Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
Register for free to join our community of investors and share your ideas. You will also get access to streaming quotes, interactive charts, trades, portfolio, live options flow and more tools.
its only been introduced to the house so far...appears no voting on it yet.
see post # 183033
That is correct...what's interesting is that all 21 co-sponsors are Republicans. I'm curious to see how this plays out when or if the push comes down from the white house to try and force the payment to the fund.
I don't think it can LEGALLY happen. I could be wrong, but I also realize the law and legal requirements aren't necessarily at the top of some of these people's priority list.
http://thomas.loc.gov/cgi-bin/query/z?c113:H.R.3901:
H.R.3901 -- Pay Back the Taxpayers Act of 2014 (Introduced in House - IH)
HR 3901 IH
113th CONGRESS
2d Session
H. R. 3901
To prohibit contributions by Fannie Mae and Freddie Mac to the Housing Trust Fund and the Capital Market Fund while such enterprises are in conservatorship or receivership, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
January 16, 2014
Mr. ROYCE (for himself, Mr. HENSARLING, Mr. GARRETT, Mrs. CAPITO, Mr. NEUGEBAUER, Mr. CAMPBELL, Mr. LUCAS, Mr. MCHENRY, Mr. WESTMORELAND, Mr. ROSS, Mrs. BACHMANN, Mr. COTTON, Mr. PITTENGER, Mr. HULTGREN, Mr. DUFFY, Mr. GRIMM, Mr. MULVANEY, Mrs. WAGNER, Mr. HUIZENGA of Michigan, Mr. HURT, and Mr. BACHUS) introduced the following bill; which was referred to the Committee on Financial Services
A BILL
To prohibit contributions by Fannie Mae and Freddie Mac to the Housing Trust Fund and the Capital Market Fund while such enterprises are in conservatorship or receivership, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the `Pay Back the Taxpayers Act of 2014'.
SEC. 2. PROHIBITION OF CONTRIBUTIONS TO HOUSING TRUST FUND AND CAPITAL MAGNET FUND WHILE ENTERPRISES ARE IN CONSERVATORSHIP OR RECEIVERSHIP.
Notwithstanding section 1337 of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4567) or any other provision of law, during the term of any conservatorship or receivership of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation pursuant to section 1367 of such Act (12 U.S.C. 4617), such enterprise shall not make any contribution or transfer to, or allocate or set aside any amounts for, the Housing Trust Fund established under section 1338 of such Act (12 U.S.C. 4568) or the Capital Magnet Fund established under section 1339 of such Act (12 U.S.C. 4569).
SEC. 3. USE OF ENTERPRISE REPAYMENTS TO REDUCE BUDGET DEFICIT.
During the term of any conservatorship or receivership of the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation pursuant to section 1367 of such Act (12 U.S.C. 4617), any amounts paid or repaid to the Secretary of the Treasury by the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation in any form, including any dividends paid pursuant to the Amended and Restated Senior Preferred Stock Purchase Agreements, dated September 26, 2008, amended May 6, 2009, further amended December 24, 2009, and further amended August 17, 2012, between the United States Department of the Treasury and the Federal National Mortgage Association, and between such Department and the Federal Home Loan Mortgage Corporation shall be covered into the General Fund of the Treasury and shall be used only for reducing the budget deficit of the Federal Government.
Watt doesn't have the legal authority to do so on his own.
One would assume that FHFA and the Treasury will have to "amend" the current "net sweep" 3rd amendment to allow for any monies to go any other place other than the Treasury. If that is indeed the case....I can see a boatload of additional lawsuits to drop C-ship and pay divs.
Q&A: Why Berkowitz Is Unhappy With Fannie, Freddie Directors
http://blogs.wsj.com/moneybeat/2014/03/03/qa-why-berkowitz-is-unhappy-with-fannie-freddie-directors/?mod=yahoo_hs
Bruce Berkowitz, the prominent mutual-fund investor, sent letters to the boards of Fannie MaeFNMA -4.17% and Freddie MacFMCC -3.25% late last week chiding them for not standing up to the government to protect shareholders such as his Fairholme Funds Inc.
Bruce R. Berkowitz —Bloomberg News
Philip Laskawy, the chairman of Fannie’s board, responded Sunday night with a statement that said the firms’ federal regulator had assumed all the powers and rights of the board when the mortgage company was taken over in 2008, leaving them without the full rights held by corporate directors. (Read his full statement.)
Fairholme and others have sued the government to challenge changes to the bailout terms that last year began requiring the companies to send all of their profits to the Treasury, replacing a 10% dividend payment that was required on the government’s investments in the companies.
Mr. Berkowitz stands to make billions for his investors if the value of his shares, valued last month at $1.3 billion, return to their pre-2008 levels. He explained why he sent the letters in an interview. What follows is a condensed and edited transcript:
WSJ: What’s the single most important thing that you hope these letters will accomplish?
Mr. Berkowitz: I hope that these letters wake up the boards that they have a fiduciary responsibility to the owners of the company, the owners of the company being the shareholders.
There are certain facts that I’m looking for someone to disprove, but I have not been able disprove these facts. Fact No. 1 is that both of these companies are essential. Point two: they haven’t cost the taxpayers a penny. They’ve had enough time to regenerate to pay back taxpayers. Now they’re going to give taxpayers a good profit. The third point: they are companies just like Coca-ColaKO -0.41% and DisneyDIS -1.78%. They trade on public exchanges…. If the directors’ job is not to protect the shareholders, which that’s what their charters say, then why are they there?
WSJ: Is this just a publicity stunt?
Mr. Berkowitz: If you call up the companies and they don’t pick up the phone, what do you do? It’s not a publicity stunt. It’s a way for us to talk to the directors and all the owners of the company in a cost-efficient manner.
WSJ: You said these companies are just like Coke and Disney, but what other companies have a near-explicit U.S. government guarantee covering trillions of dollars of their debt and securities? How can you say these are normal companies?
Mr. Berkowitz: Maybe you should ask our defense companies in our country. Health companies aren’t normal companies. Utilities aren’t normal companies. They have made bargains with government in all of its various forms.
So the bargain with Fannie and Freddie is this: the owners of Fannie and Freddie risk tens of billions of dollars of capital. In times of crisis, [the companies] step up [to support mortgage markets] when no one else does. And in exchange, they have this quote-unquote sponsorship by the government, which helps them with funding. That’s the bargain. If the government doesn’t want that bargain going forward, they have every right not to have that bargain. The directors have to understand they can’t alter the past. You can’t make a deal in the 1970s and 80s and 90s and a decade ago and then all of a sudden say, ‘Now we’re going to change it.’
WSJ: Your letter spells out where you think the directors may have liability. Would you consider legal action against directors if you don’t believe you’ve received a satisfactory response?
Mr. Berkowitz: I can’t comment about the next step. We need a response from the directors to our questions. I don’t know. I am optimistic.
WSJ: But Freddie last week disclosed that they had received three different letters from shareholders since October, and that FHFA had responded to one of them saying it wouldn’t allow Freddie to get involved. If the recent past is any guide, what makes you optimistic you’ll get a response? Should directors be concerned about not responding?
Mr. Berkowitz: If the directors have a pulse and $5 in a bank account, I think they should be concerned because not responding to me would be bordering on gross negligence.
WSJ: If everything you’re saying here is accurate—that these companies aren’t looking out for shareholders and the government is going out of their way to harm shareholders—then why would you want anything to do with these companies?
Mr. Berkowitz: That’s the nature of what I do. I invested in AIGAIG -0.60%. You could have asked me the same questions. I invested in Bank of AmericaBAC -1.27%. I have more faith in the American system than most. I have a better sense of history than most. I weigh history more important than the headlines of the day. Most people are going by the headlines. And I’m old enough to have seen change…. It’s the nature of our system to go—we swing from extreme to extreme…. Our investors have a chance to make very good returns and help resuscitate two absolutely essential companies to our country. Yes, [the government has] every right to change the future of their sponsorship, but they don’t have the right to alter the past.
I think yahoo is taking in to consideration the warrant value of the Treasury...that would put commons around 5.8 billion if they exercised their option.
Before FnF existed, home mortgages were very hard to come by. One had to put down a huge down payment....typically 50% or more. The terms were anywhere from 3 - 5 years....longer if you were lucky...maybe as high as 10 years... with a balloon payment at the end. You would then either have to refinance if you couldn't come up with that balloon payment...if you could get someone to refinance without yet another huge down payment, or you lost your home. Fannie and Freddie brought stability and accessability to hopeful home owners. They brought the American dream to millions of people wanting to OWN a home and have a stable, reasonable, and expected payment plan that allowed them to plan their future, build equity in their home, and raise a family in comfortable middle class America.
Imagine today trying to buy a $400,000 home....put down 50%...then try to pay off the other $200k in 5 yrs.
That would hit you in the area of $3500 a month for principle and interest...then add on taxes and ins...and the cost to support the home as well with gas, elec, water/sewer...maint...etc.
I'm sure the probablility to refinance would be there, but what would the interest rate be in 5 years...then another 5 and so on.
The fixed rate 15-20-25-30 year mortgages that FnF support...no banks want to back them....not at the cost/risk we see today.
Fan, Fred and the Fed, cutting America’s debt
By Rick Newman
http://finance.yahoo.com/blogs/the-exchange/a-surprising-new-way-to-cut-america-s-debt-174529518.html
Washington may have discovered a new way to shrink the $17 billion national debt. But you won't hear anybody crowing about it.
Fannie Mae (FNMA) and Freddie Mac (FMCC) — the once-doomed federal housing agencies — have both reported record profits for 2013: $84 billion for Fannie and $45 billion for Freddie, or a total combined profit of $129 billion. Apple (AAPL), by comparison, earned a puny $37 billion in 2013. Exxon Mobil earned (XOM) $33 billion; Walmart (WMT), just $16 billion. In 2008, Exxon edged out Freddie’s $45 billion profit by a couple hundred million dollars, but Fannie’s $84 billion trophy last year appears to be the largest annual profit ever recorded by a company.
Here’s the kicker: Instead of going to shareholders, Fannie and Freddie’s profit goes to the U.S. Treasury, because of the government takeover of both agencies during the 2008 financial crisis, when they became insolvent and would have declared bankruptcy without federal intervention. The mortgage bailout cost a total of $187 billion, the single largest taxpayer expense in a blizzard of bailouts. At the time, virtually nobody thought the agencies would be able to repay that money. But they finally have – and now their profits are helping run the government and pay down the national debt.
Fannie and Freddie: "People hate them"
This isn't exactly the way the government is supposed to be financed. "I don't think it's desirable," says Douglas Holtz-Eakin, president of the nonprofit American Action Forum and former director of the Congressional Budget Office. "Fannie and Freddie have better name recognition than most politicians – and people hate them."
That wasn't always the case, however. For most of their history, the two Congressionally chartered agencies were the benign, unseen hand of the housing market. They don't grant loans, but rather buy qualified mortgages once lenders have issued them, and roll them into securities that trade on public markets. That keeps cash flowing to banks and encourages them to lend more. Had Fannie and Freddie disappeared in 2008, it could have seized up the entire housing market, turning a recession into a depression.
Though the agencies have always had an undefined quasi-governmental role, they also issued public shares, which still trade over-the-counter. Before the housing bust, some private companies did the same thing as Fannie and Freddie. But they’ve gotten out of the business, leaving Fannie and Freddie with a near-monopoly in their industry. A few prominent investors have been snapping up Fannie and Freddie shares recently, figuring the government will relinquish its ownership and convert the two firms to normal public companies at some point, which could push the stock up 10- or 20-fold. There are also a number of lawsuits that could produce the same outcome, brought by prior shareholders arguing that the 2008 takeover — which pushed the shares close to 0 — was unlawful.
A surprising asset
In the meanwhile, the two agencies have become a surprisingly valuable government asset, raising the intriguing question of whether Washington should continue to operate them as a profit center. Republicans and Democrats have different ideas about how the government should unwind its investment in the two companies, but in general they agree that Washington shouldn’t be in the business of running for-profit operations that interfere with the normal functioning of markets.
Yet calls for the reform of Fannie and Freddie have quieted now that they have become a kind of government bank turning out far bigger profits than Goldman Sachs (GS) or J.P. Morgan Chase (JPM). There are a couple of bills in Congress that would gradually wind down the two agencies, while transferring their functions to a variety of other agencies or the private sector. But there's little consensus on the matter and little urgency to do anything in an election year.
There’s one other big profit center in the government: the Federal Reserve, which by law must turn over its profits to the Treasury. In 2013, the Fed sent $78 billion to the Treasury, after an $88 billion payment in 2012. Most of that income comes from interest paid on the huge portfolio of bonds the Fed has purchased under its controversial quantitative easing program, which it plans to wind down. So Fed profits should fall sharply in coming years.
Profits for Fannie and Freddie will most likely fall as well, since the runup in home prices in 2013 — which boosted their returns — will almost surely decelerate. Still, the Fed and the two mortgage agencies combined could easily contribute $50 billion to $100 billion per year to government coffers over the next several years. Even in Washington, that’s a tidy sum. The 2-percentage-point increase in the payroll tax last year, by comparison, will raise about $120 billion per year. A $100 billion annual contribution to government revenue could cut the annual deficit by nearly 20%.
It’s important to keep in mind that Fannie and Freddie, and even the Fed, can also lose money, which would come out of taxpayer pockets. If that ever happens, lawmakers would howl loudly once again and quickly propose a fix. Absent such a crisis, however, the status quo looks increasingly tolerable.
Brings back some great memories...I saw them in Jan 1969 at the filmore west with the greatful dead...high dollar concert...cost like 6 bucks to get in....but one hellll of a rockin show.
Were Fannie, Freddie Negotiations Done in Good Faith?
BY Philip van Doorn | 02/27/14 - 01:21 PM EST
NEW YORK (TheStreet) -- The battle over Fannie Mae (FNMA_) and Freddie Mac (FMCC_) is heating up, and it would appear that Mario Ugoletti will be very busy answering questions in court for the foreseeable future.
Ugoletti served as the U.S. Treasury's director of the Office of Financial Institutions Policy and participated in the drawing up of the government's agreement to bail out Fannie and Freddie, while later serving as a special adviser to former acting Federal Housing Finance Agency Director Edward Demarco and helping draw up the subsequent agreement through which nearly all of the government sponsored enterprises' profits are being swept to the government, leaving private investors in the cold. Ugoletti now serves as a special adviser to FHFA Director Mel Watt, who assumed his post in January.
Ugoletti's written testimony provided for a class action suit raises many questions about the government's decision to take nearly all of the profits of Fannie Mae and Freddie Mac in the form of dividends, a well as the timing of the decision.
http://www.thestreet.com/story/12460239/1/were-fannie-freddie-negotiations-done-in-good-faith.html?puc=yahoo&cm_ven=YAHOO
First, some background:
Fannie Mae and Freddie Mac, the two mortgage giants that together purchase the vast majority of newly originated mortgage loans in the United States, are known as the government sponsored enterprises, or GSEs. The GSEs at the height of the credit crisis in September 2008 were facing insolvency and were therefore taken under government conservatorship.
The GSEs are regulated by the FHFA, which is directly controlling Fannie and Freddie since they remain in conservatorship.
Under their original conservatorship agreements, the GSEs were required to pay the government annual dividends of 10% on senior preferred shares issued to the U.S. Treasury for bailout assistance.
Through the fourth quarter of 2011, Fannie Mae continued to make draws from the Treasury -- that is, to borrow more -- in part to cover the 10% dividends it owed to the Treasury, until the value of the Treasury's preferred shares in Fannie increased to $117.1 billion.
Freddie made a small draw on the Treasury during the first quarter of 2012, bringing the government's preferred stake in that company up to $72.3 billion. The Treasury in 2008 was also handed warrants to acquire up to 79.9% of the GSEs common shares, "for a nominal" payment, according to testimony provided by Ugoletti after being subpoenaed as part of a class action lawsuit brought against the government by a group of private investors -- including Fairholme Funds -- holding common and junior preferred GSE shares.
While their borrowings from the Treasury were growing, the GSEs didn't issue additional senior preferred shares to the government. Instead, the value of the government's preferred stakes in Fannie and Freddie grew from their initial values of $1 billion apiece.
So the Treasury's stake in the GSEs has totaled $189.4 billion since the end of the first quarter in 2012, and both GSEs have been profitable since the second quarter of 2012. On August 17, 2012, after Fannie Mae reported second-quarter income of $5.1 billion and after Freddie Mac reported second-quarter income of $3.0 billion, The FHFA and the Treasury agreed on a "third amendment" to the original bailout agreements, through which all profits of Fannie Mae and Freddie Mac, save initial capital cushions of $3 billion for each GSE, would be swept to the Treasury.
To backtrack for a moment -- the "second amendment" to the bailout agreements called for an "initial cap" on the Treasury's investment in the GSEs of $200 billion, plus the amount of draws made through the end of 2012.
With the GSEs not only having returned to profitability but having stopped making draws on the Treasury, it was no surprise to see private investors suing the government for a seat at the table.
Fannie and Freddie both announced their second-quarter earnings this week, along with significant dividend payments to be made in March. Following the March payments, the GSEs' dividends paid to the government will total $199 billion, exceeding the value of the Treasury's investment over a period of roughly five years. That's a fat return -- far greater than the original 10% coupon on the government's senior preferred shares -- and there is no mechanism in place for either Fannie or Freddie to repurchase any of the government-held preferred shares.
shoot...if they show me the right money...I will drive them to my broker and have him personally transfer my shares to them...then I'll take them out to dinner to boot...lol
Agreed...that's a pretty straight forward comment from the FHFA. I don't see anything that could be misconstrued at all..I wonder if they read....and comprehend what they themselves say....lol
SECURITIES AND EXCHANGE COMMISSION (Release No. 34-59217; File No. SR-NYSE-2008-138 )
https://www.sec.gov/rules/sro/nyse/2009/34-59217.pdf
I have highlighted a reference piece at the bottom of page 3...I have attached that reference at the bottom of this post and highlighted it as well.
January 8, 2009 Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by New York Stock Exchange LLC to Memorialize an Interpretation of the Listed Company Manual Concerning Shareholder Approval Requirements and to Describe a Certain Application of its Audit Committee Rule
Pursuant to Section 19(b)(1)1 of the Securities Exchange Act of 1934 (the “Exchange Act”),2 and Rule 19b-4 thereunder,3 notice is hereby given that, on December 22, 2008, New York Stock Exchange LLC (the “NYSE” or the “Exchange”) filed with the Securities and Exchange Commission the proposed rule change as described in Items I, II and III below, which items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule changes from interested persons.
I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to memorialize an interpretation of the Listed Company Manual. The text of the proposed rule change is available on the Exchange’s Web site
(http://www.nyse.com), at the Exchange’s Office of the Secretary and at the Commission’s Public Reference Room.
1
15 U.S.C. 78s(b)(1).
2
15 U.S.C. 78a.
3
17 CFR 240.19b-4.
2
II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The NYSE has
prepared summaries, set forth in Sections A, B and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
On September 7, 2008 the Secretary of the Treasury of the United States and the Director of the FHFA jointly announced that on September 6, 2008, pursuant to authority previously granted by Congress, FNM and FRE were placed into conservatorship with the FHFA, and Treasury entered into a Senior Preferred Stock Purchase Agreement with each company providing for, among other things, the issuance by each company to Treasury of senior preferred stock, and common stock warrants representing an ownership stake of 79.9% in each company.4
The issuance of a security convertible into common stock equal to or in excess of 20% of the then outstanding common stock of a listed company generally requires shareholder approval under Section 312.03 of the NYSE Listed Company Manual. The NYSE has for many years taken the position that a listed company which is a debtor-in-possession under the U.S. bankruptcy laws satisfies the stockholder approval that might
The Commission notes that the terms “FHFA,” “FNM,” and “FRE” refer to the Federal Housing Finance Agency, Fannie Mae, and Freddie Mac, respectively.
4
3
otherwise be required in connection with an issuance of common stock or a security convertible into common stock by obtaining bankruptcy court approval of the issuance of such stock. Such an interpretation is the only practical approach given that in such a circumstance the court, not the stockholders, has the authority to authorize or refuse to authorize the issuance of the security. Consequently, this rule filing codifies the Exchange’s longstanding position that a listed company which is a debtor-in-possession satisfies any applicable stockholder approval requirement under Section 312.03 by obtaining bankruptcy court approval of the proposed issuance.
The FHFA has specified that “the powers of the stockholders [of FNM and FRE] are suspended until the conservatorship is terminated.”5 Based on this, the NYSE has concluded that for purposes of its rules requiring stockholder approval of the issuance of securities, i.e., Sections 312.03 and 303A.08 of the Listed Company Manual, it is appropriate to treat FNM and FRE while they are in conservatorship in the same manner as if they were each a debtor-in-possession under the bankruptcy law. Accordingly, the NYSE takes the position that the requirement of Section 312.03 has been satisfied in connection with the issuance to the Department of the Treasury (the “Treasury”) by each of FNM and FRE of the warrants exercisable for common stock.
Following the establishment of the conservatorship, the independent directors serving on the audit committees of the boards of directors of each of the companies left the board. Each of FNM and FRE are currently engaged in obtaining replacement
See Questions and Answers of Conservatorship, available on the website of the
FHFA. (http://www.ofheo.gov/media/pdf/FHFACONSERVQA.pdf) Note that
FHFA in the same paragraph stated that “Stockholders will continue to retain all
rights in the stock’s financial worth; as such worth is determined by the market.”
5
4
directors and arranging the appropriate delegation from FHFA to the boards and the audit committees to allow the audit committees to function. In keeping with its normal procedures under the provisions of Listed Company Manual Section 303A.06, NYSE is allowing the companies an appropriate period of time in which to fill the vacancies on the audit committee. The NYSE was informed that in connection with the quarterly financial reports on Form 10-Q which were filed in November for the companies’ third quarter, each company arranged for its staff and independent auditor to make a presentation regarding the quarterly report to appropriate departments of the FHFA that was intended to replicate the kind of review that an audit committee would normally conduct with respect to a company’s quarterly financials. The NYSE believes that this action is appropriate in light of the fact that neither company had an audit committee that was able to conduct that review. The Exchange notes that this filing does not seek to interpret Rule 10A-3 under the Sarbanes-Oxley Act. Rather, the Exchange is simply describing its application of the requirements of Section 303A.06 of the Manual to FNM and FRE during the period that they do not have independent audit committees.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent with Section 6(b)6 of the Exchange Act in general and furthers the objectives of Section 6(b)(5) of the Exchange Act7 in particular in that it is designed to promote just and equitable principles
of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in
6
15 U.S.C. 78f(b).
7
15 U.S.C. 78f(b)(5).
5
securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Exchange believes its proposed interpretations of Sections 312.03 and 303A.06 are reasonable in light of the policies underlying those rules and constitute a suitable application of its rules to this unique and unprecedented situation. In particular, the Exchange notes that (i) it is in the public interest that the issuance of securities to the Treasury should not be subject to shareholder approval in light of the scale of Treasury’s provision of capital to the two companies and (ii) the oversight of the companies’ financial reporting by FHFA provides a reasonable level of protection to investors while the companies are repopulating their independent audit committees required by Section 303A.06.
B. Self-Regulatory Organization’s Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act.
C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received from Members, Participants or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
The proposed rule change is effective upon filing pursuant to Section 19(b)(3)(A) of the Exchange Act8 and paragraph (f)(1) of Rule 19b-4 thereunder9 as constituting a
8
17 CFR 240.19b-4(f)(1).
9
17 CFR 240.19b-4(f)(1).
6
stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing Exchange rule. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Exchange Act. Comments may be submitted by any of the following methods: Electronic Comments:
•
Use the Commission’s Internet comment form
(http://www.sec.gov/rules/sro.shtml); or
•
Send an e-mail to rule-comments@sec.gov. Please include File Number SR-
NYSE-2008-138 on the subject line. Paper Comments:
• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities
and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSE-2008-138. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent
7
amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room, on official business days between the hours of 10:00 am and 3:00 pm. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSE-2008-138 and should be submitted on or before [insert date 21 days from publication in the Federal Register].
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10
Florence E. Harmon Deputy Secretary
17 CFR 200.30-3(a)(12). 10
http://www.fhfa.gov/webfiles/35/FHFACONSERVQA.pdf
FEDERAL HOUSING FINANCE AGENCY
FACT SHEET
Contact:
Corinne Russell
(202) 414-6921
Stefanie Mullin
(202) 414-6376
QUESTIONS AND ANSWERS ON CONSERVATORSHIP
Q: What is a conservatorship?
A: A conservatorship is the legal process in which a person or entity is appointed to establish control and oversight of a Company to put it in a sound and solvent condition. In a conservatorship, the powers of the Company’s directors, officers, and shareholders are transferred to the designated Conservator.
Q: What is a Conservator?
A: A Conservator is the person or entity appointed to oversee the affairs of a Company for the purpose of bringing the Company back to financial health.
In this instance, the Federal Housing Finance Agency (“FHFA”) has been appointed by its Director to be the Conservator of the Company in accordance with the Federal Housing Finance Regulatory Reform Act of 2008 (Public Law 110-289) and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (12 U.S.C. 4501, et seq., as amended) to keep the Company in a safe and solvent financial condition.
Q: How is a Conservator appointed?
A: By statute, the FHFA is appointed Conservator by its Director after the Director determines, in his discretion, that the Company is in need of reorganization or rehabilitation of its affairs.
Q: What are the goals of this conservatorship? 1
A: The purpose of appointing the Conservator is to preserve and conserve the Company’s
assets and property and to put the Company in a sound and solvent condition. The
goals of the conservatorship are to help restore confidence in the Company, enhance its
capacity to fulfill its mission, and mitigate the systemic risk that has contributed directly
to the instability in the current market.
There is no reason for concern regarding the ongoing operations of the Company. The
Company’s operation will not be impaired and business will continue without
interruption.
Q: When will the conservatorship period end?
A: Upon the Director’s determination that the Conservator’s plan to restore the Company to
a safe and solvent condition has been completed successfully, the Director will issue an
order terminating the conservatorship. At present, there is no exact time frame that can
be given as to when this conservatorship may end.
Q: What are the powers of the Conservator?
A: The FHFA, as Conservator, may take all actions necessary and appropriate to (1) put the
Company in a sound and solvent condition and (2) carry on the Company’s business and
preserve and conserve the assets and property of the Company.
Q: What happens upon appointment of a Conservator?
A: Once an “Order Appointing a Conservator” is signed by the Director of FHFA, the
Conservator immediately succeeds to the (1) rights, titles, powers, and privileges of the
Company, and any stockholder, officer, or director of such the Company with respect to
the Company and its assets, and (2) title to all books, records and assets of the Company
held by any other custodian or third-party. The Conservator is then charged with the duty
to operate the Company.
Q: What does the Conservator do during a conservatorship?
A: The Conservator controls and directs the operations of the Company. The Conservator
may (1) take over the assets of and operate the Company with all the powers of the
shareholders, the directors, and the officers of the Company and conduct all business of
the Company; (2) collect all obligations and money due to the Company; (3) perform all
functions of the Company which are consistent with the Conservator’s appointment; (4)
preserve and conserve the assets and property of the Company; and (5) contract for
assistance in fulfilling any function, activity, action or duty of the Conservator.
Q: How will the Company run during the conservatorship?
A: The Company will continue to run as usual during the conservatorship. The Conservator
will delegate authorities to the Company’s management to move forward with the
2
3
business operations. The Conservator encourages all Company employees to continue to perform their job functions without interruption.
Q: Will the Company continue to pays its obligations during the conservatorship?
A: Yes, the Company’s obligations will be paid in the normal course of business during the Conservatorship. The Treasury Department, through a secured lending credit facility and a Senior Preferred Stock Purchase Agreement, has significantly enhanced the ability of the Company to meet its obligations. The Conservator does not anticipate that there will be any disruption in the Company’s pattern of payments or ongoing business operations.
Q: What happens to the Company’s stock during the conservatorship?
A: During the conservatorship, the Company’s stock will continue to trade. However, by statute, the powers of the stockholders are suspended until the conservatorship is terminated. Stockholders will continue to retain all rights in the stock’s financial worth; as such worth is determined by the market.
Q: Is the Company able to buy and sell investments and complete financial transactions during the conservatorship?
A: Yes, the Company’s operations continue subject to the oversight of the Conservator.
Q: What happens if the Company is liquidated?
A: Under a conservatorship, the Company is not liquidated.
Q: Can the Conservator determine to liquidate the Company?
A: The Conservator cannot make a determination to liquidate the Company, although, short of that, the Conservator has the authority to run the company in whatever way will best achieve the Conservator’s goals (discussed above). However, assuming a statutory ground exists and the Director of FHFA determines that the financial condition of the company requires it, the Director does have the discretion to place any regulated entity, including the Company, into receivership. Receivership is a statutory process for the liquidation of a regulated entity. There are no plans to liquidate the Company.
Q: Can the Company be dissolved?
A: Although the company can be liquidated as explained above, by statute the charter of the Company must be transferred to a new entity and can only be dissolved by an Act of Congress.
I Have a few questions
We know quite a few lawsuits have been settled, or at least agreed upon to be settled involving billions of dollars worth of bad MBS that both FnF were stuck with. We know there are still several lawsuits yet to be settled or decided.
questions
1. How do these repayments affect the GSE's bottom line?
2. Who gets the money?
3. If the GSE's recover that money, where does it go?
4. If the Treasury gets the money, how will that affect the GSE's bottom line?
5. Would the Treasury consider any recovered monies recovered a dividend payment?
any and all responses are welcome...if you have proof to back up your response...please post the proof.
I'm trying to gain a better understanding of what direction both political and public sentiment is leaning in regards to the conservatorship continuing.
3 Huge Differences Between U.S. and Canadian Mortgages
By Amanda Alix
February 23, 2014
http://www.fool.com/investing/general/2014/02/23/3-huge-differences-between-us-and-canadian-mortgag.aspx
As housing reform continues to be part of the Obama administration's agenda, differences between the mortgage market in the United States and that of other countries have come to light. For instance, how do domestic mortgage products differ from those offered in Canada, a country considered the most comparable to the Unites States?
Here are three critical differences between the home lending market here and in our closest neighbor to the north.
30-year mortgages? Never heard of them
While the 30-year, fixed-rate mortgage has become a staple in the U.S., Canada doesn't offer anything remotely similar. The longest term for a home loan in the North Country is five years, with the amount amortized over a 25-year period. Canadian banks also offer fixed-rate mortgages for two-year, three-year, and four-year terms.
This means Canadians can never count on having a particular loan interest rate last more than five years. At the end of the loan's life span, borrowers can refinance, but prepaying a loan early to take advantage of a drop in rates can cost mortgage customers dearly, as prepayment fees are quite hefty.
Portable loans? You bet
Prepayment may be a no-no in neighboring Canada, but mortgages are attached to the borrower, not the property -- which means they can be transferred to a new home, just like the homeowner. If the new abode is pricier, another loan is taken out to make up the difference, and mortgage insurance is shifted right along with the loan. If rates have risen since the original loan was written, the bulk of the mortgage will be protected against the hike.
Mortgage interest deduction stops at the border
Another key difference is that mortgage interest isn't deductible in Canada, a tax break dearly cherished in the United States. While this may look like a real disadvantage to the Canadian system, it is also protective: There is simply no incentive for homeowners to borrow more than they need, or to maintain high levels of mortgage debt.
Though only around 30% of U.S. taxpayers deduct their mortgage interest each year – and the tax break disproportionately benefits those with high incomes -- efforts to end the deduction have not been successful.
Why are the differences so huge?
The difference in mortgage markets between the U.S. and Canada seem to stem mainly from this issue: The U.S. openly supports homeownership, whereas Canada freely admits that it does not, at least not more than other types of housing, such as rentals and transitional housing.
In the rest of the world, 30-year mortgages are uncommon. Most countries, outside the U.S. and Denmark, don't offer them at all. Before the Great Depression, even U.S. borrowers generally took out short-term mortgages, which were paid off or refinanced when the term ended.
Which mortgage style is better?
There are advantages to both, but U.S. homeowners are smitten with the 30-year loan, the longer term and stability of which enable borrowers to plan far into the future. The Canadian system, however, isn't onerous – and affords stability to the entire housing market, as well as the financial system. Making short-term loans enables banks to lend from their own deposits, and Canadian banks are encouraged to keep loans on their own balance sheets.
Since the financial crisis, U.S. mortgages have become much less risky. New mortgage rules that took effect in the U.S. last month should help preserve this environment -- compelling banks to ensure that borrowers can repay their loans, and requiring banks that don't follow the tighter guidelines to keep riskier loans on their books.
Though 30-year mortgages didn't cause the housing crisis, more prudent lending practices should help prevent another such debacle -- and maintain the home-financing choices U.S. homeowners currently enjoy.
This may have been posted already
Treasury may have broken more than one law and if so its defense of its actions is very weak.
http://www.valuewalk.com/2014/02/fannie-mae-freddie-mac-government-will-lose-case-thinks-bove/
Fannie Mae, Freddie Mac: Government Will Lose Case, Thinks Bove
by VW StaffFebruary 20, 2014, 7:00 am
Rafferty Capital Markets’s Richard X. Bove digs deep into the Fannie Mae / Freddic Mac issue, arguing that the government has been a little too heavy-handed, perhaps overstepping its bounds, much to the chagrin of non-government shareholders. Fannie Mae and Freddie Mac’s conservatorship
It is becoming increasingly clear that the United States may have overstepped its legal rights in the handling of the Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) conservatorship. While I have no legal background I strongly believe that the government will lose its case against the numbers of companies now suing it relative to its expropriation of the profits of Fannie Mae (and Freddie Mac).
The issues are very simple. Under the Home and Economic Recovery Act of 2008 (HERA) the United States established a conservatorship to operate Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) until these companies could be returned to their charter status owned by their shareholders.
In 2012, the U.S. Treasury unilaterally changed this law without the approval of Congress. Under the so-called third amendment, the Treasury stated that all of the profits of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) would be handed to the Treasury and none of these funds would be made available to the preferred and common shareholders of these companies. Abrogation of the property rights
In effect, the Treasury nationalized these companies without any action taken by the Congress and for the sole benefit of the Treasury. This was a de facto expropriation of the firms without any compensation to the public holders of the preferred and common stock of the companies. From my perspective, it was a clear abrogation of the property rights of the owners of these companies without due process of law. In fact it was a clear repudiation of a law set up by the Congress.
In its court filings as to why it decided to override the law of the United States, the Treasury said it acted because the companies were under duress and would lose all of their cash. This view in hindsight was totally incorrect and it misrepresented the terms of the Treasury’s senior preferred stock. Under these terms, Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) was under no obligation to make cash payments to the government; it could have met its obligation by paying stock.
Information made available by the New York Times is also suggesting that Treasury is guilty of withholding material information from shareholders relative to Treasury’s intentions. If so this would be a securities fraud.
In sum, at this stage it appears that the Treasury may have broken more than one law and if so its defense of its actions is very weak
I'm quite confused to say the least. I fully understand limitations to discovery based on "privilege" as it relates to disclosures of personal, or certain levels of vital security that need to be kept "non-public". I also understand the limitations based on cost/time constraints.
However, this isn't a case of national security, nor is it a case of a public disclosure that would, or could cause harm to the general public. I am quite possibly completely wrong here, but I'm going to give it a shot.
It appears that the Treasury/FHFA are, for a lack of a better term...saying they are above the law and do/should not have to allow for discovery.
I have several questions....any and all answers are more than welcome
1. Who appointed FHFA conservator over fannie and freddie?
2. Why would FHFA willingly agree to the 3rd amendment sweep knowing full well their responsibility as conservator would be in direct conflict with their fiduciary responsibility, and responsibilities of a conservator.
3. Can FHFA be...and NOT be a federal agency serving in various capacities?
Below is from the FHFA website...sure sounds like a federal agency to me
The Federal Housing Finance Agency (FHFA) was created on July 30, 2008, when the President signed into law the Housing and Economic Recovery Act of 2008. The Act gave FHFA the authorities necessary to oversee vital components of our country’s secondary mortgage markets – Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition, this law combined the staffs of the Office of Federal Housing Enterprise Oversight (OFHEO), the Federal Housing Finance Board (FHFB), and the GSE mission office at the Department of Housing and Urban Development (HUD).
This is from one of the myriad of PDF's found within FHFA
FHFA as Conservator of the Enterprises On September 6, 2008, FHFA used its authorities to place the Enterprises into conservatorship. This was in response to a substantial deterioration in the housing markets that severely damaged the Enterprises’ financial condition and left them unable to fulfill their mission without government intervention. A key component of the conservatorships is the commitment of the U.S. Department of the Treasury to provide financial support to the Enterprises to enable them to continue to provide liquidity and stability to the mortgage market. To date, the Treasury Department has provided $189.5 billion in support, which includes an initial placement of $1 billion at each Enterprise at the time of the conservatorships and an additional cumulative $187.5 billion investment from the Treasury Department. In accordance with the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 as amended by HERA, FHFA is authorized to “take such action as may be: (i) necessary to put the regulated entity in a sound and solvent condition; and (ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.” In addition, as conservator, FHFA assumed the authority of the management and boards of the Enterprises during the period of the conservatorship. However, the Enterprises continue to operate legally as business corporations and FHFA has delegated to the chief executive officers and boards of directors responsibility for much of the day-to-day operations of the companies. The Enterprises must follow the laws and regulations governing financial disclosure, including the requirements of the Securities and Exchange Commission. As corporate executives, the Enterprises’ executive officers have legal responsibilities to use sound and prudent business judgment in their stewardship of the companies. While FHFA has broad authority over the Enterprises, the focus of the conservatorships is not to manage every aspect of their operations. Instead, FHFA leadership reconstituted the Enterprises' boards of directors in 2008 and charged them with ensuring that normal corporate governance practices and procedures are in place. The boards are responsible for carrying out normal board functions, which are subject to FHFA review and approval on critical matters. This division of duties represents the most efficient structure for FHFA to carry out its responsibilities as conservator
Fannie Mae, Freddie Mac Litigation Heating Up
by valueplaysFebruary 18, 2014, 3:15 pm
http://www.valuewalk.com/2014/02/fannie-mae-freddie-mac-litigation-heating/
Plaintiffs in the Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) litigation are requesting discovery to prove some of the claims made by Treasury in their briefs asking for dismissal of the case are accurate (this was IMO a large tactical error by the gov’t). I have long opined that this case not only does not go to trial but will not pass the discovery stage. Why?
Take a look at the snippet below. This memo was obtained without discovery.
Fannie Mae FHFA Federal National Mortgage Assctn Fnni Me (FNMA)
From the NYT
This month, an internal United States Treasury memo that outlined this restriction came up at a forum in Washington.
The memo was addressed to Timothy F. Geithner, then the Treasury secretary, from Jeffrey A. Goldstein, then the under secretary for domestic finance. In discussing Fannie and Freddie, the beleaguered government-sponsored enterprises rescued by taxpayers in September 2008, the memo referred to “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s in the future.”
The memo, which was produced in a lawsuit filed by Fannie and Freddie shareholders, was dated Dec. 20, 2010. Securities laws require material information — that is, information that might affect an investor’s view of a company — to be disclosed.
That the government would deny a company’s shareholders all its profits certainly seems material, but the existence of this policy cannot be found in the financial filings of Fannie Mae. Neither have the Treasury’s discussions about the future of the two finance giants mentioned the administration’s commitment to shut common stockholders out of future earnings.
Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s filings do refer, albeit incompletely, to the administration’s stance, noting that the Treasury “has indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment.” Note that this reference does not say all earnings.
There is serious discussion now on whether or not, since this was not disclosed to investors if in fact Treasury committed securities fraud. Legal folk can debate whether or not it constitutes it or not, but prior to this memo being obtained the question was not even being asked. Here is the proposed order in the case before Judge Lambert (Wilkins, the original Judge has been promoted to the Appeals Court):
Upon consideration of Plaintiffs’ Motion for Supplementation of the Administrative Records, for Limited Discovery, and for Suspension of Briefing on Defendants’ Dispositive Motions, it is hereby ORDERED that Plaintiffs’ Motion is GRANTED, and it is further hereby ORDERED that:
1. Defendants shall promptly supplement their administrative record submissions so as to include all materials that were directly or indirectly considered by Defendants in connection with their decision to enter into the “Net Worth Sweep” implemented by the “Third Amendment” to the Preferred Stock Purchase Agreements, including, without limitation, (a) all financial projections and associated data and analyses; and (b) the Department of Justice materials to which the “decision memorandum” found at page 4332 of the Treasury Defendants’ record submission refers. In addition, to the extent Defendants have excluded from their compilation of record materials documents that they claim are protected by applicable privileges, they shall promptly produce to Plaintiffs a privilege log identifying those documents and the nature and basis for any such claim of privilege. To the extent any such privileged materials contain purely factual information, Defendants shall promptly produce redacted versions of such materials to Plaintiffs. The productions required under this paragraph shall be made as soon as is reasonably possible, and in no event later than February __, 2014.
2. Plaintiffs are authorized to take limited discovery into the completeness of the administrative records produced by Defendants.
3. Plaintiffs are authorized to take discovery, pursuant to Federal Rule of Civil Procedure 56(d), necessary to allow Plaintiffs to present facts essential to their opposition to the motion by Defendants Federal Housing Finance Agency (“FHFA”) and the FHFA Director to dismiss Plaintiffs’ claim for breach of fiduciary duty, which motion the Court shall treat, under Federal Rule of Civil Procedure 12(d), as a motion for summary judgment.
4. Briefing on Defendants’ pending dispositive motions is suspended until such supplementation of the records and limited discovery is completed. Plaintiffs’ response to Defendants’ dispositive motions, and any cross-motion Plaintiffs decide to file, shall be filed no later than 14 days following the completion of the discovery authorized under this Order.
Treasury/FHFA cannot allow discovery. Discovery will reach to ALL communications with everyone involved with the decision. Depositions will be done under oath as we have seen many times the willingness of lower level folks to throw decision makers under the bus rather than commit perjury. Their entire case rests on their claim that FHFA acted alone, as Federal National Mortgage Assctn Fannie Mae (OTCBB:FNMA) ‘s regulator in enacting the Net Worth Sweep. Plaintiffs claim they acted as the gov’t in which case a host of laws were violated and the very sweep itself is more likely than not a 5th Amendment Violation. Thus is my thesis that should they lose this motion, we start to see events put in motion to end the net worth sweep. Remember, Federal National Mortgage Assctn Fannie Mae (OTCBB:FNMA) was put into conservatorship under Bush/Paulson and Geither/DeMarco were heads of Treasury/FHFA in 2010 when The Net Worth Sweep was enacted.
Obama is now in the White House and Lew/Watt are now the heads of Treasury/FHFA. Rather than risk messy and potentially embarrassing discovery/trial to their agencies in this case, they can instead take a victory lap by setting aside the Net Worth Sweep amendment. How? Simple. At the end of Q1 Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Fresenius SE & Co KGaA (FRA:FRE) will have most likely completely paid off the US Gov’t’s investment in them. Obama/Lew/Watt can claim success in the bailout repayment, still hold 80% of the common giving the gov’t future profits from their involvement and end this case by setting aside the Net Worth Sweep and the dozens of additional lawsuits discovery will inevitably spawn. Once the NWS amendment is set aside, the basis for the suits against them now evaporates.
Obama/Lew/Watt can “return these entities to the pension funds (think teachers, police, fire, auto unions etc), small banks and individual investors who own their securities” and pat themselves on the back for another successful government action. The dramatic rise in the value of securities held by these pension funds will be nice positive PR boost for the President and Democrats before the fall elections. A public trial on the legality of their actions will stall any potential reorganization of them as plaintiffs will ask surely for a stay in any potential changes to the entities structure. Should they return to public market with Treasury holding 80% of the common (after exercising warrants) Treasury can then still push for changes to the entities as majority shareholders without the cloud of a trial hanging over them.
So, now the question is “when”. Impossible to tell but I think we get something this spring either from Judges Lambert or Sweeney. I’m think Sweeney issues a decision first as she seems to have been less willing to buy the Gov’t’s claims and demands for dismissal and is pressing on with the litigation in her Federal Claims Court.
Here is the discovery motion: Motion for Discovery
http://www.valueplays.net/wp-content/uploads/Motion-for-Discovery.pdf
Below is the Gov’t response.
Gov’t Response to Discovery Motion
http://www.valueplays.net/wp-content/uploads/Govt-Response-to-Discovery-Motion.pdf
It is weak and I expect Sweeney to grant some discovery. It will probably be limited to specific issues but it will be granted. The gov’t, in all its motions continues to fall back on its position, “we are the gov’t and can do this”. Unfortunately for them, while the gov’t does have wide ranging powers, they still have to follow the law. The only way to decide that is for this case to go forward and based on the claims made by the gov’t in their initial brief, discovery in some form will be necessary to decide this.
Things should start getting interesting soon….
The Untouchable Profits of Fannie Mae and Freddie Mac
FEB. 15, 2014
By GRETCHEN MORGENSON
http://www.nytimes.com/2014/02/16/business/the-untouchable-profits-of-fannie-mae-and-freddie-mac.html?partner=yahoofinance&_r=0
Would you buy stock in a company that barred you from sharing in its future earnings? Of course not. Participating in the upside is what stock ownership is all about.
And yet, as of December 2010, holders of Fannie Mae and Freddie Mac common stock were subject to such a restriction by the United States government. They didn’t know it at the time, though, because the policy was not disclosed.
This month, an internal United States Treasury memo that outlined this restriction came up at a forum in Washington.
The memo was addressed to Timothy F. Geithner, then the Treasury secretary, from Jeffrey A. Goldstein, then the under secretary for domestic finance. In discussing Fannie and Freddie, the beleaguered government-sponsored enterprises rescued by taxpayers in September 2008, the memo referred to “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s in the future.”
The memo, which was produced in a lawsuit filed by Fannie and Freddie shareholders, was dated Dec. 20, 2010. Securities laws require material information — that is, information that might affect an investor’s view of a company — to be disclosed. That the government would deny a company’s shareholders all its profits certainly seems material, but the existence of this policy cannot be found in the financial filings of Fannie Mae. Neither have the Treasury’s discussions about the future of the two finance giants mentioned the administration’s commitment to shut common stockholders out of future earnings. Freddie Mac’s filings do refer, albeit incompletely, to the administration’s stance, noting that the Treasury “has indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment.” Note that this reference does not say all earnings.
Lewis D. Lowenfels, a securities law expert in New York, found this statement insufficient. “If there is disclosure regarding future Fannie and Freddie earnings and the administration has a commitment that existing Fannie and Freddie common equity holders will never receive any future positive earnings,” he said, “this commitment would be material to investors and should be disclosed.”
When the memo was written, plenty of people held these stocks. Regulatory filings show that 18,000 investors held 1.1 billion shares of Fannie Mae common stock, while just over 2,100 investors held 650 million Freddie Mac shares.
Back in 2010 and 2011, of course, common stockholders of Fannie and Freddie had little hope of making much money. During those days of rampant mortgage defaults and losses, investors were warned about the uncertainty of their companies’ prospects. Fannie and Freddie shareholders were repeatedly told that the preferred and common stock would have value only if anything remained after taxpayers were fully repaid for the rescue. With the amount of that rescue peaking at $189.5 billion, that was a very big “if.” On the day the Treasury memo was written, the price of Fannie Mae shares closed at 34 cents.
But the companies staged a turnaround; in mid-2012, they began earning billions. With interest rates low and banks not lending, Fannie and Freddie became the only mortgage game in town. By Sept. 30 of last year, the companies had returned $185 billion to the Treasury.
Failing to disclose the administration’s hard line on the companies’ shareholders is disturbing for another reason. In bailing out Fannie and Freddie, the Treasury received warrants — optionlike securities that rise in value when the shares underlying them do. When investors, hoping for a housing recovery, flocked to the shares and pushed them higher, the value of the warrants increased. Fannie’s common stock now trades at $3.06 a share.
Given Treasury’s interest in a rising stock price, depriving common equity holders of future earnings was especially important for investors to know, Mr. Lowenfels said.
A spokesman for the Treasury declined to comment. Mr. Geithner did not respond to an email, and Mr. Goldstein, now a managing director at Hellman & Friedman, a private equity firm, did not return a phone call.
All of this has come to a boil because Fannie and Freddie have become so profitable. Yet because of a change in the repayment process dictated by the Treasury in 2012, the $189.5 billion debt technically remains outstanding. The profits generated by Fannie and Freddie have instead gone to the general treasury.
I have been critical of these companies, but this change in the bailout terms seems punitive, especially when considering how other bailout recipients were treated. And it has led to lawsuits against the government from Fannie and Freddie shareholders, including insurance companies, a mutual fund and a hedge fund. The plaintiffs contend that the government’s 2012 decision to take all the companies’ profit — just as it was starting to balloon — was illegal under the 2008 law that rescued them.
After all, back in 2008, the companies were not put into receivership, the equivalent of bankruptcy. Rather, they were placed under the care of a conservator — the Federal Housing Finance Agency. That conservator was supposed to put the companies “in a sound and solvent condition” and “preserve and conserve the assets and property” of each entity.
Siphoning off the entities’ profits is the opposite of conserving their assets and property, the plaintiffs contend. And they point to a 2009 Treasury memo stating that the conservatorship of Fannie and Freddie “preserves the status and claims” of preferred and common shareholders. One of those claims is surely having access to future earnings.
A spokeswoman for the Federal Housing Finance Agency declined to comment, citing the litigation. A spokesmen for Fannie declined to comment as well. A Freddie Mac official did not elaborate beyond pointing to the language in its filings.
Perry Capital, a hedge fund, is one of the plaintiffs suing the government. Its lawsuit seeks no damages, but asks that the government follow the 2008 law. The 2010 memo was produced by the Treasury in response to this lawsuit.
Do the Treasury’s actions amount to a backdoor nationalization of the companies? A full-fledged takeover would have required Treasury to put all the companies’ obligations — $4.9 trillion at the time —on the government’s balance sheet. A nonstarter.
Furthermore, nationalization would have required the government to provide compensation to shareholders for what it took. Now the government gets the benefits of the companies’ profits while avoiding any compensation payments.
“People disagree about what should happen to the G.S.E.’s,” said Matthew D. McGill, a lawyer at Gibson, Dunn & Crutcher in Washington who represents Perry Capital. “But if the plan is to wind them down, Congress provided a means to do that in the 2008 law — it’s called receivership, and it provides a host of procedural protections to claimants. What the Treasury cannot do is abuse its conservatorship powers to nationalize the companies and then, when it deems convenient, wind them down without the protections enacted by Congress.”
Please check this link...this will better explain the authorities I am referring to. I am unable to find the article that I first read, but if I remember correctly, the authority in the state of Florida file a lawsuit demanding suspended funds from FnF.
https://www.ncsha.org/advocacy-issues/housing-trust-fund
Would this not also prevent FnF from providing requested funds to the several housing authorities that are asking for money to support low income and disadvantaged persons trying to buy homes?
My understanding is FnF pay ALL profits to the treasury minus a nominal ~$3 billion to be used for internal needs.
Obama administration says housing finance reform to advance in Senate soon
By Margaret Chadbourn
http://finance.yahoo.com/news/obama-administration-says-housing-finance-142716651.html
WASHINGTON, Feb 12 (Reuters) - The U.S. Senate Banking Committee is expected to move forward within "the next few weeks" with bipartisan plans for overhauling the U.S. mortgage finance system, Housing and Urban Development Secretary Shaun Donovan said on Wednesday.
"We'll have a bipartisan product relatively soon," Donovan said at a forum sponsored by Politico in Washington. "There is a way to find a compromise."
President Barack Obama as well as Democrats and Republicans in Congress want to wind down Fannie Mae and Freddie Mac. Leaders of the Senate banking panel wanted to roll out a housing reform bill by the end of 2013, but missed the target and have yet to introduce legislation.
"We have a relatively short window to get something done," Donovan said. "There is a great deal of bipartisan groundwork."
Senate Banking Committee Chairman Tim Johnson and Senator Mike Crapo, the panel's top Republican, are aiming to produce a bipartisan bill that builds on legislation that 10 senators had already co-sponsored to wind down Fannie Mae and Freddie Mac and allows for a federal backstop for lending in a crisis.
While momentum is building, it remains unlikely Congress will enact a law this year.
The challenge for the Senate Banking Committee is whether Johnson will be able to coax the panel's Democrats that have started to splinter over concerns about how much the bill reduces the government's support for the housing market, and fails to promote affordable housing programs.
Republicans may support the overhaul but it's unclear whether they would back down if more emphasis is placed on low-incoming housing initiatives in the negotiation process.
"We're making real progress, but there is more that we can do," Donovan said. "Both sides could walk away with something."
Any bill offered in the Senate must be reconciled with a Republican-backed measure in the House of Representatives that greatly limits the government's housing-finance role. Midterm elections also complicate the congressional calendar and detract from efforts to get something done.
The U.S. government seized Fannie Mae and Freddie Mac in 2008 after they were pushed to the brink of insolvency by investments in bad loans. The duo took $187.5 billion in taxpayer aid but have since paid about $185.2 billion in dividends to the government, thanks to the U.S. housing market rebound.
BofA, Goldman among banks facing $16 billion in fines
http://www.marketwatch.com/story/goldman-bofa-face-16-billion-in-fhfa-related-fines-2014-02-11?siteid=yhoof2
NEW YORK (MarketWatch) — The settlements of lawsuits so far with major banks pave the way for some $16 billion in additional penalties to be paid by banks including Bank of America and Goldman Sachs Group over mortgage securities sold to government-seized housing giants Fannie Mae and Freddie Mac.
Of the banks that have recently settled — including Morgan Stanley last week — the settlement amounts equate to roughly 12% to 13% of original principal balance of securities sold to the GSEs. The remaining banks could expect to pay approximately $16 billion in total if that settlement range holds.
Expect the majority of financial firms to settle this year on billions of dollars from outstanding lawsuits with the government, related to the sale of mortgage-backed securities, sources tell MarketWatch.
Out of the 18 financial institutions that have been sued by the Federal Housing Finance Agency, seven firms have settled, including Morgan Stanley and J.P. Morgan Chase & Co. JPM +0.22% .
“Most of the banks would like to settle as part of the herd and not stand out,” said John Coffee, a law professor at Columbia Law School. “It’s less individual culpability that way.”
Morgan Stanley disclosed it has settled with FHFA for $1.25 billion in a regulatory filing and the bank also added $150 million into its legal reserves as part of the disclosure. That is approximately 12% of the $10.58 billion securities that the FHFA states in the lawsuit the firm sold to Fannie and Freddie.
The FHFA began to oversee the two government agencies that guarantee the majority of U.S. residential mortgages, Fannie Mae and Freddie Mac, as a result of the financial crisis. And in 2011 it sued 18 banks over alleged faulty securities the banks sold to the two mortgage giants.
Banks including Citigroup Inc. and UBS AG UBS have already settled, however, other lawsuits remain outstanding, including against Bank of America Corp. BAC and Goldman Sachs Group Inc. GS
“You have to assume the same percentage will be applied to the other banks,” said Coffee.
Bank of America for example has two related suits stemming from Merrill Lynch and Countrywide, which the firm bought in 2008, totalling $51.5 billion in mortgage securities sold to Fannie and Freddie. Including its own originations, a 13% payout would be approximately $7.4 billion. Bank of America had no comment on the matter.
According to the FHFA lawsuit, Goldman Sachs sold $11.1 billion residential mortgage-backed securities to Fannie and Freddie, which could point to a settlement amount of $1.44 billion if the trend is correct. Goldman Sachs also declined to comment.
It’s much easier to settle the remaining cases once the bigger players settle, say sources.
However, each case is different and depends on the quality of the investments, say analysts.
For instance, General Electric Co. at 34%, and Ally Financial, at 28%, paid much more than the 12-13% range seen with the major banks.
“A lot of it has to do with the underlying quality of assets,” said Brad Hintz, analyst at Sanford Bernstein. “It’s impossible to look at the mortgages securities and say they were of the same quality, especially leading up to the financial crisis.”
Banks generally do not disclose how much is set aside for litigation costs, however. J. P. Morgan recently revealed it had set aside $23 billion .
The FHFA is in a difficult place says industry watchers. The Inspector General’s office has oversight over the agency and has to report to Congress that includes questions of the size of settlements being too big or too small.
Sen. Elizabeth Warren notably has criticized federal regulators for being too soft on large institutions.
Almost 40% or more of the banks have settled and a lot more will settle this year, noted Coffee.
“You don’t want to be the last to settle,” said Coffee.
This is inaccurate...they do NOT take in to account the original 10% dividend. If we theorize that the ORIGINAL agreement will be reinstated whereas each of the GSE's will be required to pay a 10% dividend on all monies "borrowed" from the FED...FNMA will still owe several billions of dollars once the currently mythical "NET ZERO" is reached. I expect that both FnF will reach the original "NET ZERO" including the 10% div owed once Q4 2013 is released....if not...certainly by Q1 2014.
Below link is a great PDF that breaks down what FnF has borrowed and paid back by quarter.
http://www.fas.org/sgp/crs/misc/R42760.pdf
Earnings report will come out no later than Monday March 3rd...unless they file for an extension. From what I've been able to find, the consensus is on or around 26 FEB, with some saying today...and some saying "any day now"...history says it will be closer to the end of month as you pointed out.
==Takings clause==
===Eminent domain===
{{main|Eminent domain}}
The [[Supreme Court of the United States|Supreme Court]] has held that the federal government and each state has the power of [[eminent domain]];the power to take private property for "[[public use]]". The ''Takings Clause'', the last clause of the Fifth Amendment, limits the power of eminent domain by requiring that "just compensation" be paid if private property is taken for public use. The just compensation provision of the Fifth Amendment did not originally apply directly to the states, but since [[Chicago, B. & Q. R. Co. v. Chicago|''Chicago, B. & Q. Railroad Co. v. Chicago'' (1897)]], federal courts have held that the [[Fourteenth Amendment to the United States Constitution|Fourteenth Amendment]] extended the effects of that provision to the states. The federal courts, however, have shown much deference to the determinations of Congress, and even more so to the determinations of the state legislatures, of what constitutes "public use". The property need not actually be used by the public; rather, it must be used or disposed of in such a manner as to benefit the public welfare or public interest. One exception that restrains the federal government is that the property must be used in exercise of a government's enumerated powers.
The owner of the property that is taken by the government must be justly compensated. When determining the amount that must be paid, the government does not need to take into account any speculative schemes that the owner claims the property was intended for use in. Normally, the fair market value of the property determines "just compensation". If the property is taken before the payment is made, interest accrues (though the courts have refrained from using the term "interest").
The federal courts have not restrained state and local governments from seizing privately owned land for private commercial development on behalf of private developers. This was upheld on June 23, 2005, when the Supreme Court issued its opinion in ''[[Kelo v. City of New London]].'' This 5–4 decision remains controversial. The majority opinion, by [[John Paul Stevens|Justice Stevens]], found that it was appropriate to defer to the city's decision that the development plan had a public purpose, saying that "the city has carefully formulated a development plan that it believes will provide appreciable benefits to the community, including, but not limited to, new jobs and increased tax revenue." Justice Kennedy's concurring opinion observed that in this particular case the development plan was not "of primary benefit to ... the developer" and that if that was the case the plan might have been impermissible. In the dissent, Justice [[Sandra Day O'Connor]] argued that this decision would allow the rich to benefit at the expense of the poor, asserting that "Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random. The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms." She argued that the decision eliminates "any distinction between private and [[public use]] of property;and thereby effectively delete[s] the words 'for public use' from the Takings Clause of the Fifth Amendment". A number of states, in response to Kelo, have passed laws and/or state constitutional amendments which make it more difficult for state governments to seize private land. Takings that are not "for public use" are not directly covered by the doctrine,''See'' [[Berman v. Parker]]. however such a taking might violate [[Due process in the United States|due process]] rights under the [[Fourteenth Amendment to the United States Constitution|Fourteenth amendment]], or other applicable law.
The exercise of the police power of the state resulting in a taking of private property was long held to be an exception to the requirement of government paying just compensation. However the growing trend under the various state constitution's taking clauses is to compensate innocent third parties whose property was destroyed or "taken" as a result of police action.''Wegner v.Milwaukee Mutual, City of Minneapolis'' 479 N.W.2d 38 (Minn. 1991) and ''Steele v. City of Houston'' 603 S.W.2d 786 (1980)
==="Just compensation"===
The last two words of the amendment promise "just compensation" for takings by the government. In ''[[United States v. 50 Acres of Land]] (1984)'', the [[Supreme Court of the United States|Supreme Court]] wrote that "The Court has repeatedly held that just compensation normally is to be measured by "the market value of the property at the time of the taking contemporaneously paid in money." ''[[Olson v. United States]], 292 U.S. 246 (1934)'' ... Deviation from this measure of just compensation has been required only "when market value has been too difficult to find, or when its application would result in manifest injustice to owner or public." ''[[United States v. Commodities Trading Corp]]., 339 U.S. 121, 123 (1950)''.
Summary: H.R.3901 — 113th Congress (2013-2014)
There is one summary for this bill. Bill summaries are authored by CRS.
Shown Here:
Introduced in House (01/16/2014)
Pay Back the Taxpayers Act of 2014 - Prohibits the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (government sponsored enterprises or GSEs), during the term of any conservatorship or receivership, from making any contribution or transfer to, or allocate or set aside any amounts for, the Housing Trust Fund or the Capital Magnet Fund.
Requires any amounts paid or repaid to the Secretary of the Treasury by a GSE in any form, during any conservatorship or receivership of the GSE, to be covered into the General Fund of the Treasury only for reducing the budget deficit of the federal government.
JPMorgan Joins Morgan Stanley in Settling U.S. Mortgage Lawsuits
Link: http://www.bloomberg.com/news/2014-02-05/jpmorgan-joins-morgan-stanley-in-settling-u-s-mortgage-cases.html
Morgan Stanley (MS) and JPMorgan Chase & Co. (JPM) agreed to pay $1.86 billion to end U.S. accusations of misconduct in their handling of home loans and related securities that left taxpayers shouldering losses after the financial crisis.
Morgan Stanley said yesterday it reached a $1.25 billion deal to end Federal Housing Finance Agency claims the bank sold faulty mortgage bonds to Fannie Mae (FNMA) and Freddie Mac (FMCC) before the firms’ losses pushed them into U.S. conservatorship. JPMorgan will pay $614 million after admitting it submitted ineligible loans for Federal Housing Administration and Veterans Affairs insurance.
JPMorgan “put profits ahead of responsibility by recklessly churning out thousands of defective mortgage loans, failing to inform the government of known problems with those loans and leaving the government to cover the losses,” Manhattan U.S. Attorney Preet Bharara said in a statement.
The six largest U.S. lenders have allocated more than $114 billion since the financial crisis to cover legal expenses, government probes and mortgage-related claims. Morgan Stanley’s deal with the FHFA prompted the New York-based bank to book an additional $150 million charge in the fourth quarter, reducing earnings for the period by 5 cents a share.
Photographer: Victor J. Blue/Bloomberg
Morgan Stanley, which disclosed its settlement in a regulatory filing yesterday, was... Read More
Morgan Stanley, which disclosed its settlement in a regulatory filing yesterday, was among 18 banks sued by the FHFA in 2011. Authorities sought to recoup some losses taxpayers covered when the government took control of the failing mortgage-finance companies in 2008. Seven banks, including JPMorgan and Deutsche Bank AG, agreed last year to pay a total of almost $8 billion to settle claims they also sold faulty mortgage bonds to Fannie Mae and Freddie Mac.
Deception Alleged
Morgan Stanley said last month it added $1.2 billion to legal reserves in the fourth quarter related to mortgage-backed securities litigation and investigations. The firm disclosed in a filing in November that the case involved the sale of $11 billion of mortgage-related securities.
Denise Dunckel, a spokeswoman for FHFA, confirmed the settlement in principle. The agreement requires final approvals by the parties, according to Morgan Stanley’s filing.
The FHFA wrote in its 2011 complaint that Morgan Stanley made untrue statements and material omissions in sales of mortgage bonds. The case had been set for trial in January 2015. The unpaid balance of the securities was $2.8 billion in September, and actual losses on the bonds were about $68 million, the bank said in November.
JPMorgan Accusations
JPMorgan’s settlement announced yesterday focused on the firm’s participation in U.S. programs authorizing private-sector lenders to approve mortgages for insurance or refinancing by the government. Prosecutors claimed that starting in 2002, JPMorgan “routinely violated” rules while approving thousands of loans that failed to meet the programs’ requirements.
The government’s complaint contained examples of mortgages representing a “small fraction of the thousands of loans that Chase recklessly approved.”
For example, the bank underwrote a loan for a property in Jeffersonville, Indiana, and approved it for FHA insurance in violation of rules prohibiting reliance on documents more than 120 days old to verify the borrower’s assets, according to the complaint. The borrower defaulted after making only three payments. The Department of Housing and Urban Development paid JPMorgan, as holder of the note, a $109,253 insurance claim, according to the complaint.
‘Significant Step’
JPMorgan acknowledged in its agreement that it failed to inform agencies when its own internal reviews discovered more than 500 defective loans that shouldn’t have been submitted for FHA and VA insurance, according to the Justice Department’s statement.
“This settlement recovers wrongfully claimed funds for vital government programs that give millions of Americans the opportunity to own a home,” Associate Attorney General Tony West said in the statement. U.S. District Court Judge J. Paul Oetken in Manhattan approved the accord.
“The settlement represents another significant step in the firm’s efforts to put historical mortgage-related issues behind it,” New York-based JPMorgan said in a statement. The deal can probably be covered by existing reserves, it said.
The bank separately agreed last year to pay $4 billion to settle FHFA claims related to about $33 billion in mortgage bonds.
Fannie Mae and Freddie Mac have taken $187.5 billion in U.S. aid and have returned $185.2 billion under terms of their federal conservatorship. The companies are required to turn over to the Treasury all quarterly profits above a $3 billion net worth-cap, and money is counted as a return on the almost 80 percent stakes the government holds, not as repayment of aid.
The cases are Federal Housing Finance Agency v. Morgan Stanley, 11-cv-06739, and United States of America ex rel. Keith Edwards v. JPMorgan Chase Bank, 13-cv-00220, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Michael J. Moore in New York at mmoore55@bloomberg.net; Joel Rosenblatt in San Francisco at jrosenblatt@bloomberg.net; Patricia Hurtado in Federal Court in Manhattan at
pathurtado@bloomberg.net
Interesting video and article by the Billionaire Kotch brothers.
http://news.yahoo.com/kronies--the-latest-koch-backed-project-is-a-viral-cartoon-even-the-left-can-love-224333470.html
I like to look at things in a very simplistic way...makes it easy for my brain to stay intact. Logic tells me that these funds that invested hundreds of millions of dollars in FnF knowing full well the guidelines of the conservtorship....would NOT blindly do so.
I would venture they most likely have communicated with each other...at least at the attorney level, and quite possibly have conducted mock trials to determine the most plausible outcomes.
I know if I had invested that kind of money in such a risk prone venture, I certainly would spend the money to gain a better understanding of my chances for a positive outcome and check every which way it might possibly end.
Banks CAN provide such loans...they are unwilling to tie up money with such a low return for such a great length of time. It all boils down to GREED.
With more stringent requirements in place for loans, and loans with a ratio less than 20% down requiring MIP, it is quite evident the banks don't give a crap about helping the people secure a home for their families.
Remember back 10 years ago when credit cards were at 12% - 18% interest....banks were paying 4% - 5% for their money...now they pay .125% and CC rates are as high if not higher than 10 years ago.
The banks are all about making huge money on the taxpayers dime, with little to no risk of their bottom line.
In the early 1930s, insurance companies started selling mortgages for homes...typically terms were around 50% down with monthly payments over 3 - 4 - 5 years with a balloon payment at the end. Their goal was that hopefully the home purchaser would eventually default and the insurance company could repo the home...then resell or rent it out.
Somewhere in the early to mid 1930's the FHA started the modern mortgages. And you are correct...the reason was to pull the country out of the depression era. The FHA started with I think 15 yr loans, and actually initiated pre-qualifying with as little as 5% down. They later stretched it out to 30 years as we now have. They also set building standards to ensure the home wasn't a pile of crap.
Fairholme’s Bruce Berkowitz: Fannie and Freddie ‘absolutely essential’
LINK: http://blogs.marketwatch.com/thetell/2014/02/04/fairholmes-bruce-berkowitz-fannie-and-freddie-absolutely-essential/
February 4, 2014, 12:35 PM
Fairholme Funds beat the S&P 500 in 2013 and in no small part due to two investments.
In fact, founder Bruce Berkowitz points to Fannie Mae FNMA and Freddie Mac FMCC as two of the fund’s best-performing picks.
“Both are absolutely essential for uniquely-American, affordable mortgages,” said Berkowitz. “If you disagree, try getting a 30-year, sub-5% mortgage outside of the United States.”
The two government-backed mortgage giants, also known as GSEs, were taken into conservatorship in the midst of the financial crisis as losses mounted to nearly $15 billion and there were heightened concerns they would threaten the already turbulent financial markets.
The government plan for the firms to agree to conservatorship and “extraordinarily harsh terms and conditions” during a time of global crisis “worked,” declares Berkowitz.
“Fannie and Freddie saved the day, repaid nearly every penny of cash received from the U.S. Treasury, and can look forward to resuming a prosperous future based just on the aging of assets held,” said Berkowtiz.
The Fairholme Fund FAIRX was up 35.54% in 2013, compared to the S&P 500, which was up 32.39%, according to the letter to investors released in January. And if you go back to the firm’s inception in 1999, it’s up 450.94% compared to the S&P 500, which has risen 64.68% in the same time period.
The firm’s biggest position, at nearly 50% of assets, is in common stock and warrants of American International Group Inc. AIG +1.77% .
And the second-largest position in the fund is in Bank of America Corp. BAC +0.89% common stock.
Berkowitz, a big bank-stock investor, says the companies are both designated “Global Systemically Important Financial Institutions.”
“They are too important to fail” and have significant value beyond their fortress-like balance sheets, says the fund manager.
Berkowitz believes the two firms are capable of distributing healthy earnings to owners through dividends and/or buybacks of common stock. And yet “both trade at discounts to book value.”
All-in-all a net positive.