Fannie Mae (FNMA)

[whipstick]

Here ya go Clark! Don't worry you're FUD just requires a little critical thinking to discredit entirely.

Luckily Tim Howard does it better than anyone else:

https://howardonmortgagefinance.com/2017/07/31/a-pattern-of-deception/#comment-4190


This is an article by former Chicago Federal Home Loan Bank president Alex Pollock, criticizing Treasury’s decision to direct Fannie and Freddie to continue to pay interest on the $13.5 billion in subordinated debt the companies had outstanding at the time they were put into conservatorship.

I can offer readers a little perspective on this issue.

I was intimately involved in Fannie’s decision to begin to issue subordinated debt (which I addressed in Chapter 8 of my book, in the section titled “The Voluntary Initiatives”). Treasury Secretary Summers believed that sub debt provided financial institutions with important market discipline, and advocated the mandatory use of sub debt for commercial banks. He wasn’t successful with the banks, but in 2000 both Fannie and Freddie voluntarily agreed to achieve and maintain a certain percentage of sub debt in their capital structures. We (at Fannie) were very clear with investors that we intended the principal of our sub debt to be at risk, and I in fact was astounded when I learned that, following the conservatorships, Treasury had directed Fannie and Freddie to keep paying interest on their sub debt outstanding.

Pollack says in his article that because of covenants on Fannie and Freddie’s sub debt stating that the companies could not pay any preferred stock dividends if they did not make the interest payments on their sub debt, Treasury had no choice but to make their sub debt “money good.” That’s an excuse, not a reason. Had Treasury truly wanted to help Fannie and Freddie through the financial crisis, both it and the Fed had programs that would have allowed them to make repayable loans to them, fully collateralized by the companies’ ample holdings of agency MBS. Those interest payments could have been made even if sub debt holders were wiped out (as we and Freddie had intended them to be in such circumstances). But Treasury did not want to help out Fannie and Freddie; it wanted to take them over, and to do that it created a new type of instrument—non-repayable senior preferred stock, with 10 percent dividends paid in after-tax dollars—that could be used in conjunction with non-cash losses booked by FHFA to bury the companies under a mountain of non-repayable obligations. To get its senior preferred, Treasury had to bail out Fannie and Freddie’s sub debt holders.

And there was a further benefit to Treasury to keeping the companies’ sub debt alive; it meant that to push Fannie and Freddie to the point where they had to start drawing senior preferred stock from Treasury, it had to burn through $13.5 billion less of their capital. Had Fannie and Freddie’s sub debt holders been wiped out, the companies now would have $174 billion in senior preferred stock outstanding, not $187 billion.

Pollock’s version of the sub debt story is that it was yet another fraud perpetrated on the taxpayer by Fannie and Freddie (“Fannie and Freddie’s subordinated debt produced, and its holders experienced, zero market discipline. So much for the academic theories, at least as applied to government sponsored enterprises.”) My version of the sub debt story is that it SHOULD have produced its intended result, but that Treasury chose to override its market discipline for Treasury’s own purposes. Readers can decide which version of the story better fits the facts.