Two prior Fortune 50 companies Fannie Mae and Freddie Mac give all their money to the United States government, now totaling over $108B in less than 8 years.
A lawsuit dismissed late in 2014 is up for appeals in the DC District court in 2016 that could potentially turn over the earlier memorandum opinion.
If Fannie and Freddie are allowed to retain capital, equity shares currently trading as penny stocks may no longer be penny stocks.
The government won't just show the truth and instead tax collectors are spending time and tax dollars asserting various privileges to save taxpayers from themselves.
Attention to detail is critical when reading legal documents and I am not a lawyer but I have put thousands of hours and dollars into this now.
Fannie Mae and Freddie Mac are often referred to as Government Sponsored Enterprises (GSEs) since they were brought into existence by the government and then sold to private investors decades ago. With no exception, since the time they have been brought into operational existence they have served as the gold standard and set the bar for the thirty year American home mortgage. I can't help myself. I've borrowed over $250,000 across the last 15 months and bought myself 87355 shares of FNMAS and 5271 shares of FMCKJ. Now, I'm going to tell you why I am doing this.
Straight from Judge Lamberth's dismissal, the two GSEs are considered government-sponsored, rather than government-owned:
Before I dive into my reasoning on a point by point basis regarding why I agree with Judge Steele's assessment that "Perry Capital court's reasoning is utterly bankrupt," let's first discuss why you may be interested in learning more as an investor with money to allocate.
The Investment Opportunity In Brief
Right now, the equity securities of Fannie Mae and Freddie Mac on a valuation basis appear to trade like call options of their intrinsic value in a scenario where the two underlying operating entities are allowed to keep some of the money that they make. This is in contrast to their current arrangement whereby they make billions of dollars per year and that money is transferred quarterly to the US Government in an agreement between the government and itself designed to leave the GSEs penniless in 2018. In the process known as conservatorship, the two GSEs entered with their highest capital levels in history and have transferred $108B+ to the government while the government puts out news headlines suggesting that the GSEs are a broken business model. As an investor, $108B+ of cash across no more than 8 years is the opposite of a broken business model.
The website that I primarily used to put this together was gselinks, by the way. There they have all of the legal filings. Each one of the legal filings is special in a different way. The New York Times tried to get access to the documents the government doesn't want anyone to see. Better Markets wrote a brief in support of the government. Now that discovery has shown up the plaintiffs want to amend their complaints to reflect any evidence that they think proves the government broke the law. There was a fight about if they could talk to the Chairman of the Board of Directors to ask Egbert Perry for his side of the story. A former FDIC Chairman weighed in. It's all taking a lot of time and the longer it takes the better it is for the government until the jigs up I guess if it comes to that, nobody pretends to know. The New York Time's has done a great job. The Economist has done a great job too.
I don't always know what I'm doing but I submit to you the hypothesis that Treasury knew exactly what it was doing the entire way through and this hypothesis has been corroborated by one of the GSEs prior CFO's Timothy Howard who points to internal Treasury discussions about the potential costs and benefits of nationalization:
Secondly, another prior GSE executive and prior CFO Susan McFarland has provided testimony that we can't see but we can feel its gravitational pull on plaintiff's arguments to compel production of certain documents:
These two chief financial officers of Fannie Mae seem to be supporting the notion that the reason Fannie Mae is having financial problems is not because they aren't making any money as the government would have us believe but instead because the government is preventing them from keeping any of the money they make for themselves because the government wants to take all of their money as a matter of public policy. If Fannie Mae and Freddie Mac are at any point in time allowed to retain their earnings, equity shares of the two delisted penny stocks could trade significantly higher. William Ackman and Richard X. Bove seem to suggest that $20 is a good starting point on the common shares if the government decides to exercise the warrants that it took as part of the original agreement. Ackman projects a combine normalized earnings of $15B available to common shareholders if the government is no longer allowed to keep taking their money. What's kind of funny about that is I think that the government projects that it will be taking more money from Fannie Mae and Freddie Mac than they are being forecast to make by William Ackman. Mr. Ackman must think it's his money or something that they are taking. I wonder why. Maybe you can help me figure it out. Please help me solve this mystery.
Now that you understand that the potential upside of owning securities is over 100%, let's review what's going on in the DC District's Court of Appeals.
Lamberth: The Difference Between Can't and Won't
Regardless, the MEMORANDUM OPINION issued by Lamberth proposes that HERA empowers FHFA to take everything without judicial review:
To Operate Outside The Statute Is To Violate The Statute
How exactly does the government unilaterally bankrupt two Fortune 50 companies by funneling their net worth to itself while acting as conservator when the powers as conservator are completely the opposite?
David Fiderer, who has written a book breaking down publicly available information on the GSEs proposes that the government has rationalized away the plain meaning of HERA and basic concepts of corporate law and insolvency law by saying that they are exempt from judicial review and has been able to stonewall shareholders at every turn by asserting evidentiary privileges. That's really where things get interesting for shareholders because in aggregate the legal teams that represent us have subsequently obtained evidence "which shows the government's defense to be outright false" that has been presented to the D.C. Circuit Court. In other words, while the government has been stonewalling in court A, the lawyers representing shareholders in court B were able to get evidence they say undermines the government's defense in court A and then submit this evidence to court A where the government put forth this defense that is now under Appeals.
The Net Worth Sweep Looks Like A New Security Per IRS Rules
Per the Perry Capital Institutional Appeal Brief, we quickly can discern that the nature of the Third Amendment Net Worth Sweep constitutes a new security by Treasury's own definition:
This is important because Treasury lacked the authority to purchase new securities after 2009. If the modification of a preferred security from a 10% dividend to taking the net worth of a company is by Treasury's own definition an entirely separate security altogether, plaintiffs suggest that this conduct is ultra vires. This would suggest that in this instance Treasury is willing to overlook its own rules for classifying transactions for tax purposes if by doing so it increases payments to Treasury. What's interesting is that most tax law is built around ensuring that taxes are paid when owed. This is instead a situation where a tax collector may have decided that it was owed more than should have ever been paid and where tax law can be used to protect taxpayers from tax collector over reach. From Lamberth's MEMORANDUM OPINION we see FHFA's claims:
First off, dividends are not owed. There's a huge difference between equity dividends and debt interest. Secondly, there was a PIK clause that provided that the dividends could be paid in kind, suggesting that this alleged downward spiral of having to pay anything may simply be a story manufactured for the convenience of nationalizing two Fortune 50 companies without having to worry about shareholders. Lamberth basically didn't have the evidence on hand when he ruled that the court has now:
Now, with discovery being shared from Judge Sweeney's court, statements like that no longer can be made in so far as being made because they don't have evidence. Still in dispute, however, are 11,292 documents that the government has asserted various privileges over. My view on that is that Fairholme says that evidence has been submitted in the court proving the government's claims as false and from what I can see of the redacted legal filings from Fairholme, they've got a lot already. Even still, 11,292 documents is a lot of documents that the government doesn't want us to see. To put that in perspective if 100 people were emailing back and forth once a day for 90 days, you're still short of how many documents the government doesn't want us to see. To put it another way, it sure looks like the government isn't attempting to cover up any one particular thing as much as they seem to base their defense on covering up everything and the chief problem now is that depositions undermine their arguments and plaintiffs already are distributing discovery to courts far and wide.
Ugoletti's Written Affidavit Helped Lamberth Dismiss Earlier Lawsuit Now Being Appealed
As a reminder, Mario Ugoletti put out the statement used by Lamberth to help dismiss this case the first time:
In a separate lawsuit, Saxton plaintiffs have brought into question Ugoletti's declaration above.
Either discussions happened or they did not. Ugoletti's written statement above says they did not. He was deposed, however, and according to plaintiffs his testimony calls into question evidence submitted by FHFA in the district court.
Then there's this as it relates to Ugoletti's testimony which seems to suggest that Ugoletti said something during his testimony that the government doesn't want us to see:
Here's what we know. We know that the government has told us that the Third Amendment Net Worth sweep was put in place to save Fannie and Freddie from a death spiral. It can only stand to reason that the government doesn't want us to see what he said if it doesn't support the earlier published statement he gave for them and signed for them. Do government officials really not know the law? It can't be that easy can it? These are the questions investors are asking themselves because we may soon be looking for government jobs. The average government salary for federal civilian workers was $84,153 on average in 2014 according to the U.S. Bureau of Economic Analysis (BEA). The money that they are taking from Fannie Mae and Freddie Mac can employ 178,246 people if you assume they are taking $15B away from Fannie and Freddie per year. That money is going somewhere ladies and gentlemen. We want our jobs!
The government is taking our jobs! Give us our jobs back. Give back Fannie Mae and Freddie Mac, who have had to pay $108B for the privilege of your oversight and accounting magic that I have yet to see anyone contesting. This is when the two CFOs of Fannie Mae seem to be supportive of the companies. It's tough. It's really too bad that this has all happened this way and it's really too bad that the courts have to stop the government but that's just how this is these days and it's not all that bad. Things have a way of sort of fixing themselves when things go wrong and this appears to be no exception to the rule that winners win and winners get a winners share and not losers take all. They don't like it when you tell them the truth but that's because they already know.
Don't Forget about Delaware
I know I did. Then again, there's a mammoth case there where a prior Judge himself is filing to get clarification from people who may know better than federal judges about how to interpret state law governing parts of the companies under the express understanding that FHFA could not exercise powers that it itself did not have in the relevant states where state law governs:
More importantly Judge Steele has a way with words that I had previously not seen. He sounds really smart.
More Perry Capital Arguments For Appeal
Most recently, class plaintiffs filed their initial reply brief in which they make what I think amount to a pretty compelling set of arguments that seems to make a great case that I don't know how the government is going to defend against:
Rights just don't exhaust themselves and vanish at times only to reappear at others. To have rights in receivership and not throughout the process that gets you there is to have no rights as all.
This is where FHFA's case collapses faster than a folding chair. FHFA has a very solid history of interpreting laws as loosely as possible in order to take away and exercise rights that were not theirs to begin with.
And that's where you end up, the perpetual conservatorship. It now all makes sense. The reason things are taking so long is because they are designed to take so long as to exceed the escape velocity of various statutes of limitations. Genius. People just can't talk about it:
While Parrott declined to answer questions, some of us are wondering why and the rest of us are able to piece it together. Mr. Parrott is just following orders. That's what we want, order in the court because it certainly hasn't been the prescription for the chain of events that has by design nationalized two of America's best companies.
Summary & Conclusion
When Lamberth's ruling came out the stocks of Fannie Mae and Freddie Mac got obliterated. Since the time of his ruling, discovery in Judge Sweeney's court of claims has produced evidence that has subsequently been filed in the DC District Court of appeals.
This evidence at the very least does not seem to support the notion that the reason behind the Third Amendment Net Worth Sweep was to save Fannie and Freddie from a death spiral. My view is pretty simple and is basically that based on the new evidence submitted to the Appeals Court, plaintiffs will prevail and the equity shares could trade significantly higher. Oral arguments are on April 15 and the world is watching. If at the very least, it's worth staying tuned because the legal woes of Fannie Mae and Freddie Mac make great shows.
I will never truly understand why Peter J Wallison insists that Fannie and Freddie are to blame on as many news sites as he can. Combined they took $132.2B of cash and have paid back $241B of cash, netting Treasury $108.8B since conservatorship began. The money doesn't lie, Fannie and Freddie are Fortune 50 quality companies.
The Fannie Mae court cases have greater implications than ultimately deciding whether the GSE's (Fannie Mae and Freddie Mac) should be released from government conservatorship.
A partial Timeline of events leading up to and following the financial meltdown.
Shareholders, Citizens, Taxpayers need to hold our government accountable.
The Fannie Mae court cases have greater implications than ultimately deciding whether the GSE's (Fannie Mae and Freddie Mac should be released from government conservatorship. They represent more than just shareholder's rights and their ability to participate in the success of the companies they have invested in. These cases are about our rights and liberties and the great responsibility to hold our government accountable as free citizens. They are also about keeping the American Dream alive and providing housing market liquidity to our nation's neediest. Consequently, a failure to release these entities suggests that, as a nation, we are lowering our standards of responsibility and accountability to one another.
A great quote from Jeff Atwater, Florida's Chief Financial Officer, crystallizes my point that accountability is a systemic problem which is not just isolated to the GSE's:
"Our Constitution, and the subsequent Bill of Rights, enshrines the specific liberties that Americans recognize as coming from our creator. It also defines a clear system of limits and accountability for government. But somewhere along the way, the roles of accountability are being reversed.
The absolute truth that a free people must hold their government accountable is being rejected by some and replaced by a failed idea that citizens ultimately answer to government."
Time-line of events
1977: President Jimmy Carter signed the Community Reinvestment Act which was designed to eliminate discriminatory lending in banks.
1980: the Depository Institution's Deregulation and Monetary Control Act increased the availability of alternative mortgages. These alternative mortgages are backed by government sponsored enterprises Fannie Mae which was established in 1938 as the Federal National Mortgage Association, and Freddie Mac, established in 1970 as the Federal Home Mortgage Loan Corporation.
1992: The Federal Housing Enterprise's Financial Safety and Soundness Act of 1992 provided HUD with the oversight of Fannie Mae and Freddie Mac, allowing the expansion of these 'alternative mortgages' using implicit and explicit pressures (Miller,Benjamin, North, 2010 pg. 122) on lending.
1994: The National Home-ownership Strategy began and this effort was coordinated with the Department of Housing and Urban Development to increase home-ownership among all Americans. On paper these incentives sounded pretty good and seemingly with good intentions. The reality is, almost anybody could get a mortgage as a result of the changes that were occurring. Many fell prey to their own desires and the temptation to use higher risk adjustable rate mortgages, interest-only loans, and no-documentation or stated income loans that were readily available until the financial meltdown.
1995: "Blueprint for Reinvention of HUD" and "The New HUD" was released promoting the value of home-ownership and many changes to lending standards. This, in conjunction with The National Home-ownership Strategy, loosened lending standards while seeking more creative lending practices to increase home-ownership. Policies to increase home-ownership were written with the intent the GSE's purchasing $2.4 trillion of mortgages over the next ten years.
1996: The national home-ownership rate hit 66.3 million or 65%, the highest it had ever been. HUD set standards for banking institutions which technically, did not force the banks to make sub-prime loans. However, if the lending institutions did not comply with minimum goals, Fannie Mae and Freddie Mac would have to refuse to back the mortgages (this is called moral suasion). In 1996, 42% of the mortgages in the portfolios had to be derived from borrowers who's incomes were below the median income of the area. Subsequently, this target was raised to 50% in 2000 and 52% in 2004. These where portfolios of mortgages that Fannie Mae and Freddie Mac were required to guarantee. Isn't it odd that many politicians today are now blaming the "greedy banks" and the GSE's for these failed government policies.
1997: Home-ownership had increased by 2.3 million additional home-owners. One of the largest increases in history.
1999: The Gramm-Leach-Bliley law, passed in 1999 and signed by Clinton, repealed the Glass-Steagall Act. This law benefited the economy and had a negligible effect on the looming banking crisis. Some argue that this may have helped stabilize the economy by allowing for the purchase of Merrill Lynch by Bank of America or JP Morgan to purchase Bear Sterns. The purpose of mentioning the Gramm-Leach-Bliley law was this was a period of deregulation and lack of financial oversight which not only impacted America but, Europe as well.
2000: The national home-ownership rate reached 71.6 million or 67.5%. There was an increase in the home-ownership incentives that were in place and home-ownership increased from 67.5% in 2000 to 69.2% at the end of 2004. The tide was already beginning to turn as the home-ownership rate declined back to 67.5% by the end 2008.
2005 thru 2007: Roughly 200+ billion dollars of toxic mortgages were dumped on Fannie and Freddie. These were not known risks and according to Judge Jed. S. Rakoff this scheme was a "brazen fraud.", yet Fannie and Freddie were the scapegoats.
July 2008: Congress passes the Housing and Economic Recovery Act (HERA), creating the Federal Housing Finance Agency (FHFA), and providing the option to place Fannie and Freddie into conservatorship or receivership.
September 6, 2008: FHFA chose to place Fannie Mae and Freddie Mac into conservatorship. This left approximately $34 billion of privately held preferred shares outstanding.
September 26, 2008: Treasury enters into preferred stock purchase agreements (PSPAs) with FHFA to purchase senior preferred stock of both Fannie Mae and Freddie Mac and to receive warrants for 79.9 percent of the common stock of each company.
2008: Shortly after the GSE's were put into conservatorship they were ordered to buy additional toxic MBS from the banks. This was billions of dollars worth of toxic mortgages in addition to the 200 billion between 2005 and 2007. Some estimates suggest a total of $267 billion were dumped on the GSE's
May 6, 2009: The First Amendment raises the maximum aggregate amount of funds permitted to be invested by Treasury into Fannie Mae and Freddie Mac from $100 billion to $200 billion.
December 28, 2009: The Second Amendment removes the cap on funds available through 2012 to provide stability in the mortgage market. December 31, 2009: Treasury's statutory authority to set the "terms and conditions" of Fannie Mae and Freddie Mac security purchases expires.
November 2010: Two years after the rules of conservatorship are established and after Treasury's authority to set the "terms and conditions" of security purchases expires and Perry Capital begins to purchase Fannie Mae and Freddie Mac securities for its institutional clients.
August 2012: Treasury and FHFA revise PSPAs via Sweep Amendment from a 10 percent annual dividend to quarterly sweep of all profits. Furthermore, these payments will not redeem the senior preferred stock or otherwise reduce the balance owed by Fannie Mae and Freddie Mac, essentially wiping out private investors, and liquidating, rather than conserving, the companies.
2012: Both GSE's become profitable despite absorbing billions of dollars of toxic debt. The GSE's did exactly what they were supposed to do during a financial crisis and I am thankful to those who diligently did their jobs at the GSE's despite the uncertainties and criticism in part from our own leaders.
June 29, 2013: Fannie Mae and Freddie Mac pay a combined $66.4 billion payment to Treasury. With these payments, Fannie Mae has now paid $95 billion of the roughly $116 billion it has received, while Freddie Mac has repaid roughly $37 billion of the $71.3 it received.
2014: Fannie Mae and Freddie Mac have fully paid back the taxpayers/US Treasury even though the terms of the conservatorship, technically don't consider this a repayment. By the end of September 2014, they will have paid a total of $218.7 billion. That is $31.2 billion more than the $187.5 billion they received after being placed under government conservatorship.
2015: The GSE's have paid a total of $241 billion to the treasury, earning taxpayers $53billion in excess of the $187.5billion borrowed by the GSE's
2015: Despite Government inaction, there have been many positive changes and reforms under Mel Watt and the GSE's. These include increasing private capital requirements needed by the private sector, through capital market structures and risk sharing models, which reduce potential taxpayer risks.
There is also a focus on private mortgage insurance conterparties to offset additionals risks during market stressors and the creation of a common securitization platform. The creation of a single common security is intended to reduce costs and increase liquidity within the housing finance markets and it's starting to sound like Fannie and Freddie may merge some day. Maybe it's better for these reforms to occur from within afterall.
2016: Multiple lawsuits, attempting to free the GSE's, remain in place and one of interest is Jacobs & Hindes V. the FHFA. Glen Bradford describes this well in his article Fannie Mae Lawsuit Updates Bode Well For Shareholders
The GSE's obviously play a critical role in the US financial System. They are, not only a central component of the American housing market but, they also play a crucial role in the "American Dream", by making affordable housing available to our nations new homebuyers and to lower income families. While it is important to continue to provide housing finance availability to our nation's most needy, it is equally important to prevent the abuses that occurred in the past. The new efforts under Mel Watt and the GSE's appear to be addressing those abuses.
Cause and Effect
The continued need for creative lending practices and the easing of lending standards was a great burden that was placed on our nation's financial system. Although there is fault on many levels, including the less sophisticated home buyers who bought more house than they historically may have been able to afford, the lenders who recommended the newer lending products (ARM's and stated income loans), and the banks that gave in to moral suasion from the US Treasury, government policies were ultimately the driving force behind all the events that culminated into the perfect storm. Now the GSE's are being hung out to dry for adhering to such policies.
Justice and truth will ultimately prevail but we, as a nation need to address the issues of accountability and responsibility and how these have become a cultural problem. I often lament, how good, moral, and responsible leaders can rise out of a culture that doesn't value such things. Our leaders were brought up in a culture that is losing its sense of personal accountability and responsibility. This is a grass roots problem and we need to address it by looking at our own actions and families and how we interact with others. These are the same families that have hope in the American Dream and of someday owning their own home. Unfortunately, America's values are under attack and it's time for our taxpayers and citizens to demand truth.
The circumstances surrounding Fannie and Freddie symbolize the war on the American Dream and hence, Fannie and Freddie are Americas Underdogs.
By this month. Lets see what Lew and Watt's response will be.
Visit his website and read the comments. Tim has giving return comments with knowledgeable insights.
It would be nice for some type of update. It seems that there goldfish went #$%$.. So much pump only to go dump. It seems to never end.
The Real Tim Howard has setup a comment section on his website. The link is available on gselinks page.
Yesterday, the firm of Ross Aronstam & Moritz filed a motion with the U.S. District Court for the District of Delaware for leave to file an amicus curiae brief in the Jacobs and Hindes case, which I authored. That motion, along with the accompanying brief, can be found here: gselinks
This brief follows the amicus I submitted (with the Coalition for Mortgage Security) in the appeal of the Perry Capital case in the D.C. Circuit last July. Both offer facts and evidence to rebut the assertion that Fannie Mae and Freddie Mac were in such dire straits prior to the mortgage crisis that Treasury had to rescue them at “enormous risk” to taxpayers, and then give them $187 billion in senior preferred stock to save them from “mandatory receivership and liquidation.”
The notion that Fannie and Freddie failed catastrophically and had to be rescued by Treasury always has been spun from straw, but near-universal acceptance of this tale has made eliminating the companies a sine qua non of any serious proposal for mortgage reform. Since the companies had failed so spectacularly, what possible argument could there be for keeping them around in any form?
Mirroring what we see all too frequently in the political arena these days, opponents and critics of Fannie and Freddie (and supporters of large banks) have been able to get enough of their advocates to repeat a fictitious account of the financial crisis so often and so emphatically, in venues sympathetic to their interests, that large numbers of otherwise sensible and objective people have come wholeheartedly to believe a narrative that has no basis in fact and is easily and convincingly refutable. This narrative has become entrenched in media reporting, and likely would have continued to go without major public challenge had it not been for the lawsuits filed against the government for the August 2012 Net Worth Sweep. These suits created a high profile forum for exposing what actually did happen with Fannie and Freddie.
As I write in the Delaware amicus, the flaw in Treasury’s plan to use temporary or artificial non-cash expenses to drive up Fannie and Freddie’s book losses and force them to take an unneeded $187 billion in senior preferred stock—which, because Treasury made that stock non-repayable, resulted in perpetual required payments to Treasury of $18.7 billion per year—was the very fact that these expenses were temporary or artificial. At some point they would cease, and many would come back into income. Treasury had no plan for dealing with that when it happened. The Net Worth Sweep gave Treasury the outcome it sought—the resulting earnings were paid to it, and not retained by the companies as capital—but Treasury did not have a credible defense for the actions it had taken. And after the lawsuits were filed, it had to respond to adversarial plaintiffs, not like-minded journalists.
When the questions came, Treasury’s answers did not pass the laugh test. Start with its decision to take over the companies in 2008. Treasury called that a rescue.
Except, if it was a rescue, why would Treasury Secretary Paulson have boasted to President Bush, “The first sound they’ll [Fannie and Freddie] hear is their heads hitting the floor?” Why had there been a paper about nationalizing Fannie and Freddie circulating at Treasury six months before that happened? Why would both the Fed and the Treasury have declined to use their existing authorities to make secured, riskless loans to the companies, had they ever been needed? Why would Paulson have held a secret meeting with hedge fund managers in July 2008 to tell them Treasury was considering putting Fannie and Freddie in conservatorship and wiping out their shareholders? Why would Treasury have inserted a clause in the GSE reform bill that made Fannie and Freddie directors immune from shareholder lawsuits if they gave in to pressure and let the government take the companies over for no statutory reason? Why would Paulson withhold from the companies’ CEOs and directors the terms of the “rescue” he was insisting they agree to? And what possible reason could there have been for making Fannie and Freddie take non-repayable senior preferred stock to offset even temporary shortfalls in their capital?
You can’t explain any of these developments if this was a real rescue; you can explain all of them if it was a policy-driven seizure of two shareholder-owned companies’ assets. And to take seriously Treasury’s stated reason for the Net Worth Sweep, you’d have to believe that no one there could parse a financial statement.
I put out close to 60 quarterly earnings reports as CFO at Fannie Mae, and after each one I saw how investors and security analysts went through the report’s details to try to understand what drove the company’s performance that quarter.
I can imagine a similar set of investors and analysts going through the initial quarterly releases of Fannie and Freddie following their conservatorships. Their first reaction on seeing the headline loss number would be, “Where did that come from?” They would check the business fundamentals—the changes in net interest income, guaranty fees and miscellaneous fees on the income side, and credit-related losses and administrative costs on the expense side—and conclude, “Those actually look fairly good.” Then they would discover the sources of loss: huge jumps in loan loss reserves, the absence of any tax shelter because of the existence of a reserve against deferred tax assets, write-downs of non-agency mortgage-backed securities to levels reflecting current market illiquidity, and the other book losses.
Whatever they may have thought about those losses, they would know four things about them: they were non-cash charges, most were one-time events, most were based on estimates of future losses, and many might reverse themselves.
Some version of this analytical routine would have played out after each quarterly earnings release from the second half of 2008 through the end of 2011. Each time, analysts would have seen non-cash losses continuing to drag down the operating results. Soon they would be asking themselves, “How long can this go on?” At some point the companies would not be able to keep taking losses in the current period assuming those losses might be realized in the future. Analysts would know that when Fannie and Freddie stopped taking non-cash losses, and began to draw on their mammoth loss reserves to absorb current quarter credit costs, they would be profitable again. And if some of their previously estimated book expenses did not materialize, they would be exceedingly profitable.
A summer intern at a regional brokerage firm would have understood this, but Treasury wants us to believe that nobody there did. It wants us to believe that in August of 2012 it entered into the Net Worth Sweep for the good of the companies, and that the subsequent torrent of $170 billion that flooded into Treasury coffers—overwhelmingly driven by the absence or reversal of Fannie and Freddie book losses recorded earlier—took it completely by surprise.
Sorry, Treasury. Because of the lawsuits, you’re now in a different game. Your actions, and your defense of those actions, no longer are being adjudicated only on the editorial pages of the Wall Street Journal; they also are being adjudicated in courts of law. There facts matter, and there you almost certainly will lose.
Stop Stealing From Us..
Key Note: We remain confident that Treasury’s deliberate effort to realign the equity of each company and allocate all profits to itself in perpetuity is strictly prohibited by federal and state law, and anticipate that several of these cases will be adjudicated this year.
P.S. Lets hope so this has been going on far enough. They need to stop stealing from us...
On Appeal from the United States District Court
For the District of Columbia, No. 13-mc-01288
(Royce C. Lamberth, District Judge)
ORAL ARGUMENT SCHEDULED FOR APRIL 15, 2016
The District Court’s decision should be reversed.
Bottom Line: Obama’s Government cannot function without ripping off Fannie Mae and Freddie Mac Shareholders.