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Hi Clarence,
It is quite a confusing situation to wrap one’s head around. There are 3 laws, and 3 potential roles for a Director of FHFA to play. First the Charter act privatized the former gov agencies and created FNMA. The safety and soundness act of 1992 established the framework for regulating the GSEs. Finally HERA came along and modified both the charter act and the safety and soundness act. HERA replaced the original regulator with the new “independent agency” FHFA. The Director of FHFA priority role is to regulate the GSEs based on the requirements enumerated in the statutes. This role of the Director establishes regulations required of him such as the Capitol rule, and new products rule. The Director in this role also issues reports and is supposed to provide in writing, permission for the GSEs to make a capitol distribution from the retained earnings account if the retained earnings account is below the statutory minimum. Thus all of these requirements of the director must follow the Administrative Procedures Act. In other words, the Directors role as regulator is Administrative and subject to potential APA claims. HERA also allows the Director in the regulator role to appoint himself as either a receiver or a conservator of the GSEs. The role of receiver is subject to the enumerated actions in the statutes to achieve the end result of liquefying the GSE. Therefore there is no guesswork to achieve the result. The law states exactly what a receiver is allowed to do. Finally, HERA allows the Director as Conservator to take any action necessary to put the GSE in a sound and solvent position and benefit the FHFA itself. Unlike a receivership, the final result of Conservatorship can’t be guaranteed by statute. It is necessary therefore to provide the Conservator the assumption of correctness in the actions that he takes to achieve the goals of rehabilitation of the GSEs and benefit the FHFA. Congress includes the anti-injunction clause only for the actions taken by the Director acting as Conservator. All of the courts have ruled that only when the Director acting as Conservator acts ultra-vires will a court step in. They have ruled that the Conservator has not acted ultra-vires. To date there have been no legal claims against the Director as regulator for violations of other laws.
No they didnt lose. The APA doesnt apply to the actions of a conservator under HERA. APA deals with rule making. I contend that the FHFA as regulator violated the APA when it allowed the FHFA as Conservator to sell to treasury a new novel investment product consisting of senior shares with an illegal commitment fee or charge in the form of a variable liquidation preference based on the amount of money leant from the Government’s treasury. This is a magical commitment fee whose form can change with the stroke of a pen. The statutory APA requirements for such a new investment product are written in the Safety and Soundness act of 1992. Well to continue the theme. The corrupt plaintiff Attorneys, or as FFF likes to say the dumb attorneys didn’t bother to bring an APA claim based on the actual laws that matter, choosing instead to play in the HERA actions of a Conservator sandbox. You know the actions that Congress bared the Courts to review? What a great idea, let’s ignore all the laws governing the GSEs and FHFA and instead focus all our efforts for 16 years on the actions of FHFA as Conservator. Now the Statute of limitations has run out. Better hope Crazy Carlos is right.
The reason you do not understand is because you fail to understand. The answer to why the Supremes and every other court for that matter ruled the way they did has been answered in my posts for a couple years now. You have eyes. Go read them. The plaintiff attorneys have corruptly conspired to obfuscate the issues for decades and run the clock out by refusing to allege any law breaking by the government, choosing instead to play nicely in the HERA powers of Conservator sandbox. Hello. HERA says you cant challenge the actions of the conservator. Its called the presumption of correctness. The same way you can never actually win a property tax claim, unless the tax assessor does something wrong. Plaintiff attorneys had some 15 years to bring claims of illegal activity wrt charter act safety and soundness laws etc. they corruptly chose not to. Now here we are. Better hope carlos is right.
You are correct. When I say void, I am referring to my prior reasoning in multiple posts. You correctly state that the SPSPA is not void as a matter of court rulings yet. What I was trying to state, is that I believe the gov knows that if this verdict is aloud to stand then there will be a 8-0 finding of facts that the terms of the SPSPA result in a violation of common law contract rights as codified in Del, and Virginia law. The current arrangement of LP on the Seniors that increases dollar for dollar of net-worth is just a NWS part 2. The SPSPA has been found by the DC courts to violate common contract law. Full stop. I believe Lambirth shouldn’t approve the gov motion on the merits. But I dont think merits have anything to do with it. I believe that should the verdict stand, there is now the ability for injuntive relief based on the terms of the SPSPA itself. I don’t think the agreement will withstand any attempt to collect on the LP or warrants should there be a new lawsuit from any shareholder in any district court just by filing a little tucker act claim for illegal exaction. Kind of hard to dismiss that 8-0 jury verdict in DC. This is what I believe.
Saying something is false or partly false without stating why you believe that with either an opinion or some facts is a waste of time. I have established over many posts why I believe part 1 and 2 to be creditable assumptions. You have not. So your post serves no actual purpose. I have no problem and would prefer you educate me so that I don’t perpetuate any falsehoods. Thanks. Dumb is one way to think of the attorneys. I prefer to think of their strategy as malicious and extremely effective if the goal is obfuscation and run out the clock. Given the exponential rise in unethical law-fare perpetuated by the industry over the last decades I see no other explanation.
The gov motion for dismissal as a mater of law I believe establishes 2 things. First, if the 8-0 verdict survives, then the SPSPA as currently written will have to end. Second, the gov motion is highly likely to succeed because this verdict is all that is left of a failed flimsy attempt from 15 years ago that never alleged any violations of the actual laws that mattered. No one in all of these years from state and federal district courts to the supreme court ever mentioned the charter act or the safety and soundness act of 1992. The only laws that actually matter. Therefore, with the absence of those claims, the Gov is correct based on the historical adjudication of the NWS as if it existed in a bubble that the jury verdict should be overturned. Sad but true in my opinion.
Kthompt,
I think neither HERA nor the safety and soundness law establishes risk based capital levels. Only critical and minimum capital levels ie 2.5% minimum level by statute. Stop conflating a regulation with the law. The current capital rule is a regulation. It is purely at the discretion of the Directorto set the risk based level once the APA requirements are satisfied. There is nothing stopping the Director from proposing to set a revised risk based level at say 2.6%, have a public hearing and comment period and publish the new rule in the federal register. Poof! Like magic. Then the capital classifications in HERA would be based on the statutory critical and minimum levels, and a new regulatory risk based capital of 2.6%. Not likely but that is how the gov works.
Obviously it is entirely possible to do what dajester wished for.
Dajester,
Kt is not serious and has an agenda to perpetuate a narrative that transfers as much wealth from retail investors to institutions. Notice that if you refer to his original post asking those questions that I have provided specific answers to his questions to that post and provided over the past 2 years a novel strategy that could nullify the SPSPA. Any shareholder can do this. I originally proposed that multiple shareholders file these lawsuits in their district courts all across the nation as a form of lawfare. I no longer advocate for that due to the weaponization of the DOJ and the regime gestapo.
The jury verdict is a finding of fact that the federal governments agreement with itself violates the common law contract rights of shareholders. You cant separate the NWS from the rest of the agreement because of the structure and wording of the agreement itself. The agreement is not a valid contract. I argued that the Supreme Court could have ended the argument when they ruled the FHFA director was under the direct supervision of POTUS. But they didnt. The finding of fact by the jury cant be appealed. Only the court processes can. The only logical way out now is to claim a political victory terminating the SPSPA claiming to have saved the housing finance system while protecting the taxpayers. Should nothing happen and a change in gov occur that reigns in the justice department then there will still be a couple years to challenge the SPSPA as I propose. The 8-0 finding of fact will be the argument that judges will not be able argue away and dismiss.
So since you posted the legal advice of not taking legal advice from morons on this board that “no” nothing, one could objectively discern that you are a moron who posts on this board. Thank you. Noted.
Get your facts straight. Only members of Congress are exempt from insider trading laws in the US. As the saying goes Laws for thee not me.
Im just attempting to be optimistic. The reality in my opinion is that we have a federal government that is dangerously close to losing the consent of the governed. All three branches of government are FUBAREd at the moment.
Patswil, you are correct. I have been saying for quite some time that because of the 8-0 jury verdict, the SPSPA can no longer be enforced. The 8-0 jury verdict is a finding of facts. Not law. It cannot be appealed. Only the legal process can be appealed. The jury verdict established a finding of fact that the SPSPA violates the common law contract concepts. That cannot be solved by a one time monetary award. The agreement is fatally flawed and that fact has been memorialized and is now precedent by a jury of peers in the DC federal circuit. Game over, shareholders just need to recognize the magnitude of this decision. The gov recognized this could happen when they drafted the agreement thus the terms you quoted. It is why I believe when the time is right, the next amendment to the SPSPA will be a finding that due to the courageous actions of the gov, the housing market has been stabilized, tax payers were protected, the excess moneys will be returned to the retained earnings account, and the companies saved. Oh and there will be plenty of money for everyone to own a home. Thanks to the Biden administration. Vote for us this November.
I have posted the answers to questions 1-4 numerous times. Question 5 is unknowable. My proposed claims are credible and actionable by any shareholder. The little tucker act claims are novel and with the recent jury verdict, I believe will be hard to dismiss. The SOL is 2026 or 27. I believe that the common law contract violation jury verdict ultimately foreclose on the execution of any more of the SPSPA terms and conditions. I believe that a political solution will end the conservatorship without the disastrous terms of the SPSPA being enforced soon. If not, then expect a suit to be filed in 2025 to force the issues.
The Lamberth Jury verdict and the Supreme Court verdict in Collins are two sides of the same coin. In the Collins case the Supreme Court ruled that HERA violated the separation of powers and removed the for cause language in the Act allowing the Director of FHFA to be fired by the President. More importantly for us shareholders and a gift to all of us is that they also ruled that the NWS and the SPSPA in general were well within the FHFA’s statutory powers envisioned by Congress. Now move to the Jury Trial where a jury has found that the FHFA/Treasury’s Statutorily approved actions have violated the private common law contract claims of the shareholder class.
So we now have two court cases that may establish that HERA unconstitutionally violates the contract clause of Article I section 10. But no one has yet brought a claim against the government. HERA is a very bad law that was found to violate the separation of powers and perhaps also the contract clause of the US Constitution. Is there a statute of limitations on constitutional violations? Can any shareholder make this argument and ask that all actions carried out by the Government under HERA be reversed?
Wise Man,
Appreciate your position. When making accusations of securities law fraud by elites conspiring with the gov in FnF conservatorship, keep in mind the events that transpired on Sep 10, 11 of 2001. What was revealed by Donald Rumsfeld in a press conference on Sep 10, 2001? What offices and records were destroyed in building 7 the following day? What offices of the pentagon and records were destroyed the following day? Building 7 fire started on floor 13. What gov agencies were on that floor? The global dollar amount involved in the 2008 financial collapse and fanniegate, far surpasses the financial scandal revealed on Sep 10, 2001. Monsters will do anything to keep their secrets. This is why there will never be any settlement of your alleged securities crimes.
Can someone explain what is the CRT? Why is it good or bad for FNF? Why could be considered prohibited by the charters?
Bummer. You know, if my legal theories are even partially correct and adjudicated in my favor, it would result in your preferred shares going to par and resumption of dividends. Isn’t that what you desire?
If you would like to donate some cash to Barron & Co. that would be awesome.
The freddie Mac charter requires that any new product as defined in the safety and soundness act receive prior approval from FHFA the regulator (including public notice and comment) before being offered for sale. The safety and soundness act does not define the word “product”. However, the safety and soundness act does say any new product authorized under the section of the charter act that includes the Treasury back stop must receive prior approval and public notice. In 2008, FnF sold to Treasury a new product called the senior preferred shares, this new never before seen financial instrument (product) had a variable liquidation preference charge attached that allowed for an infinite rate of return. These new products that were sold to Treasury under the FnF charter acts for the purpose of securing the nation’s housing finance system were not approved by the new independent federal agency (FHFA) whose job it was to regulate and ensure that FnF and its Conservator (FHFA-C) followed the law. Two questions for the board.
1) According to the Supreme Court Rules of statutory construction, if a term is not defined in a statute, then the common meaning of the term is Congress’s intention. To presuppose a different meaning would be a violation of due process. Since the term “Product” is not defined in the statute, can the term be limited to new activities (MBS) as many on this board assume? It is curious that FHFA published their final rule on new products in 2022. In the rule they say new products and activities require public notice and comment and define what new activities are considered new products, but do not define what a product is. Of course they don’t because the term product means the common definition of financial products including securities, obligations etc.
2) If a statute requires an agency to follow the Administrative Procedures Act as part of its duty, but the agency doesnt bother to do its job, what is the statute of limitations on challenging the failure to do its stated job? The APA says that the SOL is 6 years from the final agency action. There has been no agency action on the sale of the SPS. Is there a way to challenge the lack of agency action under the APA? Does the 6-year SOL apply?
You prove my point. Thank you. I said he posts from a viewpoint of immorality and low ethics that makes his posts narrow and cynical. We are all jaded and cynical and expect the gov to do wrong at all times. It is understandable since that has been the reality. But we don’t have to normalize it. Perhaps it is too late for us as a country and a free people.
Thanks LuLU
I agree one hundred percent with what you say which is why I haven’t called kthomp19 out personally for years. That all changed when he posted the below:
“Treasury Secretary John Paulson... Would he dilute the shareholders? Hrmmm...
Absolutely. As much as he possibly can. He owns a lot of juniors but no commons. If he becomes the Treasury Secretary then a senior-to-common conversion would benefit him in an official capacity and a junior-to-common conversion would benefit him in a personal capacity. Doing neither would not benefit him at all.”
Those are his words. He believes it is perfectly reasonable for a government official to act immorally and unethically and in the case of the above, criminally. Sorry that I offended anyone on this board. But, the above is an example of using the gov to steal from us and give to someone else. Corruption at best, communism at worst.
Kthomp19,
Your signature page is intellectually sophomoric. Actually stupid. This is an anonymous message board. Not a college law class. I can post whatever in the hopes that you and others will correct me and increase my understanding . And in the process educate others. You call me a hypocrite because I haven’t filed a lawsuit. Ooh. What kind of silliness is that? You predict a 75% chance of a cramdown. Ooh, everybody place your bets. I stand by my statement. You have only ever advocated on this board the forced transfer of wealth and property to your comrades. It is all you post about. How the government will accomplish it is all you try to prove. How the courts have provided legal cover provides you glee as you attempt to be correct. You think it perfectly appropriate for a future cabinet official to make government policy based on personal gain. You argue from a place of immorality and a lack of ethics, therefore your arguments are narrow and cynical. Even if legacy shareholders account for 2 billion of wealth, your prediction of a cramdown is still forcefully transferring wealth and property to your comrades. I have to use that term because it is the only applicable term for your 75% prediction. In any event comrade, the legacy shareholders net worth of 2 billion is because your comrades gave themselves 79.9 of the company and tied a concrete life preserver around their neck.
Thanks mini K thot. Excellent contribution to the board. As always.
Sorry Blown, that wasnt supposed to be a reply to you. My bad.
Lets all take a step back to ponder. On one hand we have kthomp with his disciples who knows everything and advocates for a cramdown transferring the wealth and property of existing owners of the company to his comrades (whoever they are) by using the executive branch powers of the republic, because he says Treasury’s job is to make a profit. Except we are 34 Trillion in debt so profit isn’t their strong suit. Then we have a wise man who believes the same gov is upholding all the laws, rules, and basic finance and we will be saved by a secret account where all the equity is held in escrow to save the day. All fantasy based on no concrete evidence. Better to listen to the Barron. The Barron has described novel strategies that any shareholder could try in their own District Court based on the little tucker act and the continuing claims doctrine. The Barron has revealed the holy Eric Holder Memo that DOJ worships that says thow shall not prosecute any member of the establishment or any corporation or their officials for financial crimes. Other actual facts that have been presented by Barron and other honest posters are as follows:
1: Treasury used the Charter act to purchase $225 Billion of MBS on the secondary market. Why? Definitely illegal.
2: Fed purchased even more and continue to hold 2.4 Trillion of MBS
3: Gov accountants in their official meeting minutes refer to SPS and warrants as a Treasury action taken under the Economic Stabilization act. If true the LP attached to the seniors is an illegal and fraudulent act. And also violates the Charter Act.
4: a jury ruled the NWS violated common contract law.
Barron doesnt know what any of this means but barron does know that none of these facts support the fantasies being bandied about on this board.
Barron’s guess is since the whole 15 year ordeal was caused by a stroke of the pen in a federal government agreement with itself, then the solution will be through the same mechanism for political capital in an election year. That would make all those inconvenient facts disappear.
Thanks Neo. I know this. It was wiseman who said why on earth would treasury use the temporary authority in the charter act to purchase 225 billion MBS on the secondary market. I asked him to tell me what law he thinks they used. Treasury violated the law period. They were required to purchase those MBS from FnF not from China and Russia. So the whole SPSPA was I believe a cover for this criminal act. All of that $225 billion should have gone directly to FNF, not foreign nations. I believe that used to be called Treason and now you know why we aren’t allowed to see the documents.
Carlos, If Im Joshua Angel then you are actually Hamish Hume. Stop that nonsense. Your posts have nothing to do with law, rules, and finance and everything to do with your “Theory” of a separate account. Its just a theory based on nothing. Until you show the proof of a separate account that magically upholds all the rules your just blowing smoke from your nether regions. Just like all the other theories on the board. Just theories. There is nothing wrong with theories. I have mine. Truth is that I didnt know about Treasury buying $250 billion of MBS on the secondary Market until last week. I bet you didnt either. But it is there in the Treasury’s financial statements. What law allowed treasury to buy $250 billion of MBS in the summer of 2008? The ESA wasnt signed until October. If they didnt use the Charter acts then they are just a rogue agency doing what ever they want with taxpayer debt. So please tell me what lawyou think they used for that purpose. You keep your faith in the laws, rules, and finance. I will keep my faith in the ability of the Government to violate those laws, rules, and finance with impunity and do whatever it wants. Rules for thee not for me. All under the legal shield of the Eric Holder memo.
Too many words, accusations, innuendos and non-sequiturs all say to me that you have no clue what is going on in the real world with FnF. Just like the rest of us here. I will base my opinion on the words of the people who carried out the dastardly deeds and their published documents.
My Theory is simple. Treasury used the amended Charter act to purchase 250 billion in MBS from China and Russia and maybe others. Then covered up this crime by forcing the SPSPA and used illegal TARP funds for the commitment. Terms were set so that the Conservatorship would last so long the crimes would be memory-holed. Why else would the government accountants refer to the SPS as Tarp? Why else would Treasury Secretary Timmy go to Congress and extend TARP for 1 year and say oh we only spent 293 Billion of the 700 billion but let us have an extra 250 billion just in case. Its all good because 550 billion is still less than 700 billion. You know We are Treasury and we protect taxpayer. Sarcasm. That there is the secret account plan. Backed up by 11,000 secret documents.
A Treasury Secretary performing an Official Government Act to benefit himself personally is unethical and criminal and should be prosecuted to the fullest extent of the Law. If Paulson Becomes Treasury Secretary, he would be required to divest all GSE holdings while serving. Executive Branch officials do not share the same perks as Congress people. The fact you suggest this as reasonable outcome says a lot about your moral fortitude.
Don’t shoot the messenger Wise man. Take it up with folks from FASAB who use the term TARP when referring to the SPS in the October 2008 FASAB meeting posted last year by 955. The meeting minutes I posted only further insinuate this is the case since they are discussing the accounting of treasury’s actions following the passage of The ESA act. Also if you read closely you will see that no money was allocated by Treasury for the commitments (13 Billion for Freddie) until after Congress appropriates a $700 Billion blank check for Treasury to use for economic stabilization activities in October of 2008. I am speculating based on what is written. You being the wise man with super accounting powers and a far greater understanding of the principals could read through Treasury’s Financial statements and consolidated balance sheets to see where they actually got the money for the SPSPAs. All the documents are public. I don’t mind being wrong. I usually am, I am just trying to understand.
Instead of speculating how Treasury will use the warrants and what their purpose was, posters should read and understand what the Government Officials actually said and discussed in their own words detailing what the purpose of the warrants were. Below is copied from the document "FEDERAL ACCOUNTING STANDARDS ADVISORY BOARD December 17-18, 2008 Room 7C13, 441 G Street NW Washington, DC 20548". This is the official meeting minutes that discusses Treasury Officials briefing of the FASAB and the boards questioning of the Treasury officials. As far as I know, this document has never been shared or discussed on IHUB. At least not since I have been on this board. As you read the minutes note how the purpose of this Treasury Presentation to FASAB is how to account for SPSPA in the federal balance sheets in the context of the economic stabilization act. It is pretty obvious to me that Treasury used TARP to fund the SPS. The October 2008 minutes use the term TARP. Treasury states that the commitment uses appropriated funds. Only the ESA funds were appropriated by Congress ($700 billion) in Dec 2008. HERA only authorized the sale of Treasuries commensurate with any purchase of GSE obligations or securities. Treasury bought $250 Billion of MBS based on HERA. I did not know that until last week. I knew the Federal Reserve did but not that Treasury did as well. Note also that there is no mention of the Charter Acts, Safety and Soundness Law, HERA, or the FHFA. The people speaking are the people who were in charge and set up the conservatorship. FHFA only serves as a shield to rubber stamp their plans. Note that they say it is the Government who put them in conservatorship. Read for yourself what the warrants are for and enjoy.
• Issues arising from Economic Stabilization Activities Department of the Treasury Participants.
Department of the Treasury representatives Messrs Al Runnels, Deputy CFO; James Lingebach, Director of Accounting and Internal Controls; Don Geiger, Office of Accounting and Internal Control; and Joel Grover; Office of the Inspector General, appeared before the Board to provide a briefing and answer questions concerning actions taken by Treasury in response to the Emergency Economic Stabilization Act (ESA). The Treasury personnel were accompanied by KPMG representatives Ms. Cathy Supernaw and Mr. Mark McFadden.
17
Final Meeting Minutes on December 17-18, 2008
On December 16, 2008, Treasury provided via email their presentation material (25 page slide presentation) as well as a 24 August 1998 three page Treasury memo addressing the financial statement presentation of the Treasury entity/non-entity financial information. These materials are included as attachments to these minutes.
Remarks and Presentation from Treasury.
After a brief welcome and introduction of all Treasury participants by the FASAB Chairman and Executive Director, Mr. Runnels offered opening remarks and asked Mr. Lingebach along with Mr. Geiger to conduct the balance of the presentation. Mr. Runnels stated that the last 2-3 months were challenging and that Credit Reform accounting took on a much greater emphasis than ever before. He thanked all those present for assisting Treasury in this endeavor.
Mr. Lingebach began with the 25 page slide presentation with primary focus drawn to major issues/points contained within the Treasury position papers (previously supplied to FASAB). These papers were used to document the accounting policies which Treasury would follow in regards to the different ESA activities announced by the Department. Mr. Lingebach suggested covering the Consolidation paper last since he had some specific slides addressing this matter that could also help answer related questions.
Treatment of Purchases of Mortgaged-Back Securities and Credit Facility. (Financial Reporting Position Paper 08-02 dated October 18, 2008)
Mr. Lingebach began by explaining that Treasury determined this to be the easiest of all the actions taken to deal with since Circular A-136, Financial Reporting Requirements, and SFFAS 2, Accounting for Direct Loans and Loan Guarantees, provided guidance. Approximately $3.3 billion in MBS purchases were made during FY2008 with probably much more to follow in FY2009. Since these purchases fall under the Credit Reform Act, credit reform accounting as per SFFAS 2 was deemed appropriate to follow. Mr. Lingebach noted that Treasury is in fact entitled to the stream of principal and interest payments with fixed maturity dates on the underlying securities.
Since there were no borrowings in the credit facility program in FY2008, no transactions transpired. Had they, they too would have been subjected to credit reform accounting.
Accounting for Senior Preferred Stock Purchase Agreement. (Financial Reporting Position Paper 08-03 dated November 11, 2008)
This area generated the most discussion because it was part of the overall liquidity agreement. In return for the senior preferred stock and common stock warrants, Treasury agreed to provide up to $100 billion ($100 B) to each GSE based upon quarterly payments if liabilities exceed assets. After significant internal Treasury discussions, it was concluded that this looked like a guarantee or insurance policy
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Final Meeting Minutes on December 17-18, 2008
program. As a result, changes which should have been made to one of the position papers (discussed below) were inadvertently not made.
Using SFFAS 1, Accounting for Selected Assets and Liabilities, although not discussed specifically, Treasury ascertained that the preferred shares and warrants should be accounted for at acquisition cost with the subsequent market value amounts disclosed in the footnotes. This practice is also consistent with Treasury financial management guidance which admittedly is not generally accepted accounting principles, but does nonetheless fall under the GAAP hierarchy.
There are several facets to these agreements: (1) receipt of stock and warrants, (2) quarterly payments, (3) initial commitment fee (effective March 31st, 2010), (4) ongoing fees, and (5) the commitment itself for $200 B. The accounting and financial reporting are somewhat complex. First, the receipt of the stock and warrants and related commitment fees are accounted for as nonentity transactions since Treasury is acting as a custodian for the stock on behalf of the general fund. However, the quarterly payments and commitment (overall $200 B) are treated as entity transactions since Treasury has received appropriated money to pay for this. As a result, different components of the agreement are treated as either entity or nonentity transactions (Please refer to the attached Treasury letter dated August 24, 1998 for related details).
Classification of GSE-related and ESF Money Market Fund Insurance Transactions as Entity or Non-entity.
(Financial Reporting Position Paper 08-04 dated October 25, 2008
This issue was considered straightforward as we used SFFAS 1, Accounting for Selected Assets and Liabilities. There was a question asked on page 3 concerning the use of a deferred asset account. This was an option discussed at an earlier stage and since Treasury is no longer using this approach it is no longer applicable and should have been revised in this position paper. The original thinking was that the quarterly payments would result in an increase in the preferred stock value resulting in an increase to assets. As it ended up, the entity piece is shown as an expense and when the payment is (actually) made it is at that time that Treasury is entitled to an increase in stock and also increase in liability to the general fund subject to periodic impairment assessments. Treasury expects to clarify the language in this position paper for FY2009 reporting purposes.
Exchange Stabilization Fund (ESF) Money Market Fund Insurance Transactions. (Financial Reporting Position Paper 08-05 dated November 17, 2008
This program was designed to make up the difference if a money market’s funds would ever “break a buck.” Specifically, the difference is the amount that a fund’s liquidation value falls below the $1.00 per share amount. This program ran through December 18 or 19 and since there were no claims filed against the collected premiums, there was no need to accrue any liabilities as of September 30.
19
Final Meeting Minutes on December 17-18, 2008 Treasury Concluding Comments
This is a broad brush (review) of the position papers and we can now begin discussing specific items in greater detail. However, there was a question regarding the $200 B commitment. Treasury had an independent firm evaluate whether or not a liability should be recognized as of year end. They advised that since a liability cannot be reasonably estimated, no amount should be reported, but rather (fully) disclosed in the footnotes.
Open Question and Answer Period.
Mr. Jackson inquired about the difficult process Treasury may have had in terms of achieving OMB quarterly reporting requirements as well as accounting for transactions in what seemed to be an overwhelming environment.
Mr. Lingebach confirmed that the process was difficult noting two points: (1) an ever changing/rapid landscape and various reports that are also due to Congress under the TARP and (2) Treasury was not planning to have a consultant assisting them every quarter due to budget/cost issues. As a result, considering matters such as impairment and given the timing of when the statements are due, Treasury is not afforded with much (analytical) time. As such, they may have to qualify their OMB quarterly submissions.
Mr. Allen confirmed with Mr. Lingebach that Treasury had in fact accrued a liability of $13.8 billion. It was noted that a payment was made after the year-end but before the financial statements were prepared. Mr. Geiger stated that this amount was first known on November 15 and statements were due November 17.
Mr. Patton addressed the disclosure contained in footnote 24 as it relates to the concept of measuring a liability amount with sufficient reliability. Mr. Lingebach stated that he personally did not have much expertise in the valuation process and relied upon Treasury’s contractor to develop the different ranges. Based on their analysis, it was determined that no amount was better (more probable) than another. Treasury’s interpretation of paragraph 34 of SFFAS 5 led them to conclude that they did not meet the sufficiently reliable requirement. Mr. Geiger then noted that: both of the GSE’s were going through similar complex processes as SEC filers and that ultimately, the amount Treasury did accrue ($13.8 B) was for Freddie Mac (as a result of some accounting write-offs in the third quarter) and zero for Fannie Mae.
The discussion then turned to the estimate range and Mr. Patton stated that what got his attention was that when you have a range and an amount is not more likely (probable) than another number in that range, typically, you would take the minimum dollar amount in the range. As such, Mr. Patton asked that Treasury (1) confirm if in fact the minimum dollar amount in the range was zero and (2) address what some might say that given the setting, $13.8 B is not much of an accrual. Mr. Dacey provided additional clarification by saying that the $13.8 B was in fact the minimum range
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Final Meeting Minutes on December 17-18, 2008
element with the maximum being $200 billion. He explained that in theory, Treasury valued the assets as of September 30 with the conditions that existed then and any future estimate would be based on future (unknown) market activity, decline, conditions, etc. In essence, Mr. Dacey concluded that this was the best estimate as of September 30.
Messrs. Lingebach and Runnels then responded by saying that in the final analysis, Treasury determined that any number selected would be merely a guess and that by doing so, the Treasury financial statements might have been misleading as opposed to supplying full disclosure. Mr. Runnels added that Treasury had significant discussions about this liquidity projection and the difficulties involved and that he was not surprised that the consultants, based on all the information available, did not believe that this rose to the normal level of reliability for estimation purposes. In essence, Treasury was certain of the $13.8 B and as a result of that certainty that is what was ultimately booked.
Mr. Torregrosa stated that CBO intends showing some forward looking liability expectation in the budget base line and in their cash projections, the impact of the cash injection amounts. Currently, there are ongoing internal CBO discussions about which assumptions and/or models would be best to use.
It was further noted by Mr. Lingebach that the GSE’s did not have much in the way of information that Treasury had any confidence in. For example, the GSE’s did not have any cash flow information that was at all reliable and that even their 60 day cash flow projections were questionable.
Mr. Schumacher helped summarize the discussion by reiterating his understanding that (1) the $13.8 B was in fact a reliable figure based on the GSE’s liabilities being in excess of assets as of September 30 and (2) that the GSE’s did not have any reliable cash-flow projections beyond 60 days. Mr. Lingebach confirmed this to be an accurate understanding.
Mr. Dacey reviewed that in theory, the September 30 balance sheets reflected GSE fair values as well as write-downs of their other assets; i.e. due to impairment. As a result, and again in theory, if the GSE’s remained solvent going forward, then the $13.8 B would be the extent of the liability. However, Mr. Dacey did point out that the conversations held with the GSE’s confirmed that if the market declines further, there would be further losses to absorb. The problem is that one cannot project with any degree of certainty how much further, if any, the market could decline.
Mr. Geiger then went on to say that one of the difficulties the firm had in doing the valuation was that there were some off balance sheet transactions that complicated the analysis and it was not as clear-cut as Treasury had hoped for. Also, the high-end of the range, $200 B was not an accounting estimate but was a figure developed from a public policy perspective to give confidence to the markets. Mr. Lingebach added that
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Final Meeting Minutes on December 17-18, 2008
although this amount is capped at $100 B for each GSE, it was not developed based upon any type of analysis of future (i.e. cash flow) needs.
Mr. Werfel noted that it would be difficult enough to try and estimate net position for a firm operating in a normal environment let alone an environment such as this. The added difficulty is that in each quarter that a payment might be made, estimating the future impact of that payment is even all the more challenging or overwhelming.
Mr. Jackson then asked if the Government knew whether or not the liquidity commitment calculation of liabilities in excess of assets would actually solve the GSE’s liquidity problems. Mr. Geiger noted that there are two other mechanisms in use in this regard: a line of credit (i.e. credit facility that was not used in FY2008) and an emergency request provision.
Mr. Farrell inquired if these other two mechanisms were being funded from the $200 B. Mr. Lingebach stated that they were not and that in addition to being separate, they had no limit or cap.
Mr. Steinberg asked Treasury to walk through the financial statements with specific emphasis in regards to footnote 24, specifically the $13.8 B. Mr. Geiger then proceeded to review the statements; the consolidated statement of net cost (page 141) at the bottom of the page noting that you will see the amount broken out and highlighted (GSE Costs-entity) further noting that assets and liabilities and the GSE’s valuation calculation(s) follow private sector GAAP/FASB.
Mr. Patton then inquired about the debit side of the journal entry (refer to Treasury Position Paper 08-04 dated October 25, 2008, page 3) that was going to originally charge a deferred asset account. Since subsequent to the issuance of the paper, Treasury had changed its mind concerning the charge to a deferred asset account, Mr. Patton asked what then would be used to record the debit side of the entry.
Mr. Lingebach then explained that entries were classified according to whether transactions were deemed entity or non-entity. For the entity piece, Treasury would not record anything until an actual payment was made and then it would be to a preferred stock account. When the amount of the quarterly payment is known, Treasury would debit the expense and then credit the liability. Then, when an actual payment occurs, Treasury would charge the liability and credit Fund Balance with Treasury; i.e. appropriated funds. Then on the non-entity side, Treasury would debit the preferred stock investment account and credit the due to the general fund account.
After Treasury ‘s explanation, Mr. Patton then asked to review the language on page 3 of the referenced position paper specific to the journal entry language. Mr. Lingebach confirmed that the language should have been revised to read that the debit would be to an expense and not to a deferred asset. For clarification purposes, Mr. Dacey noted that the asset belongs to the general fund and the expense is incurred by Treasury. Mr. Jackson then added that this is because appropriated funds were being used and that in
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essence, the transaction nets out to a zero-sum noting that the liability is basically “repaying” the appropriation.
Mr. Dacey went on to discuss that there are 3 ways that general fund transactions roll through Treasury financials: first, refunds (IRS) run through the custodial piece, second, there are interest payments on the debt, and third, there are these preferred stocks which run through Treasury’s expenses.
Mr. Reid asked Treasury that if at the end of this quarter, should the GSE’s develop an exposure estimate(s) and also record them, would this affect how Treasury measures and records its Treasury liabilities. Mr. Lingebach responded in the affirmative noting that the estimates would be based on the GSE (FASB) GAAP financials.
Mr. Reid then noted that at September 30 it was probably too early for the GSE’s to develop estimates. As such, they should be in a better position by December 31st to take matters into consideration such as defaults and non-payments which are the underlying securities and that Treasury will need to react to that appropriately. Mr. Lingebach responded by stating that the September 30 GSE figures were not audited but it did appear to Treasury that the GSE’s were trying to scrub their figures. He further noted that what triggered the payment to Freddie was the write-off of certain deferred tax assets.
Mr. Farrell inquired that if Treasury recorded this as an expense, did the GSE’s as a result book this as income/revenue or possibly as an accounts receivable. Mr. Lingebach replied that the GSE’s booked these transactions directly to equity. Mr. Farrell then asked that if at the end of the fourth quarter the GSE’s show assets to be greater than liabilities; would they be required to pay the federal government back? Mr. Lingebach replied in the negative stating that there is no repayment provision.
Mr. Dacey went on to explain that at the end of the day, the preferred stocks (subject to valuation write-downs) will be on the federal government’s balance sheet. At this point, Mr. Steinberg asked whether or not it was possible for the Federal government to financially benefit from these transactions. Mr. Lingebach stated yes, but noted only to the extent that the GSE’s do well going forward.
Mr. Lingebach then referred to page 4 of the slide presentation. Concerning the consolidation issue, he explained that Treasury relied on SFFAC 2. Since neither Fannie Mae or Freddie Mac are in the budget, Treasury looked at the six indicative criteria and determined that the first five criteria did not apply and that on number six, although a fiduciary relationship exists as a result of the conservatorship albeit through the Federal Housing Finance Administration, this conservatorship is deemed to be short term and does not constitute ownership.
Mr. Jackson then asked if that thinking would change if Treasury exercised the warrants to obtain 79.9 percent ownership. Mr. Lingebach stated that if that happened, yes. He
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noted that consolidation could occur if Treasury exercised even a lower percentage such as 50.0% or 51.0% or even something less.
Mr. Werfel clarified this by stating that a review of the accounting literature leads to the answer that generally 51 percent ownership would require consolidation with the exception that if the ownership is deemed temporary, then Treasury would not have to consolidate the GSE’s. Mr. Werfel further noted that the warrants which are analogous to stock options do not constitute control. Also, if the warrants were exercised with the intention of selling them off, there would be no requirement to consolidate.
However, Mr. Farrell noted that regardless of the exercise of the warrants, it seems that the government has at least the appearance of control as it can replace management and dictate Board appointments, approve certain transactions, etc. This led Mr. Farrell to ask about the concept of control.
Mr. Reid responded by stating that the government has set up this conservatorship in a manner similar to other conservatorships where in those cases the government did not consolidate; noting FDIC as an example.
Messrs Schumacher, Farrell and Allen noted similar concerns regarding the interpretation of temporary and what conditions might arise to redefine the relationship as permanent and whether or not the substance of the economic transactions were missing.
Mr. Reid responded by suggesting that the immediate issue faced by the Board is what the estimate of the government’s maximum (financial) exposure is. To this end, he noted that the GSE’s have not estimated this exposure (on an accrual basis) and since the maximum exposure has not been incurred on a cash-basis method, it is yet to be determined if the $200 B is sufficient. Mr. Reid further noted that the decision regarding the nature of the conservatorship is an administrative question and will be based on certain circumstances not yet known. Mr. Reid 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.
Mr. Allen asked whether or not in an economic sense the government exercised the warrants. Mr. Reid explained that the government does not need to exercise the warrants to enter into conservatorship and that there is no economic reason to exercise the warrants since its rights are statutory in nature. Mr. Dacey concurred with this explanation as well as stating that the government has separate rights apart from the warrants.
Mr. Werfel then explained that it is important to understand the government’s intention. The intention was not to eliminate the ownership interests but to prevent current shareholder speculation resulting in speculators taking advantage of government intervention at the expense of others. Driving the stock market value to zero prevents
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Final Meeting Minutes on December 17-18, 2008
this manipulation from happening. Further, timing is important since on September 7 when the conservatorship took affect the stated policy and intention was, and continues to be, that the conservatorship is temporary. There are published statements from the Secretary of the Treasury that the goal is to get the GSE’s back to a stable fiscal position so that they can go forward operating as they were operating before the conservatorship. Since this is in fact the case, the OMB concern was that by consolidating the GSE financials, we are not only in conflict with the stated policy but the financial statements would be misleading. If conditions in fact change, then another decision will need to be made. This will require continual monitoring over time as circumstances change.
Mr. Jackson asked if the common stock was now worthless from an Internal Revenue Service point of view and Mr. Werfel stated that the shares are now down below a dollar and were trading close to about $6.00 at the time of the conservatorships' announcement. OMB estimated that the exercise price for the warrants was approximately $640,000.00.
Mr. Allen then asked the Board if it felt a need to provide additional accounting standards, interpretations or guidance. Specifically, the Chair asked if there is sufficient guidance in either the audit or accounting literature regarding the definition of temporary.
Ms. Supernaw responded by saying that from the KPMG perspective, since Treasury is a Federal agency, FASAB standards are the most appropriate standards to follow. As such, from a consolidation, non-consolidation standpoint, they followed concept statement 2 and did not disagree with Treasury’s interpretation. Concerning measurability, reliability and estimates, she stated that there is good guidance in statement 2 dealing with credit reform. Ms. Supernaw emphasized that Treasury relied heavily on FASAB guidance. KPMG’s Mr. McFadden then added that there is more language regarding this issue in the accounting literature than in the audit literature. He further stated that he thought that sometime in 2002, the FASB took away the temporary exemption in its statement 144; that is, there is no longer a concept for temporary control in United States private-sector GAAP.
Mr. Allen asked if they (KPMG) saw a specific need for additional guidance to help the preparer or firm determine what is or is not temporary. He then stated that generally, accounting standards try to capture the substance of the economic transactions at the time of the event/transaction since no one knows for sure what is going to happen in the future. Concerning intent for example, one legislature cannot bind a subsequent legislature noting that there is probably nothing that binds one congressional session from the next. Consequently, the concept of what might occur in the future is not given a lot of weight, but rather weight is given to the economic substance of that particular event that has taken place.
In response to Mr. Allen’s question, Mr. Geiger responded by stating that Paragraph 50 of concept 2 addressing bailouts could be enhanced.
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Mr. Werfel responded by stating that the larger principle that guides the analysis is whether the events are in the budget or not. That is, if FASAB were to write concept 2 correctly, FASAB would align the proprietary financial statements to the President’s budget. Although control is an important issue, FASAB should address and balance such disparate budget and accounting treatments.
Mr. Steinberg suggested that since Treasury has indicated what areas the Board may be able to assist them in this regard, the discussion should concentrate and focus on those immediate issues. Turning to the presentation material, Mr. Steinberg briefly summarized each area; expanding standard number one and standard number two, providing guidance on the use of valuation specialists and “other” such as the need to move ahead swiftly with the Federal entity project.
Mr. Werfel went on to state that if you were to consolidate the financials you would include a large class of liabilities that do not have the full faith and credit of the government. Only a separate act of Congress can give the full faith credit resolution. Although CBO points out that TVA is such a case, it is immaterial by comparison. The Board should keep this in mind if it ever gets to a consolidation decision point.
Mr. Jackson replied to Mr. Werfel’s comment by stating that full faith and credit should not be a driving force behind liability recognition since we have other liabilities such as leases that fall into that category. Also, there are examples in the state and local governments such as revenue bonds that do not have full faith and credit of the government. Mr. Jackson made two additional points: (1) He agreed with Mr. Steinberg that concept statement 2 never contemplated events which are now taking place. As such, FASAB may need to go back and look at some of its statements to see if changes are needed and (2) the role of government is at question. That is, the government is taking possession not for ownership sake but rather, in order to protect the general interest and welfare of the people. The sole purpose in this case is to bring stability to the markets and not become owners. Somewhere, whether in FASAB standards or its concept statements, the Board may need to reflect this unique role of government as protector and not proprietor.
Mr. Torregrosa stated that he agreed with OMB to the extent that the budget and financial statements should articulate or link as much as possible. Concerning the indicative criteria, he stated that CBO could reach a different conclusion on each of the six items. AIG may pose an interesting matter to discuss since it was unlike the GSE’s; a purely commercial entity. The GSE’s always had an implicit guarantee and were close to the budget line. On a fair value basis, he saw nothing temporary about the GSE’s insolvency. If AIG were placed in the budget even if we are conceptually correct, that might create more problems. In short, Mr. Torregrosa stated that these entity questions are going to continue to come up and that the Board should be prepared to address them.
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Mr. Werfel explained that Treasury has a limited relationship (some TARP-AIG investment) with AIG since the Federal Reserve is primarily involved in dealing with that issue. A trust has been set up which makes the Treasury beneficiary in order to protect the taxpayers. The AIG scenario raises very different questions for our Board to address.
Mr. Dacey stated that GAO disclaimed on the financial statements as a whole. Generally, in terms of the literature it was reasonably well laid out. Although there were challenges in interpretation, it was principles based and the answer made sense. However, should the Board disagree with Treasury’s interpretations, Mr. Dacey would agree with Mr. Jackson’s earlier comments and advise the Board to consider the unique role of the federal government. Another key point to note is that the assets of Freddie and Fannie are not available to the government for general government purposes or uses.
Mr. Reid commented that these issues are directly driven by the health of the economy. That is, if the economy gets better then a lot of these issues will go away. In his opinion, FASAB will need to wait until the end of the year before it renders judgments or decides what steps to take next.
Mr. Allen noted that in his opinion, the Board has two responsibilities: (1) to recognize the structure of the Federal government and how the financial statements are correspondingly structured/presented and (2) help ensure that the basic purpose of financial statements measure and communicate the risks assumed by the citizens. We should never avoid measuring those risks because of the (unique) role of government.
Mr. Jackson replied by saying that he was not disagreeing with the Chair but wanted to emphasize the very unique and unusual situation currently being dealt with by Treasury.
Mr. Werfel in addressing the fiscal exposure of the government stated that one needs to consider the concept of remoteness regarding the $200 B. Each agreement is capped at $100 B with full disclosures noted in the financial statements. The public policy question that also comes up addresses consolidation. That is, to what extent if any, does the consolidated entity impact the behavior of the consolidator?
Mr. Allen then said that he had asked the staff to advise the Board at the next meeting concerning this very matter; as it relates to incentives and behavior. FASAB needs to better understand how issues such as entity versus non-entity impact (budget) decisions. The Board should exercise a degree of professional skepticism as do auditors, in assessing whether or not management decisions are at arm’s-length. An objective should be to help ensure that there is no undue influence one way or the other in making management decisions.
Mr. Steinberg again asked the question, how can FASAB help (Treasury) in going forward? Mr. Allen indicated that if no one had additional questions for Treasury or KPMG representatives, then the Board would take up this question.
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Final Meeting Minutes on December 17-18, 2008
At this point Ms. Payne asked the Treasury representatives a question concerning the Keep Well Agreement. Since Treasury will book the liability as quarterly payments are made, with a corresponding increase to the preferred stock investment account. From the CFR perspective, ignoring the entity / non-entity issue, for every dollar increase in liability there will be a dollar increase to expense and for every dollar in preferred stock you will have a dollar increase in revenue. As a result, assuming no impairment, there will be zero cost. However, is it correct that by applying standard one, market – or fair value - increases will not be reflected? Specifically, the initial $1 billion from each GSE is recorded at a much lower amount. Should the market pick up, Treasury will not be showing the increase and the resulting net cost to the government will exclude any potential gain.
Mr. Lingebach said that was correct and that market increases would only be shown in the disclosures. Mr. Geiger then added that we should clarify the revenue piece. The revenue received in exchange for the liquidity guarantee in this case amounted to $7 billion. This represents the standard fee that an organization would get for providing such a guarantee. Subsequent quarterly payments will not increase revenue unless a year-end revaluation is done leading to that adjustment.
Ms. Supernaw said that there are multiple pieces to consider. For example, when a payment is made there is an increase to the liquidation preference. Therefore, you will see increases but not due to market changes affecting the initial amounts received. One of the areas Treasury is seeking additional guidance, is regarding standard one; the investment accounting guidance in the standard is very general.
Mr. Jackson clarified by stating that the liquidation value of the securities would not be recognized until they were actually liquidated and Ms. Supernaw replied in the affirmative also adding that the Treasury team felt it was essential to hold to the FASAB standards.
Mr. Dacey noted that concerning the liquidation value, it is important to note that the GSE’s investment is not marketable and that Mr. Jackson’s point concerning the exercise of the warrants, should that happen, would require consolidating the financials.
Mr. Savini then asked about (1) the valuation of the preferred stock investment in light of the illiquid market situation and why this stock was not booked at its par value and (2) concerning the warrants, why wasn’t consideration given to any potential future increases to the stock assuming that the GSE’s would successfully come out of conservatorship. Mr. Geiger replied by pointing to slide number seventeen and Treasury’s footnote seven. It was agreed to use the appraised value as of September 8 as opposed to the par value. The reasoning for that was that since the market was in such flux it was highly volatile. Then Mr. Lingebach added that another reason was that in speaking with the people that negotiated this transaction, the $200 billion was not based on any financial analysis but rather it was based on what people felt would provide comfort and stability to the markets. Then in looking at the $1 billion in preferred
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stock, the question was what should the fee be for the $100 B commitment? There was nothing to indicate what the preferred stock was actually worth.
Mr. Allen then added that the point being made is, if Treasury initially valued this at market then why wasn’t it subsequently also booked at market?
Mr. Lingebach stated that Treasury received the stock in exchange for the commitment and the question was what did it really get in return or exchange. As such, Treasury was trying to determine what the investment was really worth; this is why we ignored the face value of the stock. Mr. Geiger went on to explain that they treated this as an exchange transaction and recognized $7 billion in revenue in exchange for the commitment. Concerning the warrants and why consideration wasn’t given to any potential future increases, Mr. Geiger stated that because the GSE’s could only provide 60 days of accurate information they did not have the information to do that. With the TARP program, this is something Treasury should probably look at; other methods they could use for this type of transaction.
Mr. Torregrosa then asked the question why Treasury didn’t take a corresponding 79.9% percentage of the stock value on the transaction date. Mr. Geiger replied, (1) Treasury relied on an independent valuation study performed by an accounting firm and this is actually something Treasury needs additional help with and (2) working within Treasury and in consultation with the Inspector General as well as working with the auditors, this was the best method Treasury could come up with.
Mr. Lingebach then noted this is not ~80.0% of the existing shares but rather the amount that would be determined to represent the ~80.0% at the time the warrants would be exercised, if at all. Mr. Geiger further explained that the valuation of the warrants was the easiest factor since they were valued at what the common stock was valued at in early September.
At this point Mr. Runnels stated that Treasury had basically covered all of its slides with the exception of credit reform on the mortgage backed securities and he suggested that the Board also look at the TARP program briefly and discuss Treasury’s need for further assistance.
Mr. Lingebach then proceeded to discuss two comments on the audit report. Please recall that the intent was to put Fannie and Freddie basically on life support and to allow for the next administration to take further steps in dealing with this matter. The question concerning the future role of the GSE’s will need to be addressed. As a result, this issue as well as the stated policy by the Secretary of the Treasury led officials to believe that the situation would be deemed temporary in nature. Please know that although the GSE’s will be allowed to increase their portfolios through the end of this year, the agreements call for a wind down or reduction of their portfolios thereafter. So the plan for them then is to possibly get smaller, but certainly get better as they cannot continue to operate in the manner they have been.
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Final Meeting Minutes on December 17-18, 2008
Mr. Geiger then briefly discussed the purchase of the mortgage backed securities and the last slide titled How FASAB can help. Treasury came to the conclusion that the purchase of the MBS’s would be handled under credit reform accounting. Please note that this is a relatively new area for Treasury and that in the last two weeks of the fiscal year, Treasury purchased $3.3 billion of such assets and now the department is at $31 billion. Treasury noted that credit reform accounting is basically a discounted cash-flow method.
Mr. Jackson asked if he correctly analyzed that the subsidy for this program was at zero and Mr. Geiger replied that there is actually a negative subsidy which means that they actually expect to earn money for the government. One of the things that FASAB, FMS, and OMB could do is to expand the guidance to include more than just loan programs. Credit reform accounting probably did not contemplate the purchase of these types of assets so there are no good examples to follow. Putting this in perspective, during the end of the year there were voluminous transactions of up to $1 billion per day purchasing MBS’s comprised of 145 transactions using two fiscal agents and this has continued into this year.
Mr. Jackson then asked if Treasury has the option of selecting the securities it wishes to purchase; that is, can Treasury ensure positive returns? Mr. Geiger responded by saying that within that program, there is specific investment guidance that is being used.
Mr. Werfel noted that maximizing the negative subsidy return is not the sole driver. This is probably the number one challenge Treasury has in implementing the program; selecting the correct mix of assets to not only protect the investor but also provide stability. A part of the problem that creates confusion is how the media reports what this is costing the taxpayer. Although up-front costs are flowing out which will show significant budgetary and net cost increases, since the (positive) returns will be earned over a future period of time, these amounts are not being portrayed or factored into what is being reported by the media.
Mr. Allen then noted that Mr. Werfel’s explanation makes a very good argument for using accrual budgeting methods. To which Mr. Jackson said that by using credit reform you are in fact following accrual budgeting. Mr. Werfel concurred.
Mr. Torregrosa noted that CBO has a different approach. Under the TARP program, CBO uses an adjusted credit form approach. This approach uses more of a market based risk model which affects the subsidy costs significantly. Concerning Treasury’s use of adjusted-credit reform (on MBS’s) accounting program-wide in order to achieve consistency, budget inconsistencies are created. CBO has a stated preference to treat Treasury’s MBS’s as an exchange of assets, executed at market price resulting in no impact. However, that may change.
Mr. Geiger stated that although credit reform is not new to the government, using it on MBS’s and financial instruments is a new concept. Therefore, we should all be looking at new ways to handle these types of transactions. Continuing with the presentation,
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slide eleven discusses the guarantee program for the money market funds. This is an insurance program that was designed to deal with any money market fund that may have “broken the buck”, where a fund’s assets would be valued at less than a dollar. As a result, we have incurred both earned and unearned revenues from this program and are monitoring the situation closely. This program was in response to one money market fund actually breaking a dollar. Lastly, Mr. Geiger reviewed the way FASAB can help in that statement number one only deals with Federal securities and not non- Federal securities.
Mr. Allen then asked if there were any other thoughts Treasury might have concerning our technical agenda going forward. Mr. Geiger said yes; an item that is not on slide eleven deals with FASAB’s current GAAP hierarchy project which is underway. Since many (new) Treasury initiatives/actions under the TARP program are commercial in nature, private sector GAAP addresses many of these transactions. As a result, it would be helpful to have clarifying language on how to best use the Federal GAAP hierarchy. Specifically, users need assistance in assessing when they should turn to other standards for guidance.
Mr. Runnels then reviewed slide number twenty three details; capital purchase program statistics, AIG, Citigroup, ASB, etc. Also, Mr. Runnels noted that the TARP MBS acquisitions initiative was on hold for now. Mr. Werfel said that there was an additional piece that is not under the TARP that is worth noting. In order to help the Federal Reserve, Treasury has deposited $300 B to provide liquidity to the Federal Reserve Bank and complement TARP. Mr. Steinberg asked if this was the reason for the large increase in the Treasury cash amount from last year to this year and Mr. Lingebach replied in the affirmative. Mr. Dymond indicated that this was called the Supplementary Financing Program. Mr. Steinberg observed that the Federal Reserve can only do what it’s doing because of the money that the Treasury is basically supplying on behalf of the government. Mr. Lingebach agreed and confirmed that Treasury is basically making deposits into an account. Very brief and general comments about the money supply and additional Government borrowing were made just before Mr. Allen thanked Treasury for coming and their willingness to answer both staff and Board questions.
The Board took a short recess.
31
1 At the request of the Chairman, Ms. Loughan re-opened the Board meeting to review
2 whether or not a separate project should be officially opened. In addition, she asked
3 what specific areas or issues the Board would like for staff to focus on.
4
5 Mr. Allen expressed his desire to set this up as a new project but emphasized that he
6 would like to hear from others; including the preparer and auditor.
7
8 Mr. Reid stated that there is a significant amount of activity not yet fully known.
9 However this time next year there will be a better idea as to what the exposure will
10 actually be and many issues will probably drop out. Mr. Reid stated that there might be
11 a change in intent with the new administration taking office. Mr. Reid advised that the
12 Board should wait until the August meeting before proceeding in order to avoid
13 speculation.
14
15 Mr. Allen responded by saying that issues such as temporary / permanent and fair value
16 may need to be addressed in the interim period. Mr. Allen believes that accounting for
17 investments deserves clarification regarding whether financial assets should be booked
18 at cost or fair value.
19
20 Mr. Reid indicated that before one can address how the assets should be reflected; the
21 answer rests on how you resolve the issue of whether or not the GSE’s continue to be
22 reported as temporary. That is, if they continue to be treated as temporary, that could
23 justify using fair value as opposed to a permanent relationship that could allow for held-
24 to-maturity accounting.
25
26 Mr. Dacey concurs with Mr. Reid that ultimately there may not be a long term position in
27 equities and that by next year the Board will know more. Mr. Dacey believes that once
28 you open the question of fair value on financial assets you will then have to look at the
29 remaining assets on the balance sheet as well. Mr. Dacey does not believe there are
30 any interpretation issues that are causing problems at the moment.
31
32 Mr. Allen discussed the indicative criteria and Treasury’s review which indicate that they
33 felt they did not meet the first five elements. Mr. Allen clearly believes this is an area for
34 interpretation since many would argue differently than Treasury and would come to a
35 different conclusion. Mr. Dacey agrees that there certainly is control over the GSE’s
36 even though there is no ownership, however, this puts the Board in a position of second
37 guessing Treasury. Mr. Reid believes that the consolidation decision was not primarily
38 based on FASAB guidance or criteria but rather past Federal practice and coupled with
39 the fact that these GSE’s are not in the budget one can clearly understand why
40 Treasury did not consolidate.
41
42 Mr. Allen noted to the contrary stating that Treasury clearly said they followed FASAB
43 standards and that in so doing, they came up with a conclusion that many of us would
44 not necessarily agree with. Mr. Diamond noted that Treasury pointed to paragraph 50
45 which clearly excludes bailout entities and paragraphs 48 and 49 which also exclude the
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Draft Meeting Minutes on December 17-18, 2008
Draft Meeting Minutes on December 17-18, 2008
1 GSE’s. Mr. Jackson noted however that those exclusions were prior to the government
2 exercising its right of conservatorship.
3
4 Mr. Werfel indicated that the Board typically operates on a longer term basis and as a
5 result, we should take time look at this from a distance before we determine where best
6 to move or where the gaps and/or problems are. Therefore, if there are areas of clear
7 failure, then that is where the Board should now focus. However, with the involvement
8 of all the principal parties to include both the KPMG and IG auditors, Mr. Werfel does
9 not believe there is any evidence of failure.
10
11 Mr. Torregrosa expressed concern that there was in fact a reporting failure. However,
12 since the GSE’s were not part of the budget, and absent that fact, he does not believe
13 that there is anything we could have provided as guidance that would have changed the
14 results. Also, regarding the valuation of the preferred stock and warrants and specific to
15 why some markdowns were taken and others were not, he does not believe we
16 received a clear answer to that question from Treasury officials. Mr. Torregrosa does
17 agree with previous comments made regarding the rapid timing of these events and
18 how the new administration will probably make decisions which will ultimately impact the
19 nature of the GSE’s.
20
21 Mr. Werfel indicated that the bigger question is the accounting for the equity
22 investments and this is where Ms. Payne reminded the Board that Treasury has asked
23 for help in this regard. Mr. Steinberg pointed out that we should look at original intent
24 and the proverbial “smell test” when assessing the applicability of prior guidance to
25 current circumstances. He reminded the Board that in concept number two, the Board
26 when addressing bail out language, did not consider the GSE’s but rather Lockheed,
27 Continental and Chrysler. The rationale for excluding the GSE’s is that they were
28 privately owned and the government did not explicitly guarantee the debt and to require
29 consolidation would in essence abrogate both of those notions. As we look at the
30 concept of smell test, it is clear that the Federal government is becoming significantly
31 much more involved in the both GSE’s and Federal Reserve and ultimately the citizenry
32 looks to the Federal Government as being accountable and responsible. As a result, Mr.
33 Steinberg recommends that we stay focused to what the Treasury department has
34 asked for help with; expand statement number one to include investments in non-
35 Federal securities since given the current circumstances, the statement is no longer
36 complete. Statement number two should be expanded to cover investments in addition
37 to loan programs. The last piece dealing with Treasury’s entity versus non-entity display
38 as well as the Federal Reserve Bank can be dealt with in the Federal entity project
39 which is now in progress. Currently, we also have a project underway to review existing
40 standards where we can deal with both statements number one and two. As a result,
41 there should not be a significant programmatic change by the Board.
42
43 Mr. Allen concurred with Mr. Steinberg’s comments noting that in all likelihood, an
44 exposure draft of some sort could be issued to address these issues sometime next
45 year. In any event, Mr. Allen noted that the Board’s intent is not to second guess the
46 Treasury department but rather remain an independent body through the conduct of its
33
Draft Meeting Minutes on December 17-18, 2008
1 deliberations in order to fulfill its charter. The Board could decide to initiate a new
2 project that might take two to three years and it would be worth noting that the project is
3 not to deal specifically with the situations brought forward to us today but are more
4 prospective in nature.
5
6 Mr. Steinberg reiterated his recommendation that existing projects could be expanded
7 to accommodate these issues. Mr. Allen suggested that a separate project might be
8 more appropriate since accrual accounting significantly impacts the financial picture and
9 transcends existing projects. Although Mr. Reid agreed with the impact that accrual
10 accounting might have, he agrees with Mr. Steinberg in regards to resource
11 management in addressing these matters noting that modifying the investment
12 guidance is a priority. Mr. Schumacher then asked if the Board in fact made this a
13 priority, how would the other projects be impacted; Federal entity and the review of
14 existing standards projects. Mr. Allen noted that that was a discussion that would need
15 to be held since we had more projects than staff available to do the work.
16
17 Ms. Loughan indicated that the Federal entity project was moving along and that an
18 exposure draft could be expected by the end of 2009 and she advised that some of the
19 matters such as the consolidation issue could be incorporated into her project. In
20 addressing earlier comments made by Mr. Geiger, Mr. Savini asked whether the Board
21 should consider looking at the GAAP hierarchy to see if it would make more sense to
22 clarify that users should incorporate by reference the FASB literature in regards to
23 investments as opposed to reinventing the wheel. Mr. Allen indicated that this was a key
24 discussion point in Tab B regarding FASB GAAP and there is a difference of opinion
25 among the Board as to how best address FASB GAAP. Ms. Payne indicated that the
26 Board does not have to include FASB GAAP in its hierarchy project, however, with the
27 issuance of the technical bulletin the Board can clarify if FASB GAAP applies. Mr.
28 Jackson objected by stating that since statement one does address investments, we
29 cannot go to FASB GAAP because FASAB has jurisdiction.
30
31 Mr. Farrell agreed that we should not second guess Treasury even though he might
32 have come to different conclusions. We are certainly seeing the function of government
33 change and such transactions and events are likely to recur. Also, Boards typically
34 cannot react fast enough to provide on-the-spot guidance to decision makers. Since all
35 Board members had not yet spoken, Mr. Farrell reserved judgment. Mr. Jackson did
36 agree that a new project should be established but was uncertain as to its scope. In
37 addition, Mr. Jackson agreed with Mr. Steinberg that the existing standards needed to
38 be expanded. Since we can only deal with what we currently are aware of, we might
39 need to amend the standards more than once as we go forward. Mr. Jackson does not
40 believe that there is any reporting failure however he notes that we should address
41 issues as they arise. This might include looking to other standard-setters that go
42 through a deliberative due process and including guidance in some way.
43
44 Mr. Patton stated that the consolidation issue as well as some other matters should be
45 folded into the Federal entity project, if applicable. Concerning the valuation of various
46 types of financial instruments, Mr. Patton would advise against marking to market at this
34
Draft Meeting Minutes on December 17-18, 2008
1 time because the measurement attributes projects is currently underway. The Board
2 should have its conceptual rationale established in place or at least defined in order to
3 avoid what might appear as reaching a conclusion in an ad hoc manner; rationale is
4 needed for the basis of conclusion.
5
6 Mr. Dacey agrees with Mr. Patton and referred to paragraph 148 of standard one which
7 basically says until the Board reaches decisions about the conceptual framework it
8 would be premature to recommend a valuation basis for non-federal securities. A
9 detailed discussion then ensued between Messrs. Jackson, Allen , Patton, and Dacey
10 regarding how best to proceed in order to avoid a possible auditor qualification that
11 could result if for example, FASAB accounting standards were at variance with Federal
12 law. In short Mr. Jackson does not believe we should wait for a concept statement or
13 rationale to be completed. Mr. Dacey advised that we could look to other standard
14 setters (i.e. Level D common practice GAAP) who follow a deliberative due process to
15 adopt other options. Mr. Jackson restated his opinion that since FASAB addresses
16 some of these issues, the Board should not defer to other standard-setters. Mr.
17 Steinberg then indicated that we are currently writing standards on natural resources
18 without having concept statements completed. Mr. Werfel then stated that it would be
19 helpful for the preparers and auditors to know if the Board in fact had clear opinions or
20 positions on any particular matter. In particular, such opinions and/or positions should
21 have a significant Board majority and be clearly communicated to both preparers and
22 auditors. Mr. Schumacher stated that he was unsure whether there should be a
23 separate project for these issues or if they should be folded into existing projects.
24 However, since these transactions are still unfolding we will know better in September
25 of 2009 and as such, we should only give guidance where applicable.
26
27 Mr. Allen stated that he felt that no one could really determine if there was a failure
28 anywhere, however, he noted that the Board now has an opportunity to act. He advised
29 that since the programs are still unfolding, the Board should get a sense from the staff
30 as well as certain Board members as to those likely areas that might arise or questions
31 that a preparer or attester might have to address in the coming year. Mr. Jackson then
32 stated the Board could look at the GAAP hierarchy project and advise users that they
33 could also consider other appropriate GAAP in conjunction with FASAB standards. On
34 an interim basis, the outcome might be to advise via some technical guidance, that the
35 preparer could move down the GAAP hierarchy to get to an answer under certain
36 circumstances. Mr. Jackson would like the staff to inform (high level analysis) the Board
37 at its next meeting as to whether or not the standards have a fundamental weakness
38 and whether or not the standards permit such a flow down within the gap hierarchy to
39 facilitate decision-making. In this way, we may not have to amend standards and we
40 can allow the concept statements project to move at a normal pace.
41
42 Mr. Reid emphasized the importance of taking prudent steps forward while waiting for
43 certain Treasury and Fed actions to unfold. Mr. Allen then turned again to Mr. Steinberg
44 and asked him if this could be a first step we take. Mr. Steinberg reiterated similar
45 concerns that Mr. Jackson previously expressed that existing standards do not facilitate
46 or assist the department and the conduct of its accounting for these transactions. The
35
Draft Meeting Minutes on December 17-18, 2008
1 Board will need to update the standards to reflect what is currently happening. Mr. Allen
2 said that he felt the Board was evenly divided on this issue as to whether or not there
3 should be a separate project opened. At this point, the consensus of the Board was to
4 have another meeting to discuss moving forward strategically with staff analysis
5 comparing current literature to either known conditions or future likely events in order to
6 identify gaps with recommended solutions; statements one and two in particular. Mr.
7 Patton reminded the Board and staff that mark to market should not be the only
8 measurement principal considered primarily since government actions more than likely
9 will occur when markets are unstable and/or illiquid. Based upon what we are currently
10 seeing, it makes sense to look at other valuation models for the Federal government to
11 consider.
12
13 CONCLUSIONS: Prior to adjourning, Mr. Allen summarized what the staff was
14 expected to do in preparation for the Board’s next meeting -- prepare a tentative
15 draft and short outline of the issues the staff would like the Board to consider for
16 providing additional guidance.
17
18 Adjournment
19 The meeting adjourned for the day at 4:30 PM.
Isnt the claim and subsequent judgement arising from the purchase of the Senior Preferred Shares? Isnt the terms of that purchase (variable Liquidation Preference) as modified in 2012 the root of the issue? If so, then the payout to the class holders is a capital distribution as defined.
I have a question. Your premise is that banks want to lend and home buyers want to build. However, the big 3 are subordinates of the party of Davos and the club of Rome. That is just a fact. Black Rock, State Street and Vanguard control tens of trillions of wealth. The official position of these entities is that You will own nothing, and be happy as they advocate for the destruction of the western capitalist system with WEFs fourth turning and great reset. Black Rock CEO states that he prefers the CCP system over the US. How do you reconcile your premise with the plans of globalist elites? Do they or do they not control the banks? Thanks for your posts. Much appreciated.
Perhaps you have located crazy Carlos’s super secret separate account plan trading in Argentina.
Hahahaha what a myopic view you have. You can’t get out of your own narrow way. If what you have just wrote is true, then the SPSPA as I suspect is dead and over. It cannot remain in force if it, as you say, extinguished the common law contract rights of the current shareholders. Unless of course you are advocating some type of socialist/marxist/communist technocratic tyranny. I think that is your MO. At least your posts advocate for this future. Notice you only advocate for the distribution of my property to others through your nonsense that Treasury can do whatever it wants. I believe that we will continue to be a free democratic republic that will eventually throw off the DOJ Holder memo handcuffs that bind us shareholders. We will be free. The free market will prevail. Go FNMA! And GLTA!
Ive been reading through Treasury agency financial reports and consolidated balance sheets. The Treasury purchased 250 billion of MBS in 2008 using the HERA temp authority. This is in addition to the Federal reserves MBS purchases and is in addition to the SPSPA funding commitment of 200 billion. Also the balance sheets state that in 2023 the remaining Treasury commitment should GSEs need to draw quarterly stands at 254 billion per company as agreed to in Dec 31, 2012.
What the hell is going on? How come I have never heard of a 250 billion MBS purchase in 2008 and 2009? Some posters here have questioned if GSEs ever received actual cash for the SPSPA. Who knows. Also according to the Treasury Financial Statements, the $250 billion MBS were purchased on the secondary market not from the GSEs. How does that work?
Boom!!!!
I have wondered for a long time where Treasury got the $200 billion commitment from since the amended Charter Act only authorized the purchase of GSE securities by selling an equivalent amount of treasuries. So under the law only 1 billion of treasuries would have been appropriated to purchase 1 billion of senior shares. But Treasury offered a 200 billion funding commitment. I may have found the answer in the October and Dec 2008 meeting minutes of the financial accounting standards advisory board. In these meetings which I will post tomorrow, the Treasury and FASAB discuss at length how to account for the use of economic Stabilization Act program funds such as TARP for the GSE senior preferred shares, LP and warrants. What the purpose of the warrants are etc. it is a gold mine of information. But how could it be TARP if the SPSPAs were signed before TARP was passed? It is all a fraud. There is no accounting of TARP funds to fund GSEs anywhere. But that is what was discussed in this meeting. According to GAO at the end of 2009 Treasury used about 293 billion of a potential 700 billion TARP funds appropriated. But Treasury went to congress and extended the TARP for one more year. Treasury told congress they would use no more than 550 billion of the 700 billion authorized. Treasury told congress that if there was no emergency to use the additional 250 billion then they would use the funds to pay down the debt. It is my belief that treasury used 193 billion of TARP funds illegally to fund the SPSPA and hid the accounting of the use of the funds.
Rodney this cannot be right. FFF spoke from upon high in the ivory tower. For he is a learned man, perhaps an “expert”, surely our better. He speaks from a position of authority and he has declared that you and I along with 98% of posters on this board are chuckleheads or something like that. Therefore you surely post lies as one of the 20 aliases of pro se Joshua Angel.
Seems the board is also highly triggered by discussing and posting the Eric Holder Prosecution of Corporations memo that is the DOJ/Deep state legal cover for everything that has transpired. That post was removed last week. Someone here (feds/intelligence) doesnt want shareholders to know the truth. Guess my ihub jail sentence is not eligible for parole.
Absolutely ridiculous arguments. Treasury was charged with stabilizing the economy and protecting the taxpayers while doing it. Everything you state should and I hope will occur and Treasury will say “Mission accomplished!!” This will be a political victory for Bidenomics. You act as though the only purpose for Treasury was to steal the property of others and make as large of a return as possible. Last I checked our Gov is supposed to run the gov and protect the union. Making a profit has never been high on the list. Just check the National Debt if you aren’t sure. This is only going to end for political reasons. And right now I believe the politics is such that doing what you describe is worth the most political capitol to the Biden administration that it ever has since 2008. They probably wont take advantage but that there is your reason for why Treasury would choose to end the nonsense in the next year. You act as though a couple of hundred billion dollars is a a big deal any more. I assure you after the last few spending bills. It is not. At least not to politicians.
Thanks Clarence,
What you describe in your academic analysis is way too complicated because your analysis falls into the trap of fighting the actions of a conservator that has been granted the benefit of “presumption of correctness” as codified with a judicial bar in HERA. No thank you. My academic premise would be to avoid the FHFA-C completely and any legal precedents such as the Supreme court ruling. Any shareholder of the GSEs could file a Little-Tucker act claim in their home US district court seeking illegal exaction against the Department of Treasury and FHFA as regulator for alleged violations of the GSE Charter acts, and the Safety and Soundness Act of 1992 as amended by HERA with sought damages kept under $10,000. There doesn’t seem to be a reason why the jury verdict couldnt be a part of this claim and ask the court to nullify the SPSPA based on that verdict even if the other alleged violations are dismissed. There may also be a conspiracy to deny constitutional rights aspect as well. The meeting minutes of FSAB potentially demonstrates a conspiracy of individuals to keep from consolidating the GSEs onto the nations books thereby violating the chief executive officers act and Section 4 of the 14th amendment rights of all citizens. This has been my premise. With the jury verdict available now, I believe that this strategy looks more plausible.