the Center for Financial Markets. DeMarco is a Senior Fellow for the same group. Joining Bright and DeMarco at the Center for Financial Markets is Aron Betru, Managing Director (formerly with Goldman Sachs) and Staci Warden, Executive Director (formerly with JP Morgan and US Treasury).

Bright also counts the fellow travelers at Mortgage Bankers Association (MBA) among his friends. While at PennyMac, Bright was asked to join an MBA task force charged with recommending action on housing reform.

As described by MBA: GSE Reform Legislation 

“MBA has convened a Board of Directors-level Task Force to address many of the outstanding questions surrounding GSE reform. That task force plans to unveil its recommendations in the second half of 2016.”

Though the recommendations have not been released, the following is what MBA supports:

  • An explicit federal guarantee for mortgage securities
  • Private capital in a first-loss position, backed by a federal insurance fund in the event of catastrophic losses
  • Single, highly liquid security delivered through a common securitization platform
  • Preservation of key GSE infrastructure – technology, systems, data and people – by transferring them to any new or reconstituted entities created by GSE reform

What both Milken and MBA are recommending is to merge Fannie and Freddie into one entity – back the securities with a federal guarantee and to back the entity with catastrophic loss insurance.

How is this new scheme with less competition and enhanced government support supposed to protect “the taxpayer” any better than the current structure?

Further, those that back this recommendation obviously want “something for nothing.” Common Securitization Solutions (CSS) is the company that was developed by Fannie and Freddie and paid for by Fannie and Freddie’s shareholders. CSS will manage a “single, highly liquid security” and will be administered “by key GSE infrastructure – technology, systems, data and people.”

I’m on the edge of my seat waiting for the next three Milken papers, as well as the recommendations from the MBA task force on housing finance reform.

I just can’t wait to learn more of those Bright ideas…

Five Questions with Jim Parrott

Jim Parrot’s misdeeds relating to the Fanniegate scandal are beginning to see the light of day.  The following is an interview Mr. Parrott did in March 2014. 

Parrott

Five Questions with Jim Parrott, senior fellow, the Urban Institute

MARCH 2014 EDITION

Jim Parrott, former economic adviser to President Obama, left the White House earlier this year to join the Urban Institute as a senior fellow, and to start Falling Creek Advisors, which provides financial institutions with strategic advice on housing finance issues. In the White House, Parrott served as a senior advisor with the National Economic Council (NEC). Prior to joining the NEC, Parrott was counsel to the secretary of the US Department of Housing and Urban Development (HUD).

Among Parrott’s publications for the Urban Institute is a paper, “Opening the Credit Box,” co-authored with Mark Zandi of Moody’s Analytics. It makes the argument that the country’s long-term economic health may hinge on easing mortgage-lending standards in ways that extend loans to more creditworthy borrowers. The Score connected with Parrott recently in Washington, D.C., and he graciously agreed to answer some questions about the paper, and to share his perspective on other pressing issues. [Note that our conversation took place shortly before U.S. Senate Banking Committee leaders released their proposed legislation to overhaul the mortgage finance market on March 16.]

1) Why have lenders been reluctant to expand access to mortgage credit, and do you see the credit box opening over the next year?

There are several factors that have been holding back access to credit in recent years. First, there is a general reticence by larger institutions to take on credit risk after coming through a credit-driven crisis. It is just harder these days for the mortgage banker to go to their bank’s chief risk officer (CRO) for more flexibility to take on risk, given that the CRO is likely still working through the damage that the last expansion of credit risk did to their institution.

Second, there are significant costs associated with servicing non-performing loans. Not only is it roughly ten times more expensive to service a non-performing loan than one in which the borrower continues to pay on time, but lenders today face increasing reputational and legal risk in servicing pools containing significant numbers of distressed borrowers. This leaves them wary of expanding their credit box where doing so will eventually leave them with larger numbers of borrowers who need more help hanging on to their homes.

And third (on what could be a much longer list), there is a great deal of uncertainty over the rules in GSE [Government-sponsored enterprise, i.e., Fannie Mae and Freddie Mac] and FHA lending. In particular, it is unclear when and why Fannie, Freddie or the Federal Housing Administration (FHA) will force a lender to take the credit risk back on a loan they have guaranteed or insured for mistakes in underwriting the loan. FHA lenders also have the added risk that the Department of Justice will file a claim for triple damages under the False Claims Act for such mistakes. The uncertainty of what constitutes a mistake makes it difficult for lenders to control this considerable risk through better quality control, so they control it instead by tightening the credit box through which they lend. For more on this, it’s worth taking a look at the paper Mark Zandi and I published back in September, “Opening the Credit Box”.

All of that said, I’m cautiously optimistic that we’ll see the credit box open in the months ahead, if only gradually. The larger institutions are already showing increasing comfort with taking on more risk as the market continues to improve. And while the significant cost of servicing distressed borrowers is not likely to decrease anytime soon, policymakers can make headway in addressing the third driver I mention, put-back uncertainty. FHA has already spent months working with lenders to understand why they are applying credit overlays, and seem to be a few months away from attempting to address the problem. For more on this effort take a look at this piece. And while a similar effort by the GSEs back in late 2012 fell short of expectations, I would expect- or I should say hope- that Director [Mel] Watt will push the GSEs to take another run at addressing the problems there.

2) In what areas do you expect Mel Watt, Director of the Federal Housing Finance Agency, to have the greatest impact?

Director Watt is by nature much more cautious than most appreciate. Unlike his more ardent critics and perhaps some of his most ardent supporters, I don’t see him moving aggressively or controversially in the early months, but taking his time to understand the different perspectives involved on the major issues he faces and seeing where there are areas for consensus on a path forward.

As for the topics he is most likely to focus on, I hope he chooses two areas: the first is expanding access to sustainable credit, which I’ve just explained a bit, and the second is what I think of as near-term GSE reform. There is an important opportunity for FHFA to put the GSEs into a more stable position while in conservatorship and, at the same time, better prepare them for transition to whatever future system Congress ultimately decides on. They can do this by focusing on two areas:

First, they can increase the number and scale of Fannie and Freddie’s risk-syndication pilots. Whatever one’s view of long-term reform, we all agree that it will involve much more private capital ahead of any government risk. So it is critical that we develop a better sense of how to bring in private capital ahead of the government risk. The pilots are designed to do precisely that, but they will only be informative as we increase the scale and range of the pilots involved. Only with multiple iterations of multiple structures can we compare back-end risk syndication through the capital markets and front-end risk sharing through mortgage insurers, for instance. Determining which of these structures works best, and how, is going to be essential to the direction long term reform ultimately takes, so better to begin learning now.

Second, the FHFA can begin to sync up the operations of Fannie and Freddie so that the two begin to function more and more as a single infrastructure for the mortgage market. This is a more efficient way for the enterprises to work while in conservatorship and it will put us in a better position to transition to whatever future system congress decides upon, because that system will inevitably involve a single core operational infrastructure rather than the multiple competing ones we have today (see both Johnson-Crapo and the PATH Act). The common securitization platform is an important first step, but the FHFA can also begin the move towards a single security, a single set of pooling and servicing agreements and even a single framework for master servicing agreements.

But that’s just my wish list. As I said, Director Watt is cautious by nature and, consistent with that, he views his mandate narrowly. So whether he moves on either of these fronts will depend on whether he comes to view access and/or near-term GSE reform as central to his job as a conservator. I am optimistic that he gets there on access, and hopeful that he does on near-term GSE reform.

3) Speaking of reform, now that we have movement the Senate Banking Committee, how do you see the legislative effort on housing finance reform shaping up over the summer?

If Senate Banking can get a bill out of their committee, then things are going to get interesting this summer. If they get it passed with strong bipartisan support in April, which is when Chairman [South Dakota Democrat Tim] Johnson and Ranking Member [Idaho Republican Mike] Crapo are trying to bring it for a vote, then there will be a good deal of pressure for Majority Leader [Nevada Democrat Harry] Reid to bring the bill before the full Senate for a vote. With strong support from the leaders on this topic from both sides of the aisle and the Administration, whatever makes it out of the Banking Committee is likely to have a very good chance of passing out of the Senate.

If that happens, then it would set up a fascinating dynamic with the House. Chairman [of the U.S. House Banking Committee, Texas Republican Jeb] Hensarling has passed a GSE reform bill out of the House Financial Services Committee that reflects the antagonism many House Republicans have for any government support of the market beyond the targeted support provided by FHA, VA and USDA. So they will naturally be suspicious of whatever more moderate bill ultimately comes out of the Senate. However, they are bound to realize that the political momentum on this issue is not in their favor. If we don’t pass something in this congress, it will become increasingly hard to muster the political fortitude to push reform as dramatic as that currently envisioned by the Banking Committee. So if the Senate does manage to pass something, the House will face a choice: either negotiate over the structure by which the Senate proposes to provide broad if remote government support for the market (not over whether there is such support at all as they do now), or allow the current nationalization of the housing finance system to go on indefinitely and run the very real risk that it becomes the new norm.

4) Changing topics a bit, how do you see the QM rule affecting lending in coming months?

I think early on we’ll see the biggest impact on middle class borrowers with anything less than perfect credit. Larger lenders will lend to wealthy non-QM borrowers because they want them as clients for other products. And they’ll lend to those with perfect credit scores because they don’t mind the minimal credit risk on their balance sheet. But those non-QM borrowers who don’t fall into either bucket will not be able to find a loan over the near term.

Hopefully this will change as you see a secondary market develop for these loans, allowing lenders (large and small) to make the loans without holding them in their portfolios. Unfortunately, we’re likely a ways off from that yet, given the frictions that are holding back the return of the PLS [private label securities] market.

5) Since you’ve raised the issue, how do we get private capital flowing back into a robust private label securities market?

This is a good question to ask, not only because it’s important, but also because folks have not been thinking about the issue very clearly in recent years. Most focus on getting the government out of the way, either by pricing them out of the market or lowering the maximum loan-size they can support. The assumption here is that it’s the government’s competitive advantage that is keeping private capital out.

The problem is that there are also other barriers to the re-emergence of a strong private label securities market. After being burned so badly in the downturn, investors don’t trust issuers, the ratings agencies or those that are underwriting the collateral on their investments. In essence, they don’t trust those on whom they depend to understand the credit risk on their investments. Until they do, they won’t step back into the market aggressively and we won’t see a robust PLS market.

So if you pull the government out of the market before you restore that trust throughout the system, you’ll create a credit wasteland beyond the border of government support, not bring private capital back. Fortunately you’re seeing policymakers beginning to think about this the right way. See, for instance, Treasury senior advisor Mike Stegman’s speech in New York a few weeks back.

 

Timothy Bowler, Part 2

This post is a follow-up to a February 1, 2015 post regarding Timothy Bowler. In that post, there is mention of the revolving door problem between Wall Street and Washington, DC, though it did not mention President Obama’s Executive Order 13490 — Ethics Commitments by Executive Branch Personnel. That Executive Order will be addressed here.

Timothy Bowler had worked for Goldman Sachs prior to working for the Treasury Department, where he worked as Deputy Assistant Secretary for Financial Stability from 2011 to June 2015. Apparently, Mr. Bowler has returned to Goldman Sachs. I personally was unable to verify this fact (although his LinkedIn page states he is currently a Managing Director at Goldman Sachs… not sure if that is updated), but rather rely mainly on what Josh Rosner mentioned in an April 2016 tweet.

Rosner

Based on Mr. Bowler’s actions, it appears that he violated the Executive Order twice – once upon joining the government and again when he left the government.

The previous February 2015 post had Mr. Bowler describing how Goldman Sachs could take a share of Fannie and Freddie’s business – Mr. Bowler was quoted in a July 2011 article…the same month he went from GS to Treasury.

By now, we know that Tim Bowler was a key architect of the Third Amendment to the PSPAs.

For those who want further proof, Jeff Foster pointed out in his deposition:

“FOSTER: There were a number of people that were working on the PSPAs.

PATTERSON:  And who were they?

FOSTER:  To my knowledge, myself, counsel, Tim Bowler, Michael Stegman, Mary Miller and Adam Chepenik, Beth Mlynarczyk. There were many people working on it.”

Additionally, the record is extensive that proves Mr. Bowler’s focus while at Treasury was his work to put Fannie and Freddie out of business.

The following passage is the Exec Order than banned Mr. Bowler’s activities:

  1. Revolving Door Ban   All Appointees Entering Government. I will not for a period of 2 years from the date of my appointment participate in any particular matter involving specific parties that is directly and substantially related to my former employer or former clients, including regulations and contracts.

The above passage referred to Tim Bowler’s actions when he joined the government. However, Mr. Bowler is also apparently in violation of the next two passages, as well which relates to his departure from his high-ranking government position.

  1. Revolving Door Ban   Appointees Leaving Government. If, upon my departure from the Government, I am covered by the post employment restrictions on communicating with employees of my former executive agency set forth in section 207(c) of title 18, United States Code, I agree that I will abide by those restrictions for a period of 2 years following the end of my appointment.
  1. Revolving Door Ban   Appointees Leaving Government to Lobby. In addition to abiding by the limitations of paragraph 4, I also agree, upon leaving Government service, not to lobby any covered executive branch official or non career Senior Executive Service appointee for the remainder of the Administration.

The White House visitor log shows that Tim Bowler has attended several meetings regarding housing finance. These records are for 2015 — the 2016 log will not be released until January 2017. The log shows that Mr. Bowler visited the White House seven times from when he left the government in June 2015 to December 31, 2015. Mr. Bowler was even a guest of the Obamas for a large Thanksgiving celebration on November 28, 2015.

The other six meetings were hosted by the National Economic Council (NEC), the White House group responsible for housing finance (and where Michael Stegman worked while at the White House, after his Treasury position).

Mr. Bowler met with Adrienne A. Harris, Special Assistant to the President for Economic Policy, National Economic Council at the White House on October 13, 2015.

Mr. Bowler returned two days later to meet with NEC staff again on October 15, 2015. This time, Mr. Bowler was accompanied by Adam Chepenik, Deputy Director at U.S. Department of the Treasury. Mr. Chepenik was a co-author of the Third Amendment.

On several occasions (10/27, 11/16, 12/1 and 12/16) large groups of attendees, including Tim Bowler, met with NEC staff.

Here is a sampling of attendees at one meeting (11/16):

Elaine Buckberg, Stephen Campbell and Julian Colbert (Assistant Secretary for Legislative Affairs) from Treasury. Plus, two attorneys from Treasury — Brendan Crimmins and Mark Kaufman.

Monique Rollins, Director of Capital Markets at Treasury (who reported to Tim Bowler when he was at Treasury)

Ms. Rollins gave a presentation in February 2016 outlining Treasury’s commitment in revitalizing the private label securitization mortgage market (if you’re keeping score at home more PLS likely means less Fan/Fred business; more PLS means more business for Tim Bowler’s GS).

Also from Treasury: Mark McArdle, Office of Financial Stability and Deputy Assistant Secretary Housing & TARP; Glen Sears, Deputy Assistant Secretary for Legislative Affairs Housing, Banking and Finance; and Sam Valverde, Senior Advisor to the Under Secretary for Domestic Finance.

From HUD: Edward Golding, (formerly from Urban Institute and FMCC); Thomas Heinemann, Senior Legislative Advisor; Benjamin Metcalf; Erika Moritsugu and Theodore Tozer, President of Ginnie Mae (likely recipient of Fan/Fred business if they were wound down)

Two former government officials were also at this meeting, which could indicate that they too violated the Revolving Door executive order:

Olga Gorodetsky, Managing Director, MAX Exchange (Mortgage Asset Exchange)– former Senior Policy Advisor at Treasury – left July 2015

Beth Mlynarczyk, VP Two Harbors, A REIT company – former Senior Advisor to the Counselor on Housing Finance Policy at Treasury until 2014

Each of the other meetings listed above that Mr. Bowler attended were similar as far as 20+ attendees of high-level current and/or former government officials.

This blatant disregard for the law is disturbing. Everyone attending these meetings would have known that Tim Bowler was breaking the law by his presence…especially the Treasury lawyers who attended the meetings with him. Those lawyers, and everyone else present, participated in this legal wrongdoing.

One meeting, on 10/27/15, Karen Dynan was in attendance. Dr. Dynan, Assistant Secretary for Economic Policy, is a very high-ranking Treasury official. Incredible…

It is obvious that no government official is concerned with either directly violating this Executive Order or indirectly assisting the violation by participation. This revolving door executive order takes two to tango, right? One to violate and the other to allow violation…

Perhaps these activities are a sampling of the general view of Administration officials that they are untouchable… above the law. No oversight department or agency will go after any other executive branch official.

And it’s clear that no legislative oversight committee is interested in holding executive branch officials accountable.

Perhaps our last hope is the judicial branch…

And as far as the Fourth Estate, the country’s Media, there exist fewer investigative journalists that pursue these types of stories.

If a Fifth Estate exists it would likely be the Banking and Financial Elite — that appear to have an omnipotent hidden hand — that control everything in this country. Could this oligarchy be the source that offers unlimited protection to government officials’ wrongdoing?

Would this Fifth Estate government official protection (sound like the Mafia?) extend to all wrongdoers in Fanniegate? It may be the only explanation of why so many (revolving door) officials feel so comfortable breaking so many laws…

Or can those of us that know the truth stand up to Goliath?

Ugoletti Deposition Highlight

BY MR. THOMPSON: Q. Okay. Now, you did not raise the topic of the Net Worth Sweep with the companies until just a couple of days before August 17th; is that right?

UGOLETTI: I do not recall ra- — I did not raise the topic with them. I’m not sure when Acting Director — I can’t, on this time line, I can’t recall when Acting Director DeMarco actually — and I’m pretty sure he called both companies and talked them through it. They did get a copy of what became close — what became the final version to review. But that’s, that’s — in terms of the time line, that’s as far as I can remember.

BY MR. THOMPSON: Q. But they weren’t involved in the negotiations over the Net Worth Sweep, were they?

A. No. They weren’t involved in negotiations over the PSPAs or any of the amendments to the PSPAs, or this amendment to the PSPA.

Q. But this amendment to the PSPA was driven by a perceived problem, right?

BY MR. THOMPSON:  Q. A problem that their funding commitment might be exhausted, right?

A. Right, and you’ve showed me enough of their views on what they thought the base case looked like, so why — what — so I understand what their views were.

Q. Okay. But my question is: Why not talk to them and see if they have thoughts on whether there are different alternatives to solve this problem?

A. Just not an issue that we would talk to the companies about.

Q. You didn’t value their opinion?

UGOLETTI: We valued their opinion and, their opinion and understand what their opinion is, I understand it.

BY MR. THOMPSON: Q. Okay. What was their reaction when they told all of their income would be swept to the federal government?

UGOLETTI: I don’t, I don’t recall a specific reaction that I could sit here and say —

BY MR. THOMPSON: Q. Well, a —

A. — this, this CEO said that, that CEO said that, I don’t recall, I don’t recall a specific one.

Q. Do you have a recollection of the general reaction?

A. Well, I think their general reaction was they probably were not too happy about it.

Q. Why not?

A. Well, in many camps within Fannie Mae and Freddie Mac, I mean, I think there were people, they, they certainly never liked the Treasury Department saying that they were going to be wound down. They  didn’t want to be wound down, right. You don’t want to be wound down. You want to be Fannie Mae and Freddie Mac. So to the extent that they perceived this as further somehow taking that possibility away, they might not have been very happy about it.

 

When it comes to Mr. Ugoletti, everyone immediately focuses on the DTAs. That is obviously a big deal.  

However, the above passage is also pretty significant… 

Where in this exchange is there discussion about preserving and conserving the companies’ assets? Where is the intent “…of returning the entities to normal business operations?” (J. Lockhart’s words 9/7/08)

This deposition makes explicitly clear that the Conservator rather worked with Treasury over the boards and senior leaders at Fannie and Freddie.  Remember, the original executive teams were replaced with FHFA hand-picked leaders.  And still, FHFA did not care to consult with the companies’ leadership teams on this vitally important matter.

This part of the deposition is damning evidence that both FHFA and Treasury conspired to defy the laws outlined in HERA. Here is a senior official who worked at FHFA, and Treasury before that, stating their focus was to put Fannie and Freddie out of business.  

And Mr. Ugoletti makes it clear that Treasury was making the decisions regarding Fan and Fred… not the Conservator as required by law.

It is a clear admission of guilt… 

http://gselinks.com/Court_Filings/Fairholme/13-465-0304-Unsealed-Exhibits-C-through-I.pdf

 

Foster Deposition Highlight

July 14, 2015 Deposition of Jeff Foster, Senior Policy Advisor at US Treasury 2009 – 2012

Mr. Patterson refers to Pete Patterson of Cooper and Kirk, attorney for plaintiffs

PATTERSON: How did the net worth sweep help achieve the objective of ensuring that the GSEs would be wound down and would not be allowed to return to the market in their prior form?

FOSTER: The net worth sweep and the third — the third amendment supported the wind-down of Fannie Mae and Freddie Mac to allow the size and the scope of the portfolios and guarantee book to be shrunk gradually over time, which would lower/reduce their ability to generate net income, which would reduce their ability to cover fixed income dividend payments and, therefore, the net worth sweep would have supported the execution of that wind-down policy.

PATTERSON: And then it says that feature of the third amendment, I’m assuming says this will help achieve several important objectives, including the objective that we’ve discussed. So I guess my question is, how would moving to the net worth sweep dividend advance the commitment that the GSEs would be wound down and not be allowed to return to the market in their prior form?

FOSTER: So in order to be able to wind down the GSEs in a safe and responsible manner, we needed to be able to reduce — well, Congress or FHFA would have needed to reduce the size and the footprint of the GSEs or Fannie Mae and Freddie Mac’s retained portfolio and guarantee books. That reduction in footprint would reduce their ability to generate net income. Reduce net income generation capacity would reduce its ability to meet any fixed income dividend payments under a variety of — almost under any scenario and, as a result, to be able to support the wind-down, a more flexible dividend structure supported that.

Jeff Foster’s testimony is a clear admission of guilt by clearly stating the purpose of the Third Amendment was to put Fannie and Freddie out of business. 

It is also interesting to see on Mr. Foster’s LinkedIn page that his accomplishment at Treasury was:

“Led policy work to help the housing market recover and reform the housing finance system.”

…he accomplished the housing market recovery and reformed the housing finance system by facilitating the destruction of Fannie and Freddie prior to creating an alternative or replacement system?

Under “Publications” Mr. Foster lists:
Reforming America’s Housing Finance Market
February 2011
White paper Treasury team wrote that continues to be the foundation of housing finance reform

In this paper it states: “Winding Down Fannie Mae and Freddie Mac on a responsible timeline: The Administration will work with FHFA to determine the best way to responsibly reduce Fannie Mae and Freddie Mac’s role in the market and ultimately wind down both institutions, creating the conditions for private capital to play the predominant role in housing finance.”

Is this not further proof that FHFA has not acted independently as mandated by law? Mr. Foster makes clear that the conservator never intended to restore Fannie and Freddie and that FHFA has all along worked hand-in-hand with Treasury to destroy these two privately-owned companies.

What further proof is needed?