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Nader to Secretary Lew: Internal Treasury Memo Raises
One year ago. Still valid question, notice reference to GMorgenson-
On February 19, 2014
The Honorable Jacob J. Lew
Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Dear Secretary Lew,
I am writing regarding an article published in the New York Times by the formidable Gretchen Morgenson this past weekend. The article, titled “The Untouchable Profits of Fannie Mae and Freddie Mac,” discussed an internal memo at the U.S. Treasury from 2010 which indicated that the Treasury Department was striving to ensure that no future profits would benefit the shareholders of the government sponsored enterprises (GSEs). The precise phrase in the memo reads as follows:
“Makes clear the Administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.”
What legal authority does the Administration have, as this section of the memo intimates, to completely wipe out shareholders – even after taxpayers have been repaid (as is likely to happen soon)?
This would seem to be contrary to the stated goal, in the preferred stock purchase agreements (PSPAs), of the conservatorship that the GSEs’ assets and property be “preserved and conserved.” How do you reconcile this contradiction?
Gretchen Morgenson later updated the article with a response to her request for comment from Treasury, which read: “The relevant language in the memo was about the importance of repaying taxpayers for the enormous investment that they made in the G.S.E.’s if the G.S.E.’s ever generated positive returns, which, at the time, was uncertain to ever occur.”
Contrary to this statement, neither the memo – nor Treasury’s actions by unilaterally amending the PSPAs – leaves one with the impression that this point in the memo is meant to highlight the importance of repaying the taxpayers. It seems to be setting a precedent for using and abusing the GSEs’ shareholders.
Further, Treasury’s comment only addresses the issue of the repayment of the taxpayers, and ignores the issue raised at the heart of Ms. Morgenson’s article: Does the administration aim to wipe out shareholders? Shareholders are not arguing that taxpayers should not be repaid. This is not at issue. Taxpayers should recoup their investment in the GSEs; but the Administration does not have to wipe out shareholders in order for this to happen.
This need not be an issue of choosing taxpayers over shareholders. The federal government has similarly recouped taxpayer money used to bailout other corporations (A.I.G., Citigroup, etc.) involved in the financial collapse, but has allowed the shareholders of those companies to share in their recovery. The same should be the case with the GSEs.
I have enclosed a number of items with this letter: A copy of my last letter to you, dated May 23, 2013; a copy of Ms. Morgenson’s article; and a copy of the Treasury memo referenced in her article and in this letter. I look forward to the courtesy of a timely clarifying response.
Sincerely,
Ralph Nader
Nader to Secretary Lew: Internal Treasury Memo Raises
One year ago. Still valid question, notice reference to GMorgenson-
On February 19, 2014
The Honorable Jacob J. Lew
Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Dear Secretary Lew,
I am writing regarding an article published in the New York Times by the formidable Gretchen Morgenson this past weekend. The article, titled “The Untouchable Profits of Fannie Mae and Freddie Mac,” discussed an internal memo at the U.S. Treasury from 2010 which indicated that the Treasury Department was striving to ensure that no future profits would benefit the shareholders of the government sponsored enterprises (GSEs). The precise phrase in the memo reads as follows:
“Makes clear the Administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.”
What legal authority does the Administration have, as this section of the memo intimates, to completely wipe out shareholders – even after taxpayers have been repaid (as is likely to happen soon)?
This would seem to be contrary to the stated goal, in the preferred stock purchase agreements (PSPAs), of the conservatorship that the GSEs’ assets and property be “preserved and conserved.” How do you reconcile this contradiction?
Gretchen Morgenson later updated the article with a response to her request for comment from Treasury, which read: “The relevant language in the memo was about the importance of repaying taxpayers for the enormous investment that they made in the G.S.E.’s if the G.S.E.’s ever generated positive returns, which, at the time, was uncertain to ever occur.”
Contrary to this statement, neither the memo – nor Treasury’s actions by unilaterally amending the PSPAs – leaves one with the impression that this point in the memo is meant to highlight the importance of repaying the taxpayers. It seems to be setting a precedent for using and abusing the GSEs’ shareholders.
Further, Treasury’s comment only addresses the issue of the repayment of the taxpayers, and ignores the issue raised at the heart of Ms. Morgenson’s article: Does the administration aim to wipe out shareholders? Shareholders are not arguing that taxpayers should not be repaid. This is not at issue. Taxpayers should recoup their investment in the GSEs; but the Administration does not have to wipe out shareholders in order for this to happen.
This need not be an issue of choosing taxpayers over shareholders. The federal government has similarly recouped taxpayer money used to bailout other corporations (A.I.G., Citigroup, etc.) involved in the financial collapse, but has allowed the shareholders of those companies to share in their recovery. The same should be the case with the GSEs.
I have enclosed a number of items with this letter: A copy of my last letter to you, dated May 23, 2013; a copy of Ms. Morgenson’s article; and a copy of the Treasury memo referenced in her article and in this letter. I look forward to the courtesy of a timely clarifying response.
Sincerely,
Ralph Nader
That's how I understand it also. Cat and mouse game begins, Fannie Freddie turning on its "owner".
bill-ackman-harbor-conference:
Excerpts from Mr. Ackman:
“…the U.S. government, every quarter, is taking out 100 percent of their profits, right. So you have the housing finance system, this is supposedly an off balance sheet company. It’s not consolidated into the balance sheet of the U.S. government. And the U.S. government is taking 100 percent of the profits and, you know, these — these are the — the worst capitalized institutions in the world. And that’s not a sustainable situation.”
“I think there are some members of government who want to see Fannie and Freddie go away. But if Fannie and Freddie go away, so does the 30-year pre-payable fixed rate mortgage and so does the housing market.”
“…the government is not one unified body. It’s a series of people. There are a lot of very intelligent people who work in the Senate and in the Congress. And a, you know, I think that ultimately, truth prevails. That’s been my experience as an investor and my experience in life. And we need to recapitalize Fannie and Freddie.”
bill-ackman-harbor-conference:
Excerpts from Mr. Ackman:
“…the U.S. government, every quarter, is taking out 100 percent of their profits, right. So you have the housing finance system, this is supposedly an off balance sheet company. It’s not consolidated into the balance sheet of the U.S. government. And the U.S. government is taking 100 percent of the profits and, you know, these — these are the — the worst capitalized institutions in the world. And that’s not a sustainable situation.”
“I think there are some members of government who want to see Fannie and Freddie go away. But if Fannie and Freddie go away, so does the 30-year pre-payable fixed rate mortgage and so does the housing market.”
“…the government is not one unified body. It’s a series of people. There are a lot of very intelligent people who work in the Senate and in the Congress. And a, you know, I think that ultimately, truth prevails. That’s been my experience as an investor and my experience in life. And we need to recapitalize Fannie and Freddie.”
Dusting Off FIRREA: Old Statute Is Now Potent Weapon
Law360, New York (February 12, 2015, 10:52 AM ET)
https://thetruthaboutfannieandfreddie.wordpress.com
A long-dormant law can become an unexpectedly potent weapon in the hands of an assertive prosecutor. And in recent years, few statutes have undergone a rebirth more dramatic — and for some, more troubling — than the civil penalties provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. 12 U.S.C. § 1833a.
Enacted in response to the savings and loan crisis but scarcely used over the following two decades, FIRREA has become a favored tool for prosecutors in the aftermath of the recent financial crisis. FIRREA offers prosecutors unusual and powerful advantages, which have only been amplified by the U.S. Department of Justice‘s aggressive interpretations of the statute — interpretations that have, so far, enjoyed a friendly reception from the courts.
In a nutshell, FIRREA authorizes the DOJ to impose civil financial penalties for violations of 14 enumerated criminal statutes. Some of these predicate statutes specifically penalize conduct injuring financial institutions; others sweep more broadly, but only become FIRREA predicates when the defendant’s conduct “affect[s] a federally insured financial institution.”
FIRREA’s hybrid civil-criminal structure gives the DOJ important advantages in developing and litigating FIRREA cases — advantages that are not available under other federal statutes. For example, the DOJ can recover penalties for violations of predicate criminal statutes that it proves by a preponderance of the evidence — not necessarily beyond a reasonable doubt. FIRREA also provides a 10-year statute of limitations — twice the time generally available for federal criminal statutes. And the DOJ can compel production of documents and testimony using administrative subpoenas.
For defendants in FIRREA actions, the potential exposure can be significant. As a general matter, the statute imposes penalties up to $1.1 million (or, for a continuing violation, the lesser of $1.1 million per day or $5.5 million). But — of critical importance in financial crisis cases involving large financial institutions — penalties also can reach the amount of “gain” or “loss” if “any person derives pecuniary gain from the violation, or if the violation results in pecuniary loss to a person other than the violator.”
Thus, in a case that awaits appeal, United States ex rel. O’Donnell v. Countrywide Home Loans Inc., 12-cv-1422 (JSR) (S.D.N.Y. July 30, 2014), ECF 343, Judge Jed S. Rakoff imposed a $1.3 billion penalty against Bank of America and Countrywide Financial Corp. after a jury verdict of liability. Meanwhile, in the span of less than a year, the DOJ announced a string of massive FIRREA settlements, including a $13 billion settlement with JPMorgan Chase, a $7 billion settlement with Citibank and an over $16 billion settlement with Bank of America.
In pursuing FIRREA cases, the government has advocated — often with success — expansive interpretations of the statute. Among other things, it has urged that a violation of a predicate criminal statute can “affect[] a federally insured financial institution” even when the alleged wrongdoing of the defendant (which is a financial institution) did not appear to target any other financial institution, but imposed litigation costs and reputational harms on the defendant itself. Three district judges in the Southern District of New York have endorsed this self-affecting reading of FIRREA. See United States v. Bank of N.Y. Mellon, 941 F. Supp. 2d 438, 451 (S.D.N.Y. 2013); United States v. Wells Fargo, 972 F. Supp. 2d 593, 629-30 (S.D.N.Y. 2013); United States v. Countrywide Fin. Corp. et al., 961 F. Supp. 2d 598, 604-05 (S.D.N.Y. 2013).
The government also has pushed the boundaries of FIRREA’s predicate criminal statutes. For example, in a FIRREA case brought in the Western District of North Carolina, the DOJ alleged that a prospectus supplement for a securities offering by Bank of America contained material misstatements. Complaint, United States v. Bank of Am. Corp., 13-cv-446 (W.D.N.C. Aug 6, 2013), ECF No. 1.
But violations of securities laws are not a FIRREA predicate, so the DOJ alleged instead violations of the federal false statements statute, and a statute prohibiting fraud in loan and credit applications. 18 U.S.C. §§ 1001, 1014. The strategy raised significant questions about the incursion on the securities laws by the (FIRREA-enhanced) application of general false-statement statutes — questions only exacerbated by the fact that the U.S. Securities and Exchange Commission brought its own action against Bank of America based on the same conduct. Complaint, SEC v. Bank of Am., N.A., 13-cv-447 (W.D.N.C. Aug. 6, 2013), ECF No. 1.
No less important than the scope of FIRREA offenses is the extent of the penalty the DOJ may seek. In that regard, Judge Rakoff’s decision in United States ex rel. O’Donnell offers little comfort to FIRREA defendants.
In calculating the pecuniary “gain” or “loss” from a purported misrepresentation of the underwriting process for mortgages purchased by Fannie Mae and Freddie Mac, Judge Rakoff calculated the maximum FIRREA penalty based on the full sales price of the mortgages — not on a share of that price directly attributable to the misrepresentation. This makes revenue, rather than purportedly unlawful profit, the measure of “gain.” Similarly, Judge Rakoff declined to consider whether purchasers’ “loss” resulted from the supposed misrepresentation or from exogenous declines in home values.
None of this is good news for prospective FIRREA defendants. The procedural advantages the statute affords the DOJ are formidable. And the DOJ’s expansive interpretations of the statute will be hard for defendants to test in appellate courts — not least because the threat of astronomic penalties encourages early settlements of FIRREA cases. So, while the statute’s precise scope remains uncertain, the DOJ has undoubtedly dusted off a powerful not-so-new enforcement tool against financial institutions.
—By Boris Bershteyn and John K. Carroll, Skadden Arps Slate Meagher & Flom LLP
Boris Bershteyn is a partner in Skadden’s New York office. He is a former general counsel of the Office of Management and Budget and has served as special assistant to President Barack Obama and associate White House counsel.
John Carroll is a partner in New York and formerly served as the chief of the Securities and Commodities Fraud Task Force in the Southern District of New York. He also was a member of the U.S. Attorney General’s Economic Crimes Council and the U.S. Department of Justice’s Securities and Commodities Fraud Working Group.
This article is from Skadden’s 2015 Insights.
Report TOS
Dusting Off FIRREA: Old Statute Is Now Potent Weapon
Law360, New York (February 12, 2015, 10:52 AM ET)
https://thetruthaboutfannieandfreddie.wordpress.com
A long-dormant law can become an unexpectedly potent weapon in the hands of an assertive prosecutor. And in recent years, few statutes have undergone a rebirth more dramatic — and for some, more troubling — than the civil penalties provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. 12 U.S.C. § 1833a.
Enacted in response to the savings and loan crisis but scarcely used over the following two decades, FIRREA has become a favored tool for prosecutors in the aftermath of the recent financial crisis. FIRREA offers prosecutors unusual and powerful advantages, which have only been amplified by the U.S. Department of Justice‘s aggressive interpretations of the statute — interpretations that have, so far, enjoyed a friendly reception from the courts.
In a nutshell, FIRREA authorizes the DOJ to impose civil financial penalties for violations of 14 enumerated criminal statutes. Some of these predicate statutes specifically penalize conduct injuring financial institutions; others sweep more broadly, but only become FIRREA predicates when the defendant’s conduct “affect[s] a federally insured financial institution.”
FIRREA’s hybrid civil-criminal structure gives the DOJ important advantages in developing and litigating FIRREA cases — advantages that are not available under other federal statutes. For example, the DOJ can recover penalties for violations of predicate criminal statutes that it proves by a preponderance of the evidence — not necessarily beyond a reasonable doubt. FIRREA also provides a 10-year statute of limitations — twice the time generally available for federal criminal statutes. And the DOJ can compel production of documents and testimony using administrative subpoenas.
For defendants in FIRREA actions, the potential exposure can be significant. As a general matter, the statute imposes penalties up to $1.1 million (or, for a continuing violation, the lesser of $1.1 million per day or $5.5 million). But — of critical importance in financial crisis cases involving large financial institutions — penalties also can reach the amount of “gain” or “loss” if “any person derives pecuniary gain from the violation, or if the violation results in pecuniary loss to a person other than the violator.”
Thus, in a case that awaits appeal, United States ex rel. O’Donnell v. Countrywide Home Loans Inc., 12-cv-1422 (JSR) (S.D.N.Y. July 30, 2014), ECF 343, Judge Jed S. Rakoff imposed a $1.3 billion penalty against Bank of America and Countrywide Financial Corp. after a jury verdict of liability. Meanwhile, in the span of less than a year, the DOJ announced a string of massive FIRREA settlements, including a $13 billion settlement with JPMorgan Chase, a $7 billion settlement with Citibank and an over $16 billion settlement with Bank of America.
In pursuing FIRREA cases, the government has advocated — often with success — expansive interpretations of the statute. Among other things, it has urged that a violation of a predicate criminal statute can “affect[] a federally insured financial institution” even when the alleged wrongdoing of the defendant (which is a financial institution) did not appear to target any other financial institution, but imposed litigation costs and reputational harms on the defendant itself. Three district judges in the Southern District of New York have endorsed this self-affecting reading of FIRREA. See United States v. Bank of N.Y. Mellon, 941 F. Supp. 2d 438, 451 (S.D.N.Y. 2013); United States v. Wells Fargo, 972 F. Supp. 2d 593, 629-30 (S.D.N.Y. 2013); United States v. Countrywide Fin. Corp. et al., 961 F. Supp. 2d 598, 604-05 (S.D.N.Y. 2013).
The government also has pushed the boundaries of FIRREA’s predicate criminal statutes. For example, in a FIRREA case brought in the Western District of North Carolina, the DOJ alleged that a prospectus supplement for a securities offering by Bank of America contained material misstatements. Complaint, United States v. Bank of Am. Corp., 13-cv-446 (W.D.N.C. Aug 6, 2013), ECF No. 1.
But violations of securities laws are not a FIRREA predicate, so the DOJ alleged instead violations of the federal false statements statute, and a statute prohibiting fraud in loan and credit applications. 18 U.S.C. §§ 1001, 1014. The strategy raised significant questions about the incursion on the securities laws by the (FIRREA-enhanced) application of general false-statement statutes — questions only exacerbated by the fact that the U.S. Securities and Exchange Commission brought its own action against Bank of America based on the same conduct. Complaint, SEC v. Bank of Am., N.A., 13-cv-447 (W.D.N.C. Aug. 6, 2013), ECF No. 1.
No less important than the scope of FIRREA offenses is the extent of the penalty the DOJ may seek. In that regard, Judge Rakoff’s decision in United States ex rel. O’Donnell offers little comfort to FIRREA defendants.
In calculating the pecuniary “gain” or “loss” from a purported misrepresentation of the underwriting process for mortgages purchased by Fannie Mae and Freddie Mac, Judge Rakoff calculated the maximum FIRREA penalty based on the full sales price of the mortgages — not on a share of that price directly attributable to the misrepresentation. This makes revenue, rather than purportedly unlawful profit, the measure of “gain.” Similarly, Judge Rakoff declined to consider whether purchasers’ “loss” resulted from the supposed misrepresentation or from exogenous declines in home values.
None of this is good news for prospective FIRREA defendants. The procedural advantages the statute affords the DOJ are formidable. And the DOJ’s expansive interpretations of the statute will be hard for defendants to test in appellate courts — not least because the threat of astronomic penalties encourages early settlements of FIRREA cases. So, while the statute’s precise scope remains uncertain, the DOJ has undoubtedly dusted off a powerful not-so-new enforcement tool against financial institutions.
—By Boris Bershteyn and John K. Carroll, Skadden Arps Slate Meagher & Flom LLP
Boris Bershteyn is a partner in Skadden’s New York office. He is a former general counsel of the Office of Management and Budget and has served as special assistant to President Barack Obama and associate White House counsel.
John Carroll is a partner in New York and formerly served as the chief of the Securities and Commodities Fraud Task Force in the Southern District of New York. He also was a member of the U.S. Attorney General’s Economic Crimes Council and the U.S. Department of Justice’s Securities and Commodities Fraud Working Group.
This article is from Skadden’s 2015 Insights.
Chief Executive Officer Donald Layton
"We believe it's smart for us and the U.S. taxpayer to not be overly concerned with quarter-to-quarter ... earnings volatility," he told reporters on a conference call.
So this 3.4 billion allows freddie to keep money it would otherwise send to treasury.
When interest rates go up, freddie will gain on its derivatives.
So are interest rates going up or down in 2015?
Up is the answer and freddie will make money on this bet and keep that money, instead of sending it to Treasury!!
http://finance.yahoo.com/news/freddie-mac-says-
pay-851-135747786.html
http://fanniemaeshareholder.blogspot.com
Chief Executive Officer Donald Layton
"We believe it's smart for us and the U.S. taxpayer to not be overly concerned with quarter-to-quarter ... earnings volatility," he told reporters on a conference call.
So this 3.4 billion allows freddie to keep money it would otherwise send to treasury.
When interest rates go up, freddie will gain on its derivatives.
So are interest rates going up or down in 2015?
Up is the answer and freddie will make money on this bet and keep that money, instead of sending it to Treasury!!
http://finance.yahoo.com/news/freddie-mac-says-
pay-851-135747786.html
http://fanniemaeshareholder.blogspot.com
Cannot wait. Tx D1
Shows the scope of what we are talking about when it's laid out in black and white like that. Minor administrative tweaks or risky fundamental overhaul of the U.S economy?
I'm thinking the small changes would be better lol
They're running nose and nose but I'll take Gasparino's reporting any day over this knucklehead.
Hey look, a negative article by J.Carney. Huh #biased #paidhack
Joe Light, WSJ. Shedding some light on the subject.
The beginning of the end of Cship SP.
T.Mayopolous wants out of Cship and capital reserves.
News on TD screen. Can't find the wsj link tho.
Excellent, law suits coming to a close, tighter book of business.
Default rates decline again on top of it AND gov paid in full!
Reformed and refined, ready for 2015.
Just a small battle grasshopper. The war is being fought elsewhere.
Yeah, stupid lemming billionaires
Another treasury draw question about reducing the cap reserve amount every year
First question from Bloomberg: shouldn't you retain more capital so you won't need a future draw from treasury?
Perfect
FMCC caught up to -.09. Both can launch tomorrow now in unison. All is right w the world lol
172k 3.42
Fox:"We were the first to report"
Ya heard it here first folks.... Lol
No prob. He even joked, hey buy 10k shares and well hey lol
Matter of weeks. I'm guessing we keep going until then since our current nickname is "the Greenberg trade" lol
Co host says 70/30 we win because she watches judge wheeler
Gasparino says ackman changed to claims court and we can make our own conclusions. The same court AIG is killing the govt in.
Pretty much
He said gov stealing profits and FNMA already paid up.
He says biggest volume all year and very interesting trade.
Volatile and interesting and 50/50 and co host says 65/35
HUGE EXPOSURE fox business (NOW)
Gasparino FNMA coming up in minutes fox business.
Sounds extremely positive!
I have not seen that bill so I guess I have no comment at the moment. Fnmc ? Def curious to see what that's about tho I don't believe any negative bill can get traction. Hmmm
Tx, I've never seen those two. Looks like they grabbed them from a college campus somewhere. Lol
Serves em right
Very brief. 2 guys complained about 3% down being risky. The host completely disagreed and said its great to get new buyers in homes.
Dialogue is beginning in the press and we already have backing. Good stuff
Fox slamming FNMA now lol
Will run until AIG decision at a minimum. Jmo and If they win??
Huge run
There's more but ..... That's enough for now
Combination of positive news/exposure, positive court decisions, billionaire backing, TBTF mortgage Goliath, investor actions, record earnings, net zero, positive congressional positioning and the US Constitution.
choo choo
Overwhelming yes. Not to you smoking crack, to us making a difference. I can tell you we turned some heads in D.C and that's just a simple fact. Every new trader/investor is googling and ogling FNMA.
All of our efforts including Ackman and the like gave Fox a reason to give every American homework to do.
Exposure equals knowledge and that is EXACTLY what we want!
More entertaining.... FNMA running or the crazy IHUB posts?
lol FNMA by a hair