Comment Detail

Comment

THERE IS NO LEGITIMATE REASON TO CONTINUE HOLDING FANNIE MAE AND FREDDIE MAC
IN CONSERVATORSHIP.

The taxpayer has already been the beneficiary of
the best deal since the Louisiana Purchase. Declare victory !
This morning’s third quarter earnings reports from Fannie Mae and Freddie Mac
should put the last nail in the coffin for anyone who still believes the two companies should
continue in what has become one of the longest conservatorships in history. (At this point, tied
with Britney Spears!) Both reported strong earnings and increasing capital. So much so that
as it currently stands, neither would require a dime of government assistance to get through a repeat
of the 2008 financial crisis. This should come as no surprise to close observers of the GSEs, for it marks nearly a
decade of solid financial performance coming off the crisis. And, as we have learned (see What
Happened, Why it Happened, and How to Fix It), the earnings hits they were forced to book during
the crisis were largely ‘paper losses’ forced upon them by their government overseers. But when
those losses later had to be reversed, instead of crediting the money back to the companies, the
government kept it, spending it on a host of non-housing related purposes instead. (Turns out the
2008 ‘bailout’ was really a ‘stick-up’.) Whether or not you agree with the Bush
Administration’s 2008 decision to seize Fannie and Freddie is immaterial at this point. For as it
now stands, the government, through warrants, owns 79.9 percent of their common shares. (The
rest are owned by public shareholders – including me and my family.) Thanks to something called
the “net worth sweep”, however, the government maintains it is entitled to 100 percent of their
earnings and equity – in perpetuity! Really? Uncle Sam now a mob lender?
What Biden needs to do.
• Appoint a permanent FHFA director.
Once past the current controversies which
seem to have consumed most of the
Administration’s bandwidth, the President needs
to appoint a permanent head of the Federal
Housing Finance Agency. There are two current
candidates, Acting Director Sandra Thompson
and Michael Calhoun, director of the Center for
Responsible Lending. Both would be excellent
choices.
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• Junk Calabria’s Enterprise Capital Rule
and propose a new one.
Upon clearing Senate confirmation, the
new director’s first order of business should be to
throw out the previous administration’s enterprise
capital rule. You will recall that on his way out
the door, former FHFA director Mark Calabria
imposed an onerous 4-plus-percent capital
requirement on Fannie and Freddie. This, even
though virtually every submission FHFA received
during the public comment period stated that it
should have been closer to 2½ percent. Calabria,
a long-standing Libertarian who came into the job
with the pre-conceived notion that the GSEs
should be required to hold “bank-like capital”
(even though they aren’t banks and don’t take the
kinds of risks banks do) ignored them all and did
it his way. While not enough capital puts the
taxpayer at risk, too much capital impedes the
very purposes for which the GSEs were formed:
to make available – in good times and bad – the
funds necessary for middle- and low-income
Americans to buy a home and participate in the
American Dream.
• Formulate a Consent Agreement.
A Consent Agreement allows the
Administration to put whatever restrictions it
deems desirable on the GSEs as a condition of
their being released from conservatorship. One
obvious requirement would be that they meet a
certain level of capital by a certain date. With the
Enterprise Capital Rule being changed to, say 2½
- 3 percent, they could quickly tap the public
markets to meet whatever goal is set.
A Consent Agreement also allows the
Administration to achieve its policy goals (i.e.,
Affordable Housing) and bind the GSEs in a
number of other ways. For instance, it could
specify that the proceeds of the monetization of
the government’s warrants should be set aside
into a fund dedicated to providing down payment
assistance for certain qualified first-time
homebuyers. This would literally open the door
to the American Dream to thousands of people in
every congressional district.
A Consent Agreement could also lock in a
number of so-called ‘reforms’ which have already
been put into effect. For instance, for years,
community banks complained that Fannie and
Freddie gave volume discounts to the big banks.
That has now changed. Meanwhile, the big banks
complained the GSEs were able to use their
favorable borrowing rates to acquire mortgages
cheaper than they could. That, too, is now out the
window. A Consent Agreement would codify
these ‘reforms’ into law.
Finally, a consensus seems to be forming
that the GSEs should be regulated like utilities.
(Mr. Calhoun and Lou Ranieri, among others,
recently published on this.) In return for their de
facto monopolies, Fannie and Freddie earnings
would be capped at a level high enough to
promote their statutory goals while at the same
time allowing outside shareholders a fair return on
their investment. Again, this is something which
could easily be accomplished via a Consent
Agreement.
• Declare the government repaid in full.
There should be no question about this as
it is a matter of simple arithmetic (and basic
fairness). The government advanced $193 billion
and was paid over $100 billion more in return. So
long as two-plus-two still equals four, the
government’s sleight-of-hand accounting fails.
The retention by the GSEs of Morgan Stanley
and JPMorgan is an indication that there are huge
amounts of private capital waiting on the sidelines
for this to happen.
No longer a piggy bank.
After, as one judge put it, “siphoning”
their profits for a decade, in late 2019, the
government finally allowed the GSEs to begin
retaining profitsto build up what by then was their
virtually non-existent capital accounts. True, for
every dollar of earnings they retain, the
government gets an offsetting credit as a
‘liquidation preference’. But it can only collect
on this ‘preference’ if the companies are
liquidated. Fat chance. That being the case, the
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government no longer has an incentive to allow
the present situation to go on. (Especially since it
prevents it from realizing the $100-$150 billion
for its warrants in the meantime.)
The proof is in the stress tests.
As proof that the taxpayer is no longer at risk, one
need only look to the last two stress tests. They
show that were there to be a repeat of the 2008
financial crisis, neither company would require a
dime of government assistance – even at their
present low level of capital! And capital raises
from the private sector will further insulate the
companies from ever needing a future bailout. So,
why are these companies still in conservatorship?
Those greedy hedge funds.
The only answer I can come up with is that
there are people in Washington who don’t want to
see “speculators” (a/k/a “greedy hedge funds”)
make money off what they perceive as the
government’s having come to the companies’
rescue back in ’08. It’s a false narrative, but like
any other Big Lie, when it’s been repeated for
going on 14 years, it’s an uphill struggle to
convince people otherwise. (It’s actually the
same silly argument Alexander Hamilton
swatted away in 1790.)
People who harbor these feelings do not
seem to understand that there are literally
thousands of Fannie and Freddie shareholders
who are neither hedge funds nor greedy – but who
have been grievously harmed by a
conservatorship now in its 14th year. Those
shareholders include, for instance, people like
John Herbin, president of the Jamestown State
Bank of Jamestown (pop. 286), Kansas. Mr.
Herbin saw 25 percent of his bank’s capital wiped
out when Fannie and Freddie were seized.
(Needless to say, it severely crimped his ability to
lend into the community at a time when it was
most needed.) Mr. Herbin doesn’t want to make
a killing; he just wants his bank’s capital back (14
years later with no interest).
Likewise, Nicholas Isbell of Chevy
Chase, Maryland, a Fannie Mae employee who
invested his daughter’s college tuition fund in
Fannie Mae preferred shares (then rated AA-).
Like Mr. Herbin, he isn’t looking for a windfall;
he just wants to get his daughter’s college tuition
fund back (again, 14 years later with no interest).
Then there are the union pension funds,
the insurance companies, the mutual funds – and
even the Knights of Columbus and the Catholic
Order of Foresters. Should all these
shareholders be deemed mere ‘collateral damage’
– because some people in Washington don’t like
the idea of John Paulson making money?
True, others did buy for pennies on the
dollar when Messrs. Herbin and Isbell were
refusing to sell (including, it is reported, Mr.
Paulson). But what are they guilty of having done
nearly 14 years ago? Betting on a turnaround in
the economy. Betting on the rule of law. Betting
on America.
And yes, betting on the constitution,
which holds that you can’t run an interstate
highway through the family farm without
compensating the owners of said farm. (BTW, if
it’s any consolation to the naysayers, a number of
hedge funds have already gone out of business –
or are rumored to have been forced to retrench
into family offices – thanks, in part, to the fact that
their Fannie and Freddie holdings currently trade
at less than 15 cents on the dollar.
Whatever, do the math: if the government
releases Fannie and Freddie from their
conservatorships and allows them to bring in
outside capital, for every dollar the shareholders
(who own 20.1 percent of the companies) make,
the government (which owns the other 79.9
percent) makes four.
Sounds like a deal to me.
Gary E. Hindes
October 29, 2021
646-467-5242
gary.hindes@delawarebayllc.com