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Federal Judges Listened Carefully as Investors Pressed Their Case
- April 27, 2016
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The three federal judges who recently heard oral arguments in the Perry Capital suit stemming from the Net Worth Sweep of the profits and Fannie Mae and Freddie Mac offered no hint that they were about to rubber stamp U.S. District Judge Royce Lamberth’s 2014 dismissal of the case.
The fact that they gave attorneys three full hours, rather than the one hour allotted, to present arguments and respond to a number of probing questions demonstrates that they recognize the significance of the case and want to take a careful look at all the issues involved, in the view of Hamish Hume, a partner at Boies Schiller & Flexner, who argued before the three-judge panel on behalf of investors on April 15.
“I view that as a very positive sign for the shareholders,” he said during a call with media and shareholders hosted Investors Unite Executive Director Tim Pagliara today. “The more time they spend looking at this case, the better for us. The more they look at it, the more I hope they will see that something really unjust happened.”
While there are many legal arguments against the legality of the Sweep, Hume focused on three claims: That it was a breach of contractual rights of shareholders, a breach of fiduciary duties owed by Treasury and the Federal Housing Finance Agency to both the companies and their shareholders, and a taking of private property, which gives rise to a claim for just compensation under the Constitution.
Under the contractual terms of the conservatorship established for Fannie and Freddie in 2008, the U.S. Treasury Department had a right to a 10% dividend payment on its senior preferred stock. To secure payments above that dividend, Treasury could have exercised the warrants it held for 79.9% of the companies’ common stock. Instead, Treasury implemented the Sweep. By doing so, it violated the contractual terms and maneuvered out of obligations to shareholders’ rights, which the Housing and Economic Recovery Act specifically aimed to protect.
“Under a breach of contract claim, especially when you have a breached covenant claim, a court needs to look at the economic substance of what happened,” Hume said. “Substance should matter over form. That is a really central concept here.”
Pagliara raised questions about “what the government knew and when it knew it” with regard to the timing of Sweep, and asserted that revelations in newly unsealed documents in Perry Capital’s suit point to a “premeditated attempt to destroy the companies.”
Hume acknowledged the unsealed documents were helpful to both claims. They show Treasury officials, in the months leading up to the Sweep, expected the companies to bring in profits exceeding dividend payments.
Hume noted that two of the three judges voiced a number of comments and questions about the importance of this information. Therefore, it will be critical going forward, even if it does not have a direct bearing on the violation of contractual and fiduciary responsibilities he raised before the judges
“There is a lot of ammunition there,” he said.
At this stage in this long process, what matters is that with each step in the litigation and as more facts come to light, federal judges are willing to reconsider whether the government did the right thing by investors under the law.
Bruce Berkowitz: Peter Lynch touted Fannie Mae as “the best business, literally, in America.”
By VW Staff on February 2, 2016 8:03 pm in Value Investing
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Bruce Berkowitz had a rough 2015 – below is his letter to investors
Fannie Mae and Freddie Mac
In 1986, famed Magellan Fund manager Peter Lynch touted Fannie Mae as “the best business, literally, in America.” At that time, Fannie Mae had a price-to-earnings ratio of one. Lynch noted that “when a company can earn back the price of its stock in one year, you’ve found a good deal.” Thirty years later, the price-to-earnings ratio of Fannie Mae is back at one – but the circumstances are quite different. In our view, current prices of Fannie Mae as well as its smaller cousin Freddie Mac do not refl ect the economic value of existing assets, let alone future earnings power, embedded in these world-class franchises. Indeed, the companies are not priced for a run-off of their existing businesses; they are priced for the permanent expropriation of all assets.
Fannie Mae and Freddie Mac represent 16.4% of Fund assets, primarily in the form of preferred stock. For those unfamiliar, Fannie Mae and Freddie Mac are simple and straightforward insurance companies. They are not banks. There isn’t a local Fannie Mae or Freddie Mac branch on the street corner. Unlike the big banks, Fannie Mae and Freddie Mac did not commit any consumer fraud in the run-up to the fi nancial crisis. The two do not originate mortgages and they do not deal directly with individual homeowners. However, when it comes to funding our nation’s housing market, Fannie Mae and Freddie Mac are mission critical. The companies have helped tens of millions of American families buy, rent, or refi nance a home even during the toughest economic times when banks and other lenders shun mortgage risk. Bottom line: Fannie Mae and Freddie Mac are the housing fi nance system in America, and earn a nominal amount (less than 40 basis points) for ensuring that the venerable 30-year fi xed-rate mortgage remains widely accessible and affordable.
During the 2008 fi nancial crisis, Fannie Mae and Freddie Mac helped save America’s home mortgage system and resuscitated our national economy by continuing to provide liquidity when credit and insurance markets froze solid. According to a comprehensive analysis by Thomas Ferguson and Robert Johnson published in the International Journal of Political Economy, federal regulators explicitly directed Fannie Mae and Freddie Mac to initiate massive purchases of “home mortgages and mortgage bonds to stem declines in those markets and alleviate pressures on the balance sheets of private fi rms,” particularly “overburdened banks.” Then in 2012, Treasury’s decision to usurp all of the profi ts from each company in perpetuity (the so-called “Net Worth Sweep”) improved the federal budget defi cit in an election year and avoided protracted debt ceiling negotiations with Congressional Republicans.
Roger Parloff’s recent Fortune magazine piece – “How Uncle Sam Nationalized Two Fortune 50 Companies” – details the de facto nationalization of Fannie Mae and Freddie Mac by the federal government and the determined effort by a handful of bureaucrats to hide the truth from the public:
For reasons that remain shrouded in secrecy to this day, the Treasury Department and the companies’ conservator, the Federal Housing Finance Agency (FHFA) – two arms of the same government – agreed to radically change the terms of what the GSEs would owe in exchange for the moneys they had already received. Instead of a 10% annual dividend on all the bailout funds drawn … the dividend was now to be set at 100% of each GSE’s net worth. One hundred percent. That is to say, any and all profit they posted. And this would be so in perpetuity … The two firms, on their way back to health, were effectively nationalized. The sudden change was called the “third amendment,” an innocuous-sounding designation that belies its momentous consequences … If this strikes you as, well, un-American, you’re not alone … The government’s alleged nationalization of two enormous corporations raises potentially landmark constitutional issues – comparable to President Harry Truman’s attempt to nationalize steel mills during the Korean War … Seven years into their conservatorship, the GSEs remain adrift, with shrinking capital reserves and no exit plan—a dormant, festering crisis … Documents and depositions from officials at Treasury and FHFA, obtained in discovery in a suit brought by Fairholme Funds, show that the government’s story is “highly misleading” in some respects and “outright false” in others, plaintiffs lawyers allege in court briefs … The lawyers can’t tell the media (or even their clients) specifically what the documents and depositions show, however. That’s because Court of Federal Claims Judge Margaret Sweeney has ordered those materials sealed from public view, at the government’s behest. Bewilderingly, the Justice Department has persuaded her that disclosure of that information—concerning a now three- to eight-year-old decision-making process of tremendous public interest—might cause “dire harm” and “place this nation’s financial markets in jeopardy” … The spectacle of a conservator wiping out shareholders just as the companies he’s supervising are about to have their best years in history simply doesn’t smell right. It’s hard to picture the Supreme Court letting it stand.
The market gyrations experienced during 2015 do not reflect our progress in halting Treasury’s unlawful taking of Fannie Mae’s and Freddie Mac’s assets. Indeed, newly discovered evidence – which shows the government’s defense to be outright false – was subsequently presented to the D.C. Circuit Court (under seal as required), and plaintiffs in other cases from the Northern District of Iowa to the Eastern District of Kentucky have now obtained these documents as well. We remain confident that Treasury’s deliberate effort to realign the equity of each company and allocate all profits to itself in perpetuity is strictly prohibited by federal and state law, and anticipate that several of these cases will be adjudicated this year.
Today, taxpayers own 79.9% of Fannie Mae and Freddie Mac. In this respect, taxpayers are fully aligned with private shareholders of these extremely valuable companies. In our view, anyone claiming that shareholders are seeking remuneration at “taxpayer expense” is peddling fiction. Only the disingenuous would assert that recapitalization of these companies would take decades and come at taxpayer expense, as if retaining earnings precluded the ability of each company to raise equity from private investors. Only those beholden to special interests would ignore the substantial reforms implemented at Fannie Mae and Freddie Mac over the last eight years and pretend that the companies are somehow doomed to repeat the past upon release from conservatorship.
Only those who oppose the dream of American homeownership would attempt to dismantle President Franklin Roosevelt’s New Deal by eliminating two publicly traded, shareholder-owned companies that have single-handedly provided $7 trillion dollars – yes, trillion – in liquidity to support America’s mortgage market since 2009. Shareholders simply request that the Treasury Department respect the capital structure of each company, respect the economic bundle of rights associated with our securities, and respect the law setting forth the rules of a conservatorship as decreed by Congress. The economist Herbert Stein once famously said: “If something cannot go on forever, it will stop.” Sooner rather than later, we believe the Net Worth Sweep will be halted and a common sense solution will prevail: Fannie Mae and Freddie Mac will transform into low-risk, public utilities with regulated rates of return, just like your local electric company.
EXCERPT: Henry M. Paulson Jr.'s: 'On the Brink'
By ABC NEWS Feb. 1, 2010
Henry Paulsons book "On the Brink."Amazon.com
Henry Paulson's book "On the Brink."
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In his new book, former Treasury Secretary Henry M. Paulson Jr. describes the efforts of the elite in the politicial and finacial world in response to the 2008 financial crisis.
"On the Brink" is a memoir of Paulson's time in the center of the crisis. He recounts the key decisions that were made -- including controversial ones such as the bailout of AIG -- and details debating the situation with the top political and economic officials of the time.
Paulson also outlines policies he says will benefit the country in the future.
Read the excerpt below, and then head to the "GMA" Library to find more good reads.
VIDEO: Treasury Secretary Henry Paulson President ObamaPlay
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Thursday, September 4, 2008
Do they know it's coming, Hank?" President Bush asked me. "Mr. President," I said, "we're going to move quickly and take them by surprise. The first sound they'll hear is their heads hitting the floor."
It was Thursday morning, September 4, 2008, and we were in the Oval Office of the White House discussing the fate of Fannie Mae and Freddie Mac, the troubled housing finance giants. For the good of the country, I had proposed that we seize control of the companies, fire their bosses, and prepare to provide up to $100 billion of capital support for each. If we did not act immediately, Fannie and Freddie would, I feared, take down the financial system, and the global economy, with them.
I'm a straightforward person. I like to be direct with people. But I knew that we had to ambush Fannie and Freddie. We could give them no room to maneuver. We couldn't very well go to Daniel Mudd at Fannie Mae or Richard Syron at Freddie Mac and say:
"Here's our idea for how to save you. Why don't we just take you over and throw you out of your jobs, and do it in a way that protects the taxpayer to the disadvantage of your shareholders?"
The news would leak, and they'd fight. They'd go to their many powerful friends on Capitol Hill or to the courts, and the resulting delays would cause panic in the markets. We'd trigger the very disaster we were trying to avoid.
I had come alone to the White House from an 8:00 a.m. meeting at Treasury with Ben Bernanke, the chairman of the Federal Reserve Board, who shared my concerns, and Jim Lockhart, head of the Federal Housing Finance Agency (FHFA), the main regulator for Fannie and Freddie. Many of our staffers had been up all night -- we had all been putting in 18-hour days during the summer and through the preceding Labor Day holiday weekend -- to hammer out the language and documents that would allow us to make the move. We weren't quite there yet, but it was time to get the president's official approval. We wanted to place Fannie and Freddie into conservatorship over the weekend and make sure that everything was wrapped up before the Asian markets opened Sunday night.
The mood was somber as I laid out our plans to the president and his top advisers, who included White House chief of staff Josh Bolten; deputy chief of staff Joel Kaplan; Ed Lazear, chairman of the Council of Economic Advisers; Keith Hennessey, director of the National Economic Council (NEC); and Jim Nussle, director of the Offi ce of Management and Budget. The night before, Alaska governor Sarah Palin had electrified the Republican National Convention in St. Paul, Minnesota, with her speech accepting the nomination as the party's vice presidential candidate, but there was no mention of that in the Oval Office. St. Paul might as well have been on another planet.
The president and his advisers were well informed of the seriousness of the situation. Less than two weeks before, I had gotten on a secure videoconference line in the West Wing to brief the president at his ranch in Crawford, Texas, and explained my thinking. Like him, I am a fi rm believer in free markets, and I certainly hadn't come to Washington planning to do anything to inject the government into the private sector. But Fannie and Freddie were congressionally chartered companies that already relied heavily on implicit government support, and in August, along with Bernanke, I'd come to the conclusion that taking them over was the best way to avert a meltdown, keep mortgage fi nancing available, stabilize markets, and protect the taxpayer. The president had agreed.
It is hard to exaggerate how central Fannie and Freddie were to U.S. markets. Between them they owned or guaranteed more than $5 trillion in residential mortgages and mortgage-backed securities -- about half of all those in the country. To finance operations, they were among the biggest issuers of debt in the world: a total of about $1.7 trillion for the pair. They were in the markets constantly, borrowing more than $20 billion a week at times.
But investors were losing faith in them -- for good reason. Combined, they already had $5.5 billion in net losses for the year to date. Their common share prices had plunged -- to $7.32 for Fannie the day before from $66 one year earlier. The previous month, Standard & Poor's, the rating agency, had twice downgraded the preferred stock of both companies. Investors were shying away from their auctions, raising the cost of their borrowings and making existing debt holders increasingly nervous. By the end of August, neither could raise equity capital from private investors or in the public markets.
Moreover, the financial system was increasingly shaky. Commercial and investment bank stocks were under pressure, and we were nervously monitoring the health of several ailing institutions, including Wachovia Corporation, Washington Mutual, and Lehman Brothers. We had seen what happened in March when Bear Stearns's counterparties -- the other banks and investment houses that lent it money or bought its securities—abruptly turned away. We had survived that, but the collapse of Fannie and Freddie would be catastrophic. Seemingly everyone in the world -- little banks, big banks, foreign central banks, money market funds -- owned their paper or was a counterparty. Investors would lose tens of billions; foreigners would lose confi dence in the U.S. It might cause a run on the dollar.
The president, in suit coat and tie as always, was all business, engaged and focused on our tactics. He leaned forward in his blue-and-yellow-striped armchair. I sat in the armchair to his right; the others were crowded on facing sofas. I told the president we planned to summon the top management of Fannie and Freddie to meet with Bernanke, Lockhart, and me the following afternoon. We'd lay out our decision and then present it to their boards on Saturday: we would put $100 billion of capital behind each, with hundreds of billions of dollars more available beyond that, and assure both companies of ample credit lines from the government. Obviously we preferred that they voluntarily acquiesce. But if they did not, we would seize them.
I explained that we had teams of lawyers, bank examiners, computer specialists, and others on standby, ready to roll into the companies' offices and secure their premises, trading floors, books and records, and so forth. We had already picked replacement chief executives. David Moffett, a former chief fi nancial officer from U.S. Bancorp, one of the few nearly pristine big banks in the country, was on board for Freddie Mac. For Fannie Mae we'd selected former TIAA-CREF chief executive and chairman Herb Allison. (He was vacationing in the Caribbean, and when I reached him later and twisted his arm to come to Washington the next day, he'd initially protested: "Hank, I'm in my flip-flops. I don't even have a suit down here." But he'd agreed to come.)
White House staff had been shocked when we first suggested conservatorship for Fannie and Freddie, which had the reputation of being the toughest street fighters in Washington. But they liked the boldness of the idea, as did the president. He had a deep disdain for entities like Fannie and Freddie, which he saw as part of a permanent Washington elite, detached from the heartland, with former government offi cials and lobbyists cycling through their ranks endlessly while the companies minted money, thanks, in effect, to a federal entitlement.
The president wanted to know what I thought the longer-term model for Fannie and Freddie ought to be. I was keen to avoid any existential debate on the two companies that might bog down in partisan politics on the Hill, where Fannie and Freddie had ardent friends and enemies. "Mr. President," I replied, "I don't think we want to get into that publicly right now. No one can argue that their models aren't seriously flawed and pose a systemic risk, but the last thing we want to start right now is a holy war."
"What do you suggest?"
"I'll describe this as a time-out and defer structure until later.I'll just tell everybody that we're going to do this to stabilize them and the capital markets and to put the U.S.A. behind their credit to make sure there's mortgage fi nance available in this country."
"I agree," the president said. "I wouldn't propose a new model now, either. But we'll need to do it at the right time, and we have to make clear that what we are doing now is transitory, because otherwise it looks like nationalization."
I said that I had come to believe that what made most sense longer-term was some sort of dramatically scaled-down structure where the extent of government support was clear and the companies functioned like utilities. The current model, where profits went to shareholders but losses had to be absorbed by the taxpayer, did not make sense. The president rose to signal the meeting was over. "It will sure be interesting to see if they run to Congress," he said.
I left the White House and walked back to Treasury, where we had to script what we would say to the two mortgage agencies the following day. We wanted to be sure we had the strongest case possible in the event they chose to fi ght. But even now, at the 11th hour, we still had concerns that FHFA had not effectively documented the severity of Fannie's and Freddie's capital shortfall and the case for immediate conservatorship. The cooperation among the federal agencies had generally been superb, but although Treasury, the Fed, and the Office of the Comptroller of the Currency (OCC) agreed, FHFA had been balky all along. That was a big problem because only FHFA had the statutory power to put Fannie and Freddie into conservatorship. We had to convince its people that this was the right thing to do, while making sure to let them feel they were still in charge.
I had spent much of August working with Lockhart, a friend of the president's since their prep school days. Jim understood the gravity of the situation, but his people, who had said recently that Fannie and Freddie were adequately capitalized, feared for their reputations. The president himself wouldn't intervene because it was inappropriate for him to talk with a regulator, though he was sure Lockhart would come through in the end. In any event, I invoked the president's name repeatedly. "Jim," I'd say, "you don't want to trigger a meltdown and ruin your friend's presidency, do you?"
The day before I'd gone to the White House, I spoke with Lockhart by phone at least four times: at 9:45 a.m., 3:45 p.m., 4:30 p.m., and then again later that night. "Jim, it has to be this weekend. We've got to know," I insisted.
Part of FHFA's reluctance had to do with history. It had only come into existence in July, as part of hard-won reform legislation. FHFA and its predecessor, the Office of Federal Housing Enterprise Oversight, which Lockhart had also led, were weak regulators, underresourced and outmatched by the companies they were meant to oversee, and constrained by a narrow view of their charters and authorities. FHFA's people were conditioned by their history to judge Fannie and Freddie by their statutory capital requirements, not, as we did, by the much greater amounts of capital that were necessary to satisfy the market. They relied on the companies' own analyses because they lacked the resources and ability to make independent evaluations as the Fed and OCC could. FHFA preferred to take the agencies to task for regulatory infractions and seek consent orders to force change. That approach wasn't nearly enough and would have taken time, which we did not have.
Complicating matters, FHFA had recently given the two companies clean bills of health based on their compliance with those weak statutory capital requirements. Lockhart was concerned -- and Bob Hoyt, Treasury's general counsel, agreed -- that it would be suicide if we attempted to take control of Fannie and Freddie and they went to court only to have it emerge that the FHFA had said, in effect, that there were no problems.
We had been working hard to convince FHFA to take a much more realistic view of the capital problems and had sent in teams of Fed and OCC examiners to help them understand and itemize the problems down to the last dollar. The Fed and the OCC saw a huge capital hole in Fannie and Freddie; we needed to get FHFA examiners to see the hole.
Lockhart had been skillfully working to get his examiners to come up with language they could live with. But on Thursday they still had not done enough to document the capital problems. We sent in more help. Sheila Bair, chairman of the Federal Deposit Insurance Corporation, which had ample experience in closing banks, agreed to send me her best person to help write a case. Finally, Lockhart managed to get his examiners to sign off on what we needed. Either Jim had worn those examiners down or they had come to realize that immediate conservatorship was the best way for them to resolve this dangerous situation with their reputations intact.
Thursday evening, Jim put in calls to the CEOs of Fannie and Freddie, summoning them to a meeting Friday afternoon that Ben and I would attend at FHFA's headquarters on G Street. (Jim didn't speak directly to Mudd until Friday morning.) We arranged for the first meeting to start just before 4:00 p.m. so that the market would be closed by the time it ended. We decided to lead with Fannie Mae, figuring they were more likely to be contentious.
The companies obviously knew something was up, and it didn't take long for me to start getting blowback. Dan Mudd called me on Friday morning and got straight to the point. "Hank," he asked, "what's going on? We've done all you asked. We've been cooperative. What's this about?" "Dan," I said, "if I could tell you, I wouldn't be calling the meeting."
We'd been operating in secrecy and had managed to avoid any leaks for several weeks, which may be a record for Washington. To keep everyone in the dark, we resorted to a little cloak-and-dagger that afternoon. I drove to FHFA with Kevin Fromer, my assistant secretary for legislative affairs, and Jim Wilkinson, my chief of staff, and instead of hopping out at the curb, we went straight into the building's parking garage to avoid being seen. Unfortunately, Ben Bernanke walked in the front door and was spotted by a reporter for the Wall Street Journal, who posted word on the paper's website.
We met the rest of our teams on the fourth fl oor. FHFA's offices were a contrast to those at the Fed and Treasury, which are grand and spacious, with lots of marble, high ceilings, and walls lined with elegant paintings. FHFA's offices were drab and cramped, the floors clad in thin office carpet.
As planned, we arrived a few minutes early, and as soon as I saw Lockhart I pulled him aside to buck him up. He was ready but shaky. This was a big step for him. Our fi rst meeting was with Fannie in a conference room adjacent to Jim's offi ce. We'd asked both CEOs to bring their lead directors. Fannie chairman Stephen Ashley and general counsel Beth Wilkinson accompanied Mudd. He also brought the company's outside counsel, H. Rodgin Cohen, chairman of Sullivan & Cromwell and a noted bank lawyer, who'd flown down hastily from New York.
Between our group from Treasury, the Fed's team, Lockhart's people, and Fannie's executives, there must have been about a dozen people in the glass-walled conference room, spread around the main table and arrayed along the walls.
Lockhart went first. He took Fannie Mae through a long, detailed presentation, citing one regulatory infraction after another. Most didn't amount to much, frankly; they were more like parking tickets in the scheme of things. He was a little nervous and hesitant, but he brought his speech around to the key point: his examiners had concluded there was a capital deficiency, the company was operating in an unsafe and unsound manner, and FHFA had decided to put it into conservatorship. He said that we all hoped they would agree to do this voluntarily; if not, we would seize control. We had already selected a new CEO and had teams ready to move in.
As he spoke I watched the Fannie Mae delegation. They were furious. Mudd was alternately scowling or sneering. Once he put his head between his hands and shook it. In truth, I felt a good bit of sympathy for him. He had been dealt a tough hand. Fannie could be arrogant, even pompous, but Mudd had become CEO after a messy accounting scandal and had been reasonably cooperative as he tried to clean things up.
I followed Lockhart and laid out my argument as simply as I could. Jim, I said, had described a serious capital deficiency. I agreed with his analysis, but added that although I'd been authorized by Congress to do so, I had decided that I was not prepared to put any capital into Fannie in its current form. I told them that I felt Fannie Mae had done a better job than Freddie Mac; they had raised $7.4 billion earlier in the year, while Freddie had delayed and had a bigger capital hole. Now, however, neither could raise any private money. The markets simply did not differentiate between Fannie and Freddie. We would not, either. I recommended conservatorship and said that Mudd would have to go. Only under those conditions would we be prepared to put in capital.
"If you acquiesce," I concluded, "I will make clear to all I am not blaming management. You didn't create the business model you have, and it's flawed. You didn't create the regulatory model, and it is equally flawed."
I left unspoken what I would say publicly if they didn't acquiesce.
Ben Bernanke followed and made a very strong speech. He said he was very supportive of the proposed actions. Because of the capital deficiency, the safety and soundness of Fannie Mae was at risk, and that in turn imperiled the stability of the financial system. It was in the best interests of the country to do this, he concluded.
Though stunned and angry, the Fannie team was quick to raise issues. Mudd clearly thought Fannie was being treated with great injustice. He and his team were eager to put space between their company and Freddie, and the truth was they had done a better job. But I said that for investors it was a distinction without a difference -- investors in both companies were looking to their congressional charters and implicit guarantees from the United States of America. The market perceived them as indistinguishable. And that was it. The Fannie executives asked how much equity capital we planned to put in. How would we structure it? We wouldn't say. We weren't eager to give many details at all, because we didn't want to read about it in the press.
"Dan's too gracious a man to raise this," said Beth Wilkinson. "But we're a unified management team. How come he is the only one being fired, and why are you replacing him?"
"I don't think you can do something this drastic and not change the CEO," I replied. "Beyond that, frankly, I want to do as little as possible to change management."
"Our board will want to take a close look at this," Mudd said, attempting to push back.
Richard Alexander, the managing partner for Arnold & Porter, FHFA's outside counsel, replied: "I need you to understand that when these gentlemen"-- he meant Lockhart, Bernanke, and me -- "come to your board meeting tomorrow, it's not to have a dialogue."
"Okay," Rodge Cohen said, and it was clear he understood the game was over.
After the meeting, I made a few quick calls to key legislators. I had learned much, none of it good, since going to Congress in July for unprecedented emergency authorities to stabilize Fannie and Freddie. I had said then that if legislators gave me a big enough weapon -- a "bazooka" was what I specifically requested -- it was likely I wouldn't have to use it. But I had not known of the extent of the companies' problems then. After I had learned of the capital hole, I had been unable to speak about it publicly, so conservatorship would come as a shock, as would the level of taxpayer support. I was also very concerned that Congress might be angered that I had turned temporary authority to invest in Fannie and Freddie, which would expire at year-end 2009, into what effectively was a permanent guarantee on all their debt.
First up were Barney Frank, chairman of the House Committee on Financial Services, and Chris Dodd, his counterpart on the Senate Banking Committee. Barney was scary-smart, ready with a quip, and usually a pleasure to work with. He was energetic, a skilled and pragmatic legislator whose main interest was in doing what he believed was best for the country. He bargained hard but stuck to his word. Dodd was more of a challenge. We'd worked together on Fannie and Freddie reform, but he had been distracted by his unsuccessful campaign for the Democratic presidential nomination and seemed exhausted afterward. Though personable and knowledgeable, he was not as consistent or predictable as Barney, and his job was more diffi cult because it was much harder to get things done in the Senate. He and his staff had a close relationship with Fannie, so I knew that if they decided to fight, they would go to him.
As it turned out, the calls went well. I explained that what we were doing was driven by necessity, not ideology; we had to preempt a market panic. I knew their initially supportive reactions might change—after they understood all the facts and had gauged the public reaction. But we were off to a good start. Then I went into the meeting with Freddie. Dick Syron had brought his outside counsel, along with a few of his directors, including Geoff Boisi, an old colleague from my Goldman Sachs days.
We ran through the same script with Freddie, and the difference was clear: Where Mudd had been seething, Syron was relaxed, seemingly relieved. He had appeared frustrated and exhausted as he managed the company, and he looked like he'd been hoping for this to happen. He was ready to do his duty—like the man handed a revolver and told, "Go ahead and do it for the regiment."
He and his people mostly had procedural issues to raise. Would it be all right for directors to phone in or would they have to come in person? How would the news be communicated to their employees?
As we had with Fannie Mae, we swore everyone in the room to silence. (Nonetheless the news leaked almost immediately.) When the meeting broke up, I made some more calls to the Hill and to the White House, where I gave Josh Bolten a heads-up. I spoke with, among others, New York senator Chuck Schumer; Alabama senator Richard Shelby, the ranking Republican on the Senate Banking Committee; and Alabama representative Spencer Bachus, the ranking Republican on the House Committee on Financial Services.
I went home exhausted, had a quick dinner with my wife, Wendy, and went to bed at 9:30 p.m. (I'm an "early to bed, early to rise" fellow. I simply need my eight hours of sleep. I wish it weren't the case, but it is.)
At 10:30 p.m. the home phone rang, and I picked it up. My first thought, which I dreaded, was that maybe someone was calling to tell me Fannie was going to fi ght. Instead I heard the voice of Senator Barack Obama, the Democratic nominee for president.
"Hank," he began, "you've got to be the only guy in the country who's working as hard as I am."
He was calling from someplace on the road. He had learned about the moves we'd made and wanted to talk about what it meant. I didn't know him very well at all. At my last official function as Goldman Sachs CEO before moving to Washington, I'd invited him to speak to our partners at a meeting we'd held in Chicago. The other main speaker at that event had been Berkshire Hathaway CEO Warren Buffett. I would, in fact, get to know Obama better over the course of the fall, speaking to him frequently, sometimes several times a day, about the crisis. I was impressed with him. He was always well informed, well briefed, and self-confident. He could talk about the issues I was dealing with in an intelligent way. That night he wanted to hear everything we'd done and how and why. I took the senator through our thinking and our tactics. He was quick to grasp why we thought the two agencies were so critical to stabilizing the markets and keeping low-cost mortgage financing available. He appreciated our desire to protect the taxpayers as well.
"Bailouts like this are very unpopular," he pointed out.
I replied that it wasn't a bailout in any real sense. Common and preferred shareholders alike were being wiped out, and we had replaced the CEOs.
"That sounds like strong medicine," Obama said. He was glad we were replacing the CEOs and asked about whether there had been any golden parachutes.
I told him we would take care of that, and he shifted the conversation to discuss the broader issues for the capital markets and the economy. He wanted to hear my views on how we'd gotten to this point, and how serious the problems were.
"It's serious," I said, "and it's going to get worse."
In all, we were on the phone that night for perhaps 30 minutes.
Arizona senator John McCain's selection of Sarah Palin as his running mate had energized the Republican base, and McCain was surging in the polls, but at least overtly there didn't seem to be "politics" or maneuvering in Obama's approach to me. Throughout the crisis, he played it straight. He genuinely seemed to want to do the right thing. He wanted to avoid doing anything publicly -- or privately -- that would damage our efforts to stabilize the markets and the economy.
But of course, there's always politics at play: the day after the election Obama abruptly stopped talking to me.
When I woke the next morning, word of our plan to take control of Fannie and Freddie was bannered in all the major newspapers.
Then, when I got to the office, I told my staff about my conversation with Obama, and they got a bit panicky. Since some Republicans considered me to be a closet Democrat, my staff had misgivings about any action on my part that might be construed as favoring Obama. So we figured I had better put in a call to McCain to even things up.
I connected with the Republican candidate late in the morning. I had a cordial relationship with John, but we were not particularly close and had never discussed economic issues -- our most indepth conversations had concerned climate change. But that day McCain was ebullient and friendly. The Palin selection had clearly revitalized him, and he began by saying he wanted to introduce me to his running mate, whom he put on the phone with us.
McCain had little more to say as I described the actions we had taken and why, but Governor Palin immediately made her presence felt. Right away she started calling me Hank. Now, everyone calls me Hank. My assistant calls me Hank. Everyone on my staff, from top to bottom, calls me Hank. It's what I like. But for some reason, the way she said it over the phone like that, even though we'd never met, rubbed me the wrong way.
I'm also not sure she grasped the full dimensions of the situation I had sketched out -- or so some of her comments made me think. But she grasped the politics pretty quickly.
"Hank," she asked, "did any of their executives get golden parachutes? Did you fi re all the people you need to? Hank, can we claw back any of their compensation?"
From that call I went into a noon meeting that lasted perhaps an hour with the board of directors of Freddie Mac. In the afternoon, around 3:00 p.m., it was Fannie Mae's turn. To avoid publicity, we switched from FHFA headquarters to a ground-fl oor conference room at the Federal Housing Finance Board offices, a few blocks from Lafayette Square.
Lockhart, Bernanke, and I followed the same script from the previous afternoon: Jim led off explaining that we had decided on conservatorship, citing capital inadequacy and his list of infractions. I laid out our terms, and Ben followed with his description of the catastrophe that would occur if we did not take these actions.
Going into the weekend, there had been some trepidation among our team that the two government-sponsored enterprises (GSEs), especially Fannie, would resist. But after all my years as a Goldman Sachs banker I knew boards, and I felt sure that they would heed our call. They had fiduciary duties to their shareholders, so they would want us to make the strongest case we could.
We emphasized that if the government didn't put them into conservatorship, the companies would face insolvency and their shareholders would be worse off. I also knew that having these arguments made directly to them by their companies' regulator, the secretary of the Treasury, and the chairman of the Federal Reserve Board would carry immense weight.
Just like the initial meetings the day before, the session with the Freddie board went much easier than the one with its sister institution.
Fannie's directors, like its management, wanted to differentiate their company from Freddie, but we made clear we could do no such thing.
I made a round of phone calls Saturday and Sunday to congressional leaders, as well as to senior fi nancial industry executives, outlining our actions and the importance of stabilizing Fannie and Freddie. Just about everyone was supportive, even congratulatory, although I do remember Chris Dodd being a little put out when I talked to him a second time, on Sunday.
"Whatever happened to your bazooka, Hank?" he asked.
I explained that I had never thought I'd have to use the emergency powers Congress had given me in July, but given the state of affairs at the GSEs, I'd had no choice. Still, I knew I would have to spend some time with Chris to make him feel more comfortable.
After the Fannie board meeting, I received a call I'd been expecting most of the day. Word had gotten out that I'd talked to Palin, so I'd been thinking, Joe Biden's bound to call, too. And, sure enough, he did. The predictability of it gave me my one good laugh of the day, but the Democratic vice presidential candidate was on top of the issue; he understood the nature of the problem we faced and supported our strong actions.
Sunday morning at 11:00, Jim Lockhart and I officially unveiled the Fannie Mae and Freddie Mac rescue with a statement to the press. I described four key steps we were taking: FHFA would place the companies into conservatorship; the government would provide up to $100 billion to each company to backstop any capital shortfalls; Treasury would establish a new secured lending credit facility for Fannie and Freddie and would begin a temporary program to buy mortgage-backed securities they guaranteed, to boost the housing market.
I wanted to cut through all the complex fi nance and get to the heart of our actions and what they meant for Americans and their families. The GSEs were so big and so interwoven into the fabric of the fi nancial system that a failure of either would mean grave distress throughout the world.
"This turmoil," I said, "would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans, and other consumer credit and business fi nance. And a failure would be harmful to economic growth and job creation."
It would also have major international financial ramifications.
Among the many financial leaders I spoke to that day were my old friends Zhou Xiaochuan, the head of the central bank of China, and Wang Qishan, vice premier in charge of China's financial and economic affairs. It was important to relay what was going on to the Chinese, who owned a vast quantity of U.S. securities, including hundreds of billions of dollars of GSE debt. They had trusted our assurances and held on to this paper at a crucial time in a shaky market. Fortunately, I knew both men well, and we had been able to speak frankly to one another throughout the crisis.
"I always said we'd live up to our obligations," I reminded Wang. "We take them seriously."
"You're doing everything you know how to," Wang said, adding that the Chinese would continue to hold their positions. He congratulated me on our moves but struck a cautious note: "I know you think this may end all of your problems, but it may not be over yet."
Still, that Sunday afternoon in my offi ce, placing calls all around the world, I couldn't help but feel a bit relieved. We had just pulled off perhaps the biggest financial rescue in history. Fannie and Freddie had not been able to stop us, Congress was supportive, and the market looked sure to accept our moves.
I was alone, looking out the tall windows of my office, which faced south toward the National Mall. I was not naïve. I knew there were plenty of danger spots in the financial system and in the economy, but I felt a burden lift off of me as I looked out on the Washington Monument. I had come to Washington to make a difference, and we had, I thought, just saved the country -- and the world -- from financial catastrophe. The next day, Lehman Brothers began to collapse.
Obama and Financial Regulation: The Dodd-Frank Legacy
07/21/2016 08:58 am 08:58:04
Douglas Holtz-Eakin
President, American Action Forum
President Obama took office in the immediate aftermath of the financial crisis and Great Recession, so it is hardly surprising that the White House took advantage of Democrat majorities in the House and Senate to push forward new financial regulations. Indeed, the administration was so eager to take advantage of the opportunity that it began the legislative process before receiving the report of the Financial Crisis Inquiry Commission (FCIC), which the president had created by signing into law Fraud Enforcement and Recovery Act in May 2009.
Given the rush, it is hardly a surprise that there was a fundamental misdiagnosis of the origins of the crisis. The simple mantra that drove the debate - Wall Street greed and under-regulation -led to legislation known as The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Dodd-Frank turns six on July 21, and, given its manifest flaws, it is fair to wonder about what might have been and whether a more stable financial system could have been achieved at lower regulatory and economic cost.
Dodd-Frank was a sweeping reform. It created new agencies and bureaus: the Financial Stability Oversight Council (FSOC), the Office of Financial Research in Treasury, the Consumer Financial Protection Bureau (CBPB), the Federal Insurance Office in Treasury, an Office of Credit Ratings within the Securities and Exchange Commission and others. It revamped securitization rules; changed the oversight of derivatives; changed the prudential standards for risk-based capital, leverage, liquidity, and contingent capital; imposed the Volcker Rule; had provisions for corporate governance, and more. And, in the process of being implemented, it required roughly 400 separate rulemakings that remain incomplete 6 years later.
These myriad reforms are united by a single proposition: the solution was more regulation and bigger government. That is a fundamental misreading of the crisis, which was born of under-regulation (e.g., mortgage origination, largely by the state), over-regulation (e.g., the affordable housing standards imposed on Fannie Mae and Freddie Mac), and poor regulation (e.g., prudential regulation by the Securities and Exchange Commission). In the process, Dodd-Frank was also filled with provisions that had nothing to do with the crisis per se, whether it is the expensive Volcker rule (which limits proprietary trading that had nothing to do with the crisis) or the conflict minerals rule (which has served only to inflict economic damage on the Congo), or others.
By failing to develop a nuanced understanding of the crisis, the administration birthed a bad law. And by doing so in a partisan fashion, it ensured that Dodd-Frank would become a political lightning rod until President Obama departs office.
The public understands this. More voters surveyed believe that “big government” has had more of a negative impact on their personal financial situation than “big Wall St. Banks.” A majority of voters also believe the avalanche of new federal regulations issued under Dodd-Frank is strangling our economy, killing jobs, and eating away at our freedoms. And a vast majority surveyed agree with the statement “Although the Obama Administration claims that lack of regulation caused the financial crisis of 2008, the real cause was misguided federal policy that encourage banks to offer loans to people who could not pay them back, leading to a nationwide real estate crash.” All of this is true even though 63 percent of those surveyed said they are unfamiliar with Dodd-Frank. They may not know the name, but they understand the actions and their implications.
Dodd-Frank turns six this year and, essentially untouched, will represent President Obama’s financial regulation legacy. It is a legacy of excessive cost, economic damage, and overly intrusive government that is out of proportion to the economic stability it contributes.
JIM Parrot makes #7 to take the 5th !
Transparency ?
Breaking News: Co-Conspirator Jim Parrot Takes The Fifth In Depositon.
THIS POS THIEF RUNNING THIS COUNTRY NOW HAS 7 MODAFOKERS THAT HAVE TAKEN THE 5TH, JIM PARROT MAKES 7, GOOGLE ALL THE OBAM ADMINISTRATION PEOPLE THAT HAVE TAKEN THE 5TH, TWO FROM THE IRS ALONE, VA ADMINISTRATION, 2 MORE FROM TARP MONEY, HILLARY'S EMAIL SERVER BOY BRIAN PAGLIARINO,
HITLER REMIX ON FANNIE MAE - ENJOY
Updated crooked lizt- drop these POS !
Ann Wagner H.R.2767
Barry Zigas
Ben Bernake
Bill Huizenga H.R.2767
Blaine Luetkemeyer H.R.2767
Bob Goodlatte H.R.2767
Bruce Kamich
Chris Collins H.R.2767
Chris Stewart H.R.2767
Congressman Ed Royce
Curt Clawson H.R.2767
David Schweikert H.R.2767
David Stevens
Ed DeMarco
Ed Pinto.
Eric Holder (DOJ) for not doing their job Gene Sparling Hank Paulson Jack Kingston H.R.2767 Jack Lew Janet Yellen (For not doing her job) Jeb Hensarling H.R.2767 Jeff Duncan H.R.2767 Jim Jordan H.R.2767 Jim Parrott Joe Light John Carney Justin Amash H.R.2767 Keith Rothfus H.R.2767 Kevin Yoder H.R.2767 Larretta Lynch (DOJ) for not doing her job Lewis Ranieri Louie Gohmert H.R.2767 Lynn Westmoreland H.R.2767 Mac Thornberry H.R.2767 Mark Meadows H.R.2767 Mark Zandi Marlin Stutzman H.R.2767 Marsha Blackburn H.R.2767 Mel Watt Michael Berman Michael Burgess H.R.2767 Michele Bachmann H.R.2767 Mick Mulvaney H.R.2767 Patirck McHenry H.R.2767 Pete Olseon H.R.2767 Peter Wallison President Obama Randy Hultgren H.R.2767 Randy Neugebauer H.R.2767 Robert Hurt H.R.2767 Robert Pittenger H.R.2767 Roger Williams H.R.2767 Sam Johnson H.R.2767 Scott DesJarlais H.R.2767 Scott Garrett H.R.2767 Sean Duffy H.R.2767 SEC (For not doing their job) Senater Crapo Senater Johnson Senator Corker Senator Warner Shelley Capito H.R.2767 Spencer Bachus H.R.2767 Stevan Pearce H.R.2767 Steve King H.R.2767 Steve Scalise H.R.2767 Steven Palazzo H.R.2767 Ted Yoho H.R.2767 Tim Geithner Todd Rokita H.R.2767 Tom Cotton H.R.2767 Tom Huelskamp H.R.2767 Tom McClintock H.R.2767 Tom Price H.R.2767 Trent Franks H.R.2767 Trey Radel H.R.2767 Vicky Hartzler H.R.2767 Walter Jones H.R.2767
These people are un-ethical and deserve to be voted out of office or fired or put in prison for their involvement with the GSEs.
Please feel free to add to the list
MEL WATT INTERVIEW
GSE Equities: I Don't Want To Say I Told You So
Jul.18.16 | About: Fannie Mae (FNMA)
Glen Bradford
Glen Bradford
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Summary
•The government is taking all of Fannie Mae and Freddie Mac's money as a matter of public policy and if this remains to be the case: FNMA=0 & FMCC=0.
•Laws exist for a reason. Courts exist for a reason. Accounting rules exist for a reason. The net worth sweep exists for the reason to crush GSE shareholders.
•This isn't news. We all know now what's been happening to the GSEs. The question remains, what happens next and what does it all mean?
Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) are two private companies that currently are operated by the government under conservatorship where they give all of their money to the government. If you ignore their capital structure they are functionally being run like government agencies. If you ignore accounting rules, they lost a lot of money between 2008 and 2011. If you look at the conservatorship objectively, it's produced over $100B of cash for the government so far on top of their liquidation preference and self-issued warrants.
According to the government, 4617(f) and 4623(d) prevents non-governmental shareholders from:
1.Inspecting the books and records.
2.Having standing to file lawsuits.
Investment Opportunity In Brief: Well, that poison pill has been tough for shareholders to digest and the lawsuits have been piling up. In the event that at least one court rules that any one of the steps the administration took to reclassify GSE profits as government revenue without compensation broke at least one law, the theory is that the GSE equity securities would have more than $0 value. By the accounts of Richard X. Bove and Bill Ackman, common shares at current G-fee levels are worth around $20 at their current fully diluted share counts considering that combined the GSEs stand to make $15B/annum.
Nationalization Through Expropriation
The overarching theme of what has been happening to the GSEs is not uncommon in other countries:
“
Nationalization occurs when a state or a state-owned enterprise assumes ownership or other form of control over a formerly private asset. One way to nationalize assets is through direct expropriation. Analogous to many countries around the world, several Latin American governments are permitted by their constitutions to expropriate private property with the goal of benefiting the greater public. In the United States, this action is called "eminent dominant," which is the seizure of private property by the government upon due monetary compensation.
A Bank Too Big to Jail
Fair Game
By GRETCHEN MORGENSON JULY 15, 2016
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Lanny Breuer, at lectern, head of the Justice Department’s criminal division, announced the HSBC penalty and settlement in 2012. Credit Richard Drew/Associated Press
Have you ever wondered why the crippling 2008 financial crisis generated almost no criminal prosecutions of large banks and their top executives?
Then take a moment to read the congressional report issued on July 11 titled “Too Big to Jail.” Citing internal documents that the United States Treasury took three years to produce, the report shows how regulators and prosecutors turned a potential criminal prosecution of a large global bank — HSBC — into a watered-down settlement that insulated its executives and failed to take into account the full scope of the bank’s violations.
The report, prepared by the Republican staff of the House Financial Services Committee, does not examine a matter related to the mortgage crisis. Rather, it looks at the Department of Justice’s 2012 settlement with HSBC, the British banking behemoth, after accusations that it laundered nearly $900 million for drug traffickers and processed transactions on behalf of Cuba, Iran, Libya, Sudan and Myanmar, or Burma, when those countries were subject to United States sanctions.
HSBC and its American subsidiary, HSBC Bank USA, agreed to pay almost $2 billion under the settlement, striking a deferred prosecution arrangement that remains in place. Under such deals, the government agrees to delay or forgo prosecution of a company if it promises to change its behavior.
In spite of the settlement’s size, it did not represent a body blow to the bank. Announced in late 2012, the HSBC agreement was almost a footnote to the earlier fallout from the mortgage crisis. Still, the facts outlined by prosecutors were damning enough to raise questions about why the bank had not been subject to harsher treatment, fueling the view that large financial institutions are not only too big to be allowed to fail but also are too significant to be prosecuted criminally.
The report on HSBC was not adopted by the full House committee, but neither did it generate a dissent from others on the committee. It was released, the staff said, “to shed light on whether D.O.J. is making prosecutorial decisions based on the size of financial institutions and D.O.J.’s belief that such prosecutions could negatively impact the economy.”
There doesn’t seem to be much doubt about that. Indeed, the report concluded that the Justice Department’s leadership overruled an internal recommendation to prosecute HSBC, citing concerns “that prosecuting the bank ‘could result in a global financial disaster.’”
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RELATED COVERAGE
DEALBOOK
HSBC to Pay $1.92 Billion Fine to Settle Charges Over Laundering DEC. 10, 2012
FROM OUR ADVERTISERS
This will surprise few Americans who learned during the financial crisis that banks and their officials are rarely held to account.
Peter Carr, a spokesman for the Justice Department, said it was “committed to aggressively investigating allegations of wrongdoing at financial institutions, and, along with our law enforcement partners, holding individuals and corporations responsible for their conduct.” Since 2014, he said, It has prosecuted numerous individuals for corporate misconduct, including top executives.
Eric H. Holder Jr., the former attorney general, did not return a phone call seeking comment about the report.
Quoting from internal Treasury records, the report said that once the Justice Department decided not to prosecute HSBC, its officials began softening the deal offered to the bank. One change involved releasing the bank’s employees, officers and directors from potential prosecution.
The original agreement provided no protection from prosecution for employees who “knowingly and willfully” processed financial transactions with countries under American sanctions, the report said.
But the final deferred prosecution agreement gave a conditional release from liability for transactions disclosed to investigators during the period covered by the settlement.
DOCUMENT
‘Too Big to Jail’ Congressional Report
Citing internal documents that the United States Treasury took three years to produce, the report looks at the Department of Justice’s 2012 settlement with HSBC.
OPEN DOCUMENT
David A. Skeel, a professor of corporate law at the University of Pennsylvania Law School, said he was struck by this change. “This is one case where it looks like the government might have been able to prosecute misbehaving executives during the crisis period, yet it waived its right to do so,” he said in an email.
Another modification involved penalties to be exacted from executives if HSBC failed to live up to compliance requirements.
While initial terms called for voiding the entire year’s bonus compensation at the bank if it did not meet compliance hurdles, the final deferred prosecution agreement said only that a failure could potentially void the bonuses. This revision, the report said, “apparently leaves open the possibility for executives to get their bonuses, despite failing to meet compliance standards.”
Another disturbing element turned up by the House committee: The settlement terms were given to HSBC before officials in the Treasury’s Office of Foreign Assets Control, or O.F.A.C., had assessed the full extent of the bank’s sanctions violations.
The Justice Department called for HSBC to pay $375 million to settle the sanctions violations. But officials in charge of analyzing those violations were still awaiting additional information from the bank when this figure was submitted. Therefore, they could not be sure the amount was adequate.
“No matter that our sanctions numbers might come in higher than that,” an official at the Treasury office wrote in an email to colleagues. “We weren’t consulted. We were told.”
As a result, the report said, officials of the Office of Foreign Assets Control “decided to hastily resolve internal concerns about the extent of HSBC’s sanctions violations and ‘frame’ O.F.A.C.’s final settlement number to mirror the $375 million ‘deemed settled’ value proposed” by the Justice Department.
Mary Kreiner Ramirez, a professor at Washburn University School of Law in Topeka, Kan., and a former assistant United States attorney, said she was startled by how much influence officials at the Financial Services Authority — Britain’s top financial regulator at the time — had on the Justice Department’s process in the HSBC matter, according to the report.
“It would seem that in making the decision with respect to HSBC, Holder gave more attention to the concerns expressed by the F.S.A. than he did with respect to our own agencies,” Ms. Ramirez said in an interview. “And think about it: Congress spent three years trying to uncover this information that F.S.A. was getting at the time the events were unfolding.”
That it took the House committee so long to receive the information from the Treasury Department once again raises questions about transparency in government, something the Obama administration has called a top priority.
“Treasury improperly impeded the committee’s investigation” for nearly three years before producing certain subpoenaed records, the report said. The department’s production of records “is missing dozens, if not hundreds, of pages,” the report said.
Joshua Drobnyk, a Treasury spokesman, disputed this characterization, saying the department had cooperated extensively with Congress. “Treasury made hundreds of pages of documents available to the committee more than two years ago, in April 2014, and committee staff reviewed the materials five separate times,” Mr. Drobnyk said in a statement.
But Jeb Hensarling, the Texas Republican who heads the House Financial Services Committee, doesn’t buy it. “If an incomplete response to the committee after three years and the threat of deposition subpoenas isn’t stonewalling, I don’t know what is,” he said in a statement. “After these revelations, if the Obama administration refuses to be transparent, produce the documents that it is withholding and address the urgent questions that this report has raised, the American people need to ask why.”
By shedding light on the HSBC matter, the report is “the best kind of anticorruption action,” said Edward J. Kane, a professor of finance at Boston College and an authority on regulatory failures. “The fact that so many of these cases are settled rather than going to court means we don’t get an airing of facts and challenges of facts.”
The report should be viewed as “evidence of an abuse of the regulatory system,” Mr. Kane added. “And unless proven otherwise, this is just the tip of the iceberg.”
Now We Know — The DOJ Ignored Two FCIC Citi Criminal Referrals!
Mar 24, 201643 views3 Likes0 CommentsShare on LinkedInShare on FacebookShare on Twitter
Several items have recently hit the press regarding the financial crisis of 2008 which could lead to further investigation of what actually happened and who is responsible.
One that has me excited is the National Archives releasing the first of many documents of the Financial Crisis Inquiry Commission (FCIC) which have been sealed for five years!!!
The media is already picking up on this and noted that the FCIC made a criminal referral for Robert Rubin, et al. in September of 2010. They discovered that ”Rubin reportedly blessed the increased risk taking at Citi … Their direct exposures to subprime bonds were $55 billion according to the Commission. The FCIC staff notes say that ”based on FCIC interviews and documents obtained during our investigation, it is clear that CEO Chuck Prince and Robert Rubin … knew this information.”
Fortune goes on to say, Prince and Rubin, were made aware of Citi’s exposure “no later than September 9, 2007.” Yet later that fall, “they told analysts that the bank’s exposure to subprime was just $13 billion, reporting it as 76% less than what actually was.”
But here’s the real blockbuster that Fortune and the other media have not found yet! They will, it’s there. In the records of the February 2011 business meeting it is noted that the FCIC also made a second Citi criminal referral based solely on my testimony and evidence. It is very unlikely that any other bank got two criminal referrals from the FCIC which were subsequently covered up and ignored by Attorney General Eric Holder(!) – even though the Commission saw evidence that laws were possibly violated.
The motion for referral states:
Whereas, the Commission is instructed to refer to the Attorney General of the United States and any appropriate State Attorney General any person that the Commission finds may have violated the laws of the Unites States in relation to ( the financial crisis), and
Whereas, there have been presented to the Commissioners a memorandum concerning possible violations of the laws of the United States regarding the allegations made by Richard Bowen, and
Whereas, the Commission finds that laws of the United States may have been violated with respect to such matters
Now, Therefore, Be it Resolved that the Chairman is authorized on behalf of the Commission to forward the memorandum and accompanying exhibits to the Attorney General of the United States for further investigation and possible action.
(The FCIC February 9, 2011 meeting document record is available here, page 3 and pages 63-65)
I gave extensive testimony and evidence in an interview with the Commission’s senior investigative and legal staff on February 27 of 2010. I also gave them evidence, including copies of the fraudulent representations given to Fannie/Freddie and purchasers of mortgage backed securities and a list of the securitizations that I knew involved fraudulent representations. Yet, while the testimony of Rubin and others could be read on-line on the Commission’s website, beginning in February of 2011, the transcript of my testimony, as well as all my evidence submitted, was locked up in the National Archives for five years!
However, my transcript has just been released (available here ) and was sent to the DOJ with the FCIC referral, and all of the evidence I submitted, which is referenced in the transcript, and is now listed to be released by the National Archives.
But what about this five year lockup period, and does it relate to Rubin and other Citi execs? As my friend, fellow founder of Bank Whistleblowers United, Gary J. Aguirre, lawyer,former investigator with the United States Securities and Exchange Commission (SEC) and himself a whistleblower queried in an email:
One might be forgiven for asking: why the five year wait? Reminds me of something, but what is it? Oh yeah, that’s the statute of limitations. Rubin’s safe now.
Here’s my take on the running of the S/L on Wall Street crimes a couple of years ago: The five-year statute of limitations has all but run out on all of these frauds. Each passing day was meaningful for one reason: neither the SEC nor the Department of Justice filed a case. In this way, the government passively and quietly granted Wall Street immunity for designing and executing its $22-trillion dollar fraud. This grant of immunity drew little media attention. There was nothing to report. No sentences were commuted because no one had been sentenced. No crimes were pardoned because there were no convictions. However, the absence of news created a media void. Left to chance, filling it could get ugly. A crackdown was needed. Sensitive to the media’s need for a crackdown, but unwilling to conduct a real one, the government offered a substitute: a crackdown on hedge funds for insider trading.
So five years too late? Even though the evidence in the first referral shows Rubin lied, regardless of the media yelling for justice… is he too big to jail? Also, what about all of my evidence and testimony which was sent to the DOJ and which the FCIC also felt showed possible violations of law??
Phil Angelides, the former chairman of the FCIC says, “It’s been a disappointment to me and others that the Justice Department has not pursued the potential wrongdoing by individuals identified in the matters we referred to them. At the very least, they owe the American people the reassurance they conducted a thorough investigation of individuals who engaged in misconduct”
No, Mr. Angelides, the American people deserve justice.
Yale Legal Scholar: FHFA & Treasury “Exceeded” Authority on Fannie and Freddie
- June 30, 2015
Writing in the National Law Review, Yale Law School lecturer Logan Beirne dissects the recently filed lawsuit in Iowa by three Fannie Mae and Freddie Mac investors accusing the federal government of exceeding its authority as a conservator. Beirne says the case “astutely focuses on [the Federal Housing Finance Agency’s statutory breeches,” unlike the earlier suits that focused on constitutional claims. Beirne writes:
“However, rather than work as conservator to benefit Fannie Mae and Freddie Mac’s shareholders, as is its obligation under traditional conservatorship law, the FHFA acted for the benefit of the U.S. government – and to the detriment of those private shareholders. In a surprise deal, the FHFA effectively wiped out the private shareholders and essentially turned the proceeds of Freddie and Fannie to the U.S. Treasury.”
When the government decided to put the enterprises into conservatorship, it was done in part to ensure that Fannie and Freddie did not experience more distress than they already had. We’ve noted before that the government imposed tough terms in exchange for this, but at the time, the vast majority believed it was a necessary step. As Beirne points out, the companies returned to profitability by the second quarter in 2012 … and then the Third Amendment Sweep was created just a few months later.
As a conservator, though, FHFA, despite comments from officials, had a statutory obligation to shareholders. Concerns for taxpayers are important, yes, but breaches of contractual responsibilities are frowned upon, and can lead to future distrust. Beirne writes:
“As conservator under HERA, it is precisely the FHFA’s responsibility to work for the benefit of the shareholders. Under standard corporate law principles, that conservator is bound, by a strong fiduciary duty to protect the corporate assets for the benefit of both common and preferred shareholders. By working for the benefit of third party taxpayers – and to the detriment of private shareholders – the FHFA is in breach of its duties under HERA.”
The three plaintiffs in the Iowa case – Thomas Saxton, Ida Saxton and Bradly Paynter – have alleged that FHFA and the U.S. Treasury “systemically exceeded their limited authority under HERA” and “acted arbitrarily and capriciously.” Anyone who’s familiar with the history here should certainly agree with that. Beirne rightly concludes that while the “political winds of the moment” make the seizure of private property from shareholder seem popular, the long-term consequences of allowing this violation of the rule of law to go unchecked would have very costly consequences on the housing market.
New York Times and Ralph Nader criticize Obama for illegally seizing private property and violating disclosure laws
The New York Times and Ralph Nader have recently criticized President Obama for illegally seizing assets from shareholders of Fannie Mae and Freddie Mac, and for illegally avoiding disclosing this information to shareholders.
The fifth amendment requires that compensation be given for such seizures, but Obama did not do this.
Federal disclosure laws require that shareholders be informed of this information immediately, but Obama waited more than three years to tell them.
Neither of these actions by Obama surprises me one bit. These things are consistent with his many, many, many other illegal activities. He has no respect for the rule of law, the constitution, private property, or individual liberty.
The New York Times reports:
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.
Ralph Nader wrote:
“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)?”
“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.”
“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.”
“The magnitude of falsity is enormous”: Federal judge rips into banks implicated in 2008 collapse
Two foreign banks went to court instead of settling. They may end up regretting it.
SCOTT ERIC KAUFMAN Follow
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TOPICS: BANKING CRISIS, FANNIE MAE, FREDDIE MAC, JUDGE DENISE COTES, NOMURA HOLDINGS, ROYAL BACK OF SCOTLAND, BUSINESS NEWS, NEWS
"The magnitude of falsity is enormous": Federal judge rips into banks implicated in 2008 collapse
(Credit: Nomad_Soul via Shutterstock)
On Monday, a federal judge ruled, in no uncertain terms, that two banks deliberately misled Fannie Mae and Freddie Mac when it sold them subprime mortages during the housing boom, the New York Times’ Peter Eavis reports.
Judge Denise Cote of the Federal District Court in Manhattan wrote that Nomura Holdings and the Royal Bank of Scotland (RBS) directly contributed to the bond market collapse, then lied about their involvement, writing that “[t]he magnitude of falsity, conservatively measured, is enormous.” Unlike Goldman Sachs and Bank of America, which settled with the government for $18 billion in order to prevent the public from learning about the true extent of their behavior, Nomura and RBS challenged the government — which was not the best idea, according to Judge Cote.
Nomura and RBS “relied, as they are entitled to do, on a multifaceted attack on the plaintiff’s evidence. That attack failed.”
“This case is complex from almost any angle,” she wrote, “but at its core there is a single, simple question. Did defendants accurately describe the home mortages in the Offering Documents for the securities they sold that were backed by those mortgages? Following trial, the answer to that question is clear. The Offering Documents did not correctly describe the mortgage loans.”
Judge Cote tore into Nomura, writing that the company cut corners in order to maximize profits in a way that sabotaged the entire bond market. “As its witnesses repeatedly described and as its documents illustrated, Nomura’s goal was to work with the sellers of loans and to do what it could to foster a good relationship with them,” she wrote. “Given this attitude, it is unsurprising that even when there were specific warnings about the risk of working with an originator, those warnings fell on deaf ears.”
“The origination and securitization of these defective loans not only contributed to the collapse of the housing market, the very macroeconomic factor that defendants say caused the losses,” she added, “but once that collapse started, improperly underwritten loans were hit hardest and drove the collapse even further.”
Bank of America whistle-blower’s bombshell: “We were told to lie”
Bombshell: Bank of America whistle-blowers detail horrid schemes to fleece borrowers, reward foreclosures (UPDATED)
DAVID DAYEN Follow
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TOPICS: BANK OF AMERICA, EDITOR'S PICKS, FORECLOSURE, HAMP, JP MORGAN CHASE, LOANS, MORTGAGE, MORTGAGE CRISIS, MORTGAGE FRAUD, WALL STREET, WHISTLEBLOWERS, BUSINESS NEWS, POLITICS NEWS
Bank of America whistle-blower's bombshell: "We were told to lie"
(Credit: Sashkin via Shutterstock/Salon)
Bank of America’s mortgage servicing unit systematically lied to homeowners, fraudulently denied loan modifications, and paid their staff bonuses for deliberately pushing people into foreclosure: Yes, these allegations were suspected by any homeowner who ever had to deal with the bank to try to get a loan modification – but now they come from six former employees and one contractor, whose sworn statements were added last week to a civil lawsuit filed in federal court in Massachusetts.
“Bank of America’s practice is to string homeowners along with no apparent intention of providing the permanent loan modifications it promises,” said Erika Brown, one of the former employees. The damning evidence would spur a series of criminal investigations of BofA executives, if we still had a rule of law in this country for Wall Street banks.
The government’s Home Affordable Modification Program (HAMP), which gave banks cash incentives to modify loans under certain standards, was supposed to streamline the process and help up to 4 million struggling homeowners (to date, active permanent modifications number about 870,000). In reality, Bank of America used it as a tool, say these former employees, to squeeze as much money as possible out of struggling borrowers before eventually foreclosing on them. Borrowers were supposed to make three trial payments before the loan modification became permanent; in actuality, many borrowers would make payments for a year or more, only to find themselves rejected for a permanent modification, and then owing the difference between the trial modification and their original payment. Former Treasury Secretary Timothy Geithner famously described HAMP as a means to “foam the runway” for the banks, spreading out foreclosures so banks could more readily absorb them.
These Bank of America employees offer the first glimpse into how they pulled it off. Employees, many of whom allege they were given no basic training on how to even use HAMP, were instructed to tell borrowers that documents were incomplete or missing when they were not, or that the file was “under review” when it hadn’t been accessed in months. Former loan-level representative Simone Gordon says flat-out in her affidavit that “we were told to lie to customers” about the receipt of documents and trial payments. She added that the bank would hold financial documents borrowers submitted for review for at least 30 days. “Once thirty days passed, Bank of America would consider many of these documents to be ‘stale’ and the homeowner would have to re-apply for a modification,” Gordon writes. Theresa Terrelonge, another ex-employee, said that the company would consistently tell homeowners to resubmit information, restarting the clock on the HAMP process.
Worse than this, Bank of America would simply throw out documents on a consistent basis. Former case management supervisor William Wilson alleged that, during bimonthly sessions called the “blitz,” case managers and underwriters would simply deny any file with financial documents that were more than 60 days old. “During a blitz, a single team would decline between 600 and 1,500 modification files at a time,” Wilson wrote. “I personally reviewed hundreds of files in which the computer systems showed that the homeowner had fulfilled a Trial Period Plan and was entitled to a permanent loan modification, but was nevertheless declined for a permanent modification during a blitz.” Employees were then instructed to make up a reason for the denial to submit to the Treasury Department, which monitored the program. Others say that bank employees falsified records in the computer system and removed documents from homeowner files to make it look like the borrower did not qualify for a permanent modification.
Senior managers provided carrots and sticks for employees to lie to customers and push them into foreclosure. Simone Gordon described meetings where managers created quotas for lower-level employees, and a bonus system for reaching those quotas. Employees “who placed ten or more accounts into foreclosure in a given month received a $500 bonus,” Gordon wrote. “Bank of America also gave employees gift cards to retail stores like Target or Bed Bath and Beyond as rewards for placing accounts into foreclosure.” Employees were closely monitored, and those who didn’t meet quotas, or who dared to give borrowers accurate information, were fired, as was anyone who “questioned the ethics … of declining loan modifications for false and fraudulent reasons,” according to William Wilson.
Bank of America characterized the affidavits as “rife with factual inaccuracies.” But they match complaints from borrowers having to resubmit documents multiple times, and getting denied for permanent modifications despite making all trial payments. And these statements come from all over the country from ex-employees without a relationship to one another. It did not result from one “rogue” bank branch.
Mr. Buffett’s Pregnant Silence (or How the Executive Branch is Helping Him Steal Fannie Mae from Retail Investors who Can’t Fight Back)
First, to set the stage, a story from Mr. Buffett’s official biographer, Alice Schroeder, about how Mr. Buffett has a glorious history of screwing the retail investor (I assume the story was included in Snowball to illustrate Mr. Buffett’s keen ability to identify and capture value…I think it emphasizes something else entirely)
“By then, Dan Monen, his lawyer, had joined Warren on a personal side project that he had been pursuing for some time: buying the stock of an Omaha-based insurer, National American Fire Insurance. This company’s worthless stock had been sold to farmers all over Nebraska by unscrupulous promotors in exchange for Liberty Bonds issued during World War I.
The defrauded farmers had no idea that their moldering paper was now worth something. National American was (now) earning $29 per share. National American was one of the cheapest stocks Warren had ever seen.
So Dan Monen, Warren’s partner and proxy, went off to the countryside carrying wads of Warren’s money…He sat on front porches, drinking iced tea, eating pie with farmers and their wives, and offering cash for their stock certificates….Warren kept it in the original shareholders’ names, with a power of attorney attached that gave him control, rather than transferring it into his name.
The brainstorm behind Warren’s National American coup had been more than just price. He had learned the value of gathering as much as possible of something scarce.”
…or he had learned the value of forcefully punching defrauded farmers in the groin.
2. In his 1991 letter to shareholders, Mr. Buffett confessed that NOT accumulating as many Fannie Mae shares as he could was a major blunder.
In early 1988, we decided to buy 30 million shares (adjusted for a subsequent split) of Federal National Mortgage Association (Fannie Mae), which would have been a $350-$400 million investment. We had owned the stock some years earlier and understood the company’s business. Furthermore, it was clear to us that David Maxwell, Fannie Mae’s CEO, had dealt superbly with some problems that he had inherited and had established the company as a financial powerhouse?—?with the best yet to come.
I visited David in Washington and confirmed that he would not be uncomfortable if we were to take a large position. After we bought about 7 million shares, the price began to climb. In frustration, I stopped buying (a mistake that,thankfully,I did not repeat when Coca-Cola stock rose similarly during our purchase program).
In an even sillier move, I surrendered to my distaste for holding small positions and sold the 7 million shares we owned. I wish I could give you a halfway rational explanation for my amateurish behavior vis-a-vis Fannie Mae.
3. Mr. Buffett’s silence regarding Fannie Mae’s conservatorship and the 3rd Amendment sweep is deafening…for a very good reason (or billions and billions and billions of them).
4. Mr. Buffett is very close with Hank Paulson (his banker at GS for many years) and didn’t utter a peep when Fannie & Freddie were put into conservatorship, stuffed like a turkey with $40 Billion of TBTF toxic mortgages (the only balance sheets in town that could absorb them), and saddled with intentionally punitive terms. (Note: the government’s force-feading Fannie and Freddie TBTF mortgage garbage may have helped some of Mr. Buffett’s rather large TBTF investments, no? Pass me my 6th cherry coke!)
FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD December 17–18, 2008 “Mr. Reid (note: deputy assistant treas sec) reminded the Board that the government owning the preferred stock with punitive dividend terms provides incentive for the GSE’s to work its issues out as expeditiously as possible. Furthermore, by design, the warrants were issued not to take ownership but rather to devalue the common stock.”
Note: the TBTF banks were charged 2.5% interest and were not required to turn over any equity unlike AIG, FNMA, FMCC (otherwise known as the “Crisis Patsies”). Just a reminder that Morgan Stanley had already borrowed over $100 Billion by Sept ‘08.
5. Mr. Buffett is very close with President Obama and didn’t utter a peep when the admin/treasury starting taking all of Fannie & Freddie’s profits in 2012 (the gov claims they were in a “death spiral” but knew they were about to return to soaring profitability…come on people). Fannie and Freddie have poured over $220B into the treasury’s coffers since the sweep (really impeccable timing on that sweep admin/treas!)…to be used however the administration sees fit (really makes those deficit reduction numbers look awesome!).
6. Oh, and then there’s this…Berkshire Hathaway’s largest publicly traded holding is Wells Fargo.
7. And Wells Fargo wants Fannie and Freddie dead. “No joke, I once heard a Wells lobbyist say ‘we are going to kill Fannie and Freddie and take over their business.’”?—?unnamed source, you decide if he/she’s lying
8. Louise R, a retired nurse who resides in California, owns 36,000 shares of Fannie Mae common stock, some of which she and her late husband purchased over 25 years ago.
9. Josephine R. is a retired psychiatric social worker and inner-city school counselor who owns 1,000 shares of Fannie Mae purchased 15 years ago.
Note: (Louise and Josephine acquired their shares way before Bill Ackman or Bruce Berkowitz did…to all of the folks peddling the cheap, lazy narrative that this is about greedy hedge funds and not vulnerable retail investors and staggeringly important constitutional issues, shame)
10. Even if it flies in the face of all that we (and especially he) should hold dear regarding the rule of law in our capital markets and country, Mr. Buffett is more than happy to let admin/treas attempt to kill fannie/freddie and screw the retail investors who have owned shares for decades (retail investors can’t afford to fight the gov…you may hate the GSEs, but you should be able to erase the names of the plaintiffs and decide what the subject government actions mean in terms of fundamental shareholder rights and broad, critical constitutional issues)
These are the GSEs not drone strikes. Executive Privilege claims are ludicrous and highly indicative of “foul play.” If you think the folks on this priv log from White House and Treasury weren’t drafting the 3rd Amendment Sweep, I’ll point you towards my crack dealer…I mean my friend’s crack dealer.
11. Mr. Buffett’s hoping he finally has a chance to get his hands on Fannie Mae (through his massive holding in Wells Fargo), the missed opportunity he lamented in his 1991 shareholder letter. You know the financial powerhouse (his words) that got away. (Alternatively, there’s always that massive Berkshire cash hoard waiting for elephants to kill…and Fannie Mae’s a nice looking elephant). I wonder how many times he’s spoken with the President about it?
12. So Dan Monen, Warren’s partner and proxy, went off to the countryside carrying wads of Warren’s money…He sat on front porches, drinking iced tea, eating pie with farmers and their wives, and offering cash for their stock certificates…
References: The Snowball: Warren Buffett and the Business of Life (Or How My Colon Looks after 80 Yrs of Cheeseburgers), Berkshire Hathaway Chairman’s Letter 1991 (So So Folksy), FASAB Minutes 12/17 2008 (Oh Sh%$ There’s a Transcript of this?)
THE ONLY REASON BANKS SHOWED PROFIT IS BECAUSE THE FED IS PAYING THEM TO HOLD MONEY, RIGGED.