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I think that the intent of the government from the Day 1 takeover of the Board of Directors is extremely relevant to show a continuous intent and modus operandi by the government that their never was a plan to help the gses (they could have just provided a line of credit, if that even would have been necessary!) but was instead to Nationalize them while simultaneously keeping trillions and trillions of MBS liabilities OFF the federal governments balance sheet! Tim Howards Amicus Brief outlines a strong case for this and it seems during the hard fought Discovery period that has been redacted from public view, it was a Mafia like takeover.
What would be the impact on the Income Statement? What EXACTLY would be the financial and managerial accounting book entries?
I think there is some truth to that! The "textualists" tend to believe the US Constitution should be rigidly construed whereas some like Kagan, Breyer, and Sotomayor tend to believe that it is intended to be more flexible with an ability to change with the times. Everyone of us is shaped by our own unique experiences in life and we can't expect the Supremes to check their philosophies and life experiences at the door before deciding cases.
Where are you flying too today?
That's right Chess, preferred stock investors generally tend to be more conservative in their investing risk tolerance level than common stock investors and that's why they consistently use "watch out for bankruptcy", "the immediate and imminent dilution solution", and "we will win on retro divies at the CFC" to try to appeal to the limited group of investors that congregate here and elsewhere. Some serious questions for jps:
(1) When will the dividend stream be turned back on?
(2) Will they get 50%, 60%, 70%, 80%, 90%, 100%, 110% of par?
(3) Will a company that is starved for capital from a depletion of capital by their "conservator" be able to redeem the preferred?
(4) Will the CFC cases pan out?
(5) How many years will I have to wait for my zero coupon bond to mature and at what par level?
(6) If the nws ends and the LP goes to zero, will the companies recap organically through retained earnings or will it be through a combination of re and more common stock issuance?
(7) What present and future litigation will impact all of the above?
No question BOTH Common and JPS are selling for fire sale prices, but I prefer owning competitive well run low risk moat protected corporations to just holding a glorified zero coupon bond with an unknown maturity and future dividend stream.
Nice! I was looking at a chart today on SCOTUSBLOG and they have statistics on what percentage of the times each of the nine Justices vote the same on a case and YES Kagan, Breyer, and Sotomayor tend to vote with each other more so than they do with the other Justices:
https://www.scotusblog.com/statistics/
Go down to Justice Agreement.
It looks like the FHFA made the twins set aside close to $80B in 2009 ALONE, THIS WAS IN ADDITION TO THE LOAN LOSS RESERVES ALREADY IN PLACE! Not to mention $50B in loan loss reserves booked for 2010 & 2011! What were the twins ACTUAL DOLLAR LOAN LOSSES DURING THE GFC? WHAT ABOUT THE SETTLEMENTS FROM THE TBTF BANKS THAT DUMPED THESE TOXIC MORTGAGES (MANY UNDER GOVERNMENT DIRECTION!) ON THE GSES BALANCE SHEET?
Amazing how the Government ended up cutting itself $100B checks from the twins in 2013, isn't it? MC the other day was bitchin about the gses' not taking some personal responsibility, WELL WHERE WAS MC TAKING ANY RESPONSIBILITY WHATSOEVER FOR THESE BOGUS ACCOUNTING SHENANIGANS TAKEN SIMPLY TO ROB THE GSES AND CONSEQUENTLY THEIR PREFERRED AND COMMON SHAREHOLDERS WHEN HE WAS COMING UP WITH HIS CUMULATIVE LOSS FIGURES WHEN TWISTING ALL LOGIC TO COME UP WITH A 4+% CAP RULE?
I know, he's just one of the more egregious governmental bad actors (there are many from each side of the political spectrum to choose from!). You just got to ask yourself, why would a governmental acting director of the FHFA, GIVE AWAY ALL ITS WARDS PROFITS INTO PERPETUITY, WHEN HERA CLEARLY STATES AND CONSERVATORSHIP LAW SAYS A CONSERVATOR IS TO PRESERVE AND CONSERVE ITS WARDS ASSETS?
Answer: BECAUSE HE WANTED TO DECIDE CONTRARY TO HIS LEGAL MANDATE THAT THE TWINS SHOULD BE REPLACED BY A YET TO BE DETERMINED NEW SYSTEM!
So, so wrong, let's see if the SCOTUS delivers!
I'm hoping it's Jim Parrot!
So we can all buy a never expiring option on the eventual exit from "conservatorship" on two of the worlds largest and most profitable financial corporation duopolies in the world, whose assets are insulated from interest rate risk and whose average LTV is 70 for two or three bucks? With an imminent USSCT ruling?
Seems like we could be headed higher on the sp as we approach the Supreme Court ruling.
They have a conference meeting next Friday and will have gone since March without any oral arguments to hear so they will likely have a couple cases ready to release.
Did you hear the news about Gemworth selling their Mortgage Insurance business or some of it?
https://seekingalpha.com/amp/article/4417622-genworth-financial-great-time-to-buy
Remember Justice Breyer questioning Hashim, the governments lawyer, "We'll were did the money go? The US Treasury! And who is the US Treasury IT'S THE GOVERNMENT! So WHY ISN'T THIS A NATIONALIZATION!"
The money went into the UST's general fund to cover operating expenses of the federal government, and recall Obama at the time COULDN'T GET A DIME OUT OF THE REPUBLICAN CONTROLLED CONGRESS!
Hence the nws! So here we are ALMOST NINE YEARS LATER!
"The largest theft of private property by the US GOVERNMENT in history!" - David Thompson
"55. Treasury thereby appropriated to itself all future profits of the Companies,
effectively nationalizing them. Correspondingly, Treasury kept the Companies from
accumulating capital that could ensure their ongoing solvency and ability to operate as
private, rehabilitated companies without depending on the government; from having any
funds to pay dividends to any other stockholders; and, except in limited circumstances, from
being able to pay down the balance on the commitment (the net-worth payments do not reduce
this balance) so as to substantially decrease Treasury’s liquidation preference over the Junior
Preferred and common stockholders.
56. The effect was to extinguish any possibility that any shareholder other than the
United States will receive any value from the Companies. The government’s action also, actual windfall of billions of dollars per year without the need for any appropriation from
Congress. And it placed the burden of a public program, designed and intended to benefit the
government’s purposes, disproportionately upon the relatively small group of shareholders
who invested and believed in the Companies’ prospects, including Junior Preferred
Stockholders, rather than upon the public as a whole.
government’s purposes, disproportionately upon the relatively small group of shareholders
who invested and believed in the Companies’ prospects, including Junior Preferred
Stockholders, rather than upon the public as a whole.
57. It turns out that, during much of the period that the Agency was assuring Junior
Preferred Shareholders that its objective was to stabilize the Companies and terminate the
conservatorship, Treasury had quietly been seeking a way to wind-down the Companies,
which came to include seeking a way to seize all of their value notwithstanding that its
emergency stock-purchasing authority had expired. An internal memorandum to Treasury
Secretary Geithner from the then-Under Secretary of the Treasury for Domestic Finance,
Jeffrey Goldstein, dated December 20, 2010, referred to a “commitment” by the Obama
Administration to “ensure existing common equity holders will not have access to any positive
earnings from the [Companies] in the future.” (Emphasis added.) And in February 2011
Treasury issued a report expressing its intention to “us[e] a combination of policy levers to
wind down Fannie Mae and Freddie Mac,” claiming that the Administration would “work
with [FHFA]” to this end—all while Mr. DeMarco continued throughout 2011 to assure
Congress and the public that his goal was to rehabilitate the Companies. At the same time,
Treasury stated its belief that, under the current Treasury SPAs, “there is sufficient funding to
ensure the orderly and deliberate wind down of Fannie Mae and Freddie Mac, as described in
our plan.”
58. According to a senior Treasury official, Jeffrey Foster, the idea for a variable
dividend payment based on positive net worth originated from a phone conversation between himself and Mario Ugoletti in 2010. Mr. Ugoletti had been appointed in 2009 as a special
advisor to the Agency’s Acting Director, and served as primary liaison to Treasury with
respect to the Treasury SPAs and the amendments thereto. Before 2009, Mr. Ugoletti worked
at Treasury for 14 years, from 1995 to 2009, serving as Director of the Office of Financial
Institutions Policy during the last five years of his tenure. In that capacity, he participated, on
behalf of Treasury, in creating and implementing the Treasury SPAs.
"
Clearly the government has been a bad actor here and as the curtain of secrecy is raised and exposed to the light of day, this Exproriation of private shareholders property will not survive! Given the governments reluctance to give up their cash cow, I believe that the SCOTUS will have to end this and their judgment cometh!
Hank Paulson and Ben Bernanke strong arming the Board of Directors to relinquish control of the gses to the federal government (after they and OFHEO had just recently reassured the market, "The gses are well capitalized!") had even surprised Moodys and Fitch:
"Indeed, the Companies’
preferred stock was generally viewed as a conservative and reliable investment—even as of
August 8, 2008, after enactment of the Recovery Act and shortly before the imposition of the
conservatorship, Fannie Mae’s Junior Preferred Stock was rated AA- by S&P, A1 by
Moody’s, and A+ by Fitch."
"Actual credit losses from 2007 to 2011 were approximately $140 billion
less than anticipated. A significant portion of the losses recorded in that period related to the
write-down of deferred tax assets, which the Companies would reverse when they returned to
profitability."
"Lockhart similarly explained four months later, on July 8, that the Companies
were “adequately capitalized, which is our highest criteria.” Two days after that, on July 10,
he again confirmed, in a public statement, that Fannie Mae and Freddie Mac were “adequately
capitalized, holding capital well in excess of the OFHEO-directed requirement, which exceeds
the statutory minimums. They have large liquidity portfolios, access to the debt market and
over $1.5 trillion in unpledged assets.” This same day, then-Treasury Secretary Henry
Paulson testified to the House Financial Services Committee that the Companies’ “regulator
has made clear that they are adequately capitalized.” The then-Chairman of the Federal
Reserve, Ben Bernanke, echoed this, also testifying before that committee, on July 16, 2008,
that the Companies were adequately capitalized and in no danger of failing. Further, upon
information and belief, an August 2008 analysis for the Agency of Freddie Mac’s financial
condition, by BlackRock, concluded that Freddie Mac’s “long-term solvency does not appear
endangered—we do not expect Freddie Mac to breach critical capital levels even in stress
case.”"
THE SETUP
"33. In letters to each Company dated August 22, 2008, the Agency found
(consistent with the Director’s public statements) that each Company met all relevant capital
requirements, including additional capital requirements imposed by the Agency above the
statutory minimums and requirements arising from the Agency’s risk-based capital stress test.
34. Nevertheless, on information and belief, Treasury and the Agency around the
beginning of September 2008 sought the consent of the Companies’ boards of directors to
place the Companies into conservatorship. The Agency obtained such consent on the ground,
in part, that conservatorship would serve the interests of the Companies’ shareholders. In
exchange for the Agency’s promise, the Companies agreed not to challenge being put under
conservatorship.
35. On September 6, 2008, the Agency did place each of the Companies into
conservatorship."
The hits keep coming from the 5+ years of Discovery...How many investors had this similar investment expectation that the government conservator would actually follow the law? "Owl Creek reasonably expected that the mortgage market would recover;
that the Companies would return as bulwarks in housing; and that the Agency, having ensured
the soundness and solvency of the Companies, accordingly would terminate their
conservatorships."
Instead opportunistic politicians (really from both parties) have used our private property for their own exclusive benefit!
"100. Owl Creek further expected that, in any event, the Agency would—as it had
assured markets it would do, and as the Recovery Act reasonably indicated it should and
would do—act with a view to rehabilitating the Companies and not as an accomplice to
Treasury’s carnivorous secret plan to seize, for itself, the entire value of the Companies in
disregard of the property interests of Owl Creek and other shareholders.
101. As such, by early summer of 2012, Owl Creek reasonably anticipated that the
Companies would soon emerge from conservatorship (as two Directors of the Agency had
publicly predicted), from which it would be in a position to redeem the Treasury Senior
Preferred Stock and allow Owl Creek to realize benefits from its reasonable investment-
backed expectations in the property interests represented by the Junior Preferred Stock. Owl
Creek, in any event, did not reasonably expect the Sweep Amendment or any other action that
would make the conservatorship antithetical to those goals and in fact make them impossible
to achieve.".
"Nor was Owl Creek aware of any prior use of
a senior preferred stock instrument to strip 100% of a company’s profits in perpetuity, to the
derogation of the property rights of other holders of stock."
"Susan McFarland (who as Fannie Mae’s Chief Financial Officer had met with
Treasury on August 9, 2012) testified:
So when the amendment went into place, part of my
reaction was they did that in response to my
communication of our forecasts and the implication of
those forecasts, that it was probably a desire not to allow
capital to build up within the enterprises and not to allow
the enterprises to recapitalize themselves."
"84. After lawsuits were filed challenging the Sweep Amendment, the Agency
attempted to offer pre-textual justifications. In a declaration the Agency submitted in
proceedings in the United States District Court for the District of Columbia, Mr. Ugoletti
claimed that the Agency had agreed to the Sweep Amendment due to concerns that the burden
of paying the 10% dividend owed to Treasury might reduce the amount of Treasury’s
commitment that remained available to the Companies. As noted above, however, Treasury
knew that the Companies could pay the dividend “well into the future even with the caps,”
and projections available to both Treasury and the Agency indicated that the Companies
would have more than sufficient funding through 2022. (As of the beginning of 2013, Freddie
Mac had over $140 billion still available on its commitment from Treasury, and Fannie Mae
had over $117.6 billion.) In fact, in an internal mark-up of a document explaining the
reasoning for the sweep, a Treasury official wrote that the argument that the “10 percent
dividend was likely to be unstable as the businesses were reduced” “[d]oesn’t hold water.”"
"Similarly, in an email between Treasury and White House officials on August 15,
2012, which did not copy the Agency or the Companies, Treasury official Adam Chepenik
declared that, “by taking all of their profits going forward, we are making clear that the
[Companies] will not ever be allowed to return to profitable entities at the center of our
housing finance system,” and he confirmed that “taxpayers will receive every dollar of profit
the [Companies] make.” (Emphasis in original.)"
The proverbial dog that never barked! WONDER WHAT'S IN THESE REDACTED DOCUMENTS!
"NOTE ON CONFIDENTIAL MATERIAL OMITTED
Pursuant to Federal Circuit Rule 25.1(c)(1), material subject to the Third
Amended Protective Order entered in )DLUKROPH )XQGV ,QF HW DO Y 8QLWHG
6WDWHV, Case No. 13-465 (Ct. Fed. Cl.) [ECF 417] (the “Protective Order”),
has been redacted from this non-confidential version of the Joint Appendix.
The material on Appx429, Appx430, Appx435, Appx436, Appx446, and
Appx447 (Fairholme Second Amended Complaint); Appx868 (email between
Treasury officials); Appx872–873 (Treasury proposal regarding PSPAs); Appx875–
876 (email between Treasury and White House officials); Appx880–882 (Freddie
Mac Board Minutes); Appx883–887 (Fannie Mae Board Minutes); and Appx902–
906 (deposition transcript of Jeffrey Foster), has been redacted pursuant to the
government’s request that the information remain subject to the Protective Order.
The Private Shareholders take no position on whether the information should be
confidential."
Why would the gses boards approve dividends to shareholders if in financial trouble?
"...is further illustrated by the decision by Fannie’s Board of Directors to declare
dividends on both its preferred and common stock in August 2008 and by FHFA’s subsequent..
This is interesting: "35. In Fannie Mae’s September 11, 2008 Form 8-K, it stated that “FHFA, as
Conservator, has the power to repudiate contracts entered into by Fannie Mae prior to the
appointment of FHFA as Conservator if FHFA determines, in its sole discretion, that
performance of the contract is burdensome and that repudiation of the contract promotes the
orderly administration of Fannie Mae’s affairs. FHFA’s right to repudiate any contract must be exercised within a reasonable period of time after its appointment as Conservator.” This
statement reflected what is expressly set forth in HERA regarding FHFA’s power to repudiate
contracts. 12 U.S.C. § 4617(d). Thus, if FHFA was to repudiate the contracts between the
Companies and their shareholders, FHFA was required to do so “within a reasonable period of
time after its appointment as conservator” on September 6, 2008.
36. FHFA did not, either within a reasonable period of time after its
appointment as Conservator or at any other time before August 17, 2012, purport to repudiate
any of the contracts governing the Companies’ Preferred Stock or any of its other shareholder
relationships.
37. At the time the conservatorship was imposed, FHFA’s director stated that
it was critical to complete key regulations implementing HERA governing minimum capital
standards, prudential safety and soundness standards and portfolio limits “so that any new
investor will understand the investment proposition,” clearly showing that FHFA intended that
private investors would continue to purchase Fannie Mae and Freddie Mac securities. Statement
of FHFA Director James B. Lockhart (Sept. 7, 2008) (available at goo.gl/xMjTse)."
"44. Treasury’s authority under HERA to purchase the Companies’ securities
expired on December 31, 2009. See 12 U.S.C. §§ 1455(l)(4), 1719(g)(4). After that date, HERA
authorized Treasury only “to hold, exercise any rights received in connection with, or sell”
previously purchased securities. Id. §§ 1455(l)(2)(D), 1719(g)(2)(D)."
"49. In fact, as early as November 8, 2011, the accounting and consulting firm
Grant Thornton LLP prepared a report for Treasury acknowledging that “[f]rom December 31,
2012 through September 30, 2018, Freddie Mac is not projected to draw on the liquidity
commitment to make its dividend payments because of increased earnings driven by significantly reduced credit losses in 2012 and 2014.” (GT007342.) A December 2011 internal Treasury
memorandum acknowledged that “both Fannie Mae and Freddie Mac are expected to be net
income positive (before dividends) on a stable, ongoing basis after 2012 . . . .” (UST00473633.)"
"56. But, rather than taking steps to enable the Companies to redeem the Senior
Preferred Stock or at least to accumulate capital for the benefit of the Companies and their
private shareholders, the Government took the unprecedented step of radically changing the deal
FHFA and Treasury had originally made so as to seize 100% of all value the Companies could
ever generate, and to eliminate any possibility that private shareholders would ever receive
anything. On August 17, 2012, FHFA, purportedly acting as Conservator for the Companies,
and the Treasury “agreed to” a so-called “Third Amendment” to the PSPAs. This Third
Amendment was not really an “agreement” between two different entities negotiating at arm’s
length, but was instead a unilateral action by two government entities acting in concert. It
provides that in place of the 10% coupon due on Treasury’s Senior Preferred Stock under the
original PSPAs, the Treasury would now receive a dividend equal to 100% of the Companies’
net worth (minus a small reserve that shrinks to zero in 2018). And, since the PSPAs provided
that in the event of a liquidation of Fannie Mae or Freddie Mac, the Government would receive a
liquidation distribution that included the amount of any prior unpaid dividend, the Third
Amendment guaranteed that even if the Companies were liquidated, Treasury would receive
100% of their net worth in that liquidation. No matter how much value the Companies generate,
the Third Amendment provides that 100% of it has to go to the Treasury."
"61. The Government’s determination to eradicate private stockholder rights
dates back to before 2012, although this was not publicly known. For example, jurisdictional
discovery in this case has revealed that as early as December 20, 2010, then Under Secretary for
Domestic Finance Jeffrey A. Goldstein authored an “ACTION MEMORANDUM” for Secretary
Geithner noting that referred to “the Administration’s commitment to ensure existing common
equity holders will not have access to any positive earnings from the GSEs in the future.” See 13-
cv-1053 (D.D.C.) ECF No. 23-5 at TREASURY-0202."
Thanks, if the federal government truly wants private capital to be in a 1st Loss Position, they will have to restore the damages they inflicted on the private capital shareholders! I just read this and thought you would enjoy reading it: "10. The rights that were expropriated by the Government through the Net
Worth Sweep belonged to real people who made real investments into Fannie and Freddie. For
years, Fannie and Freddie were able to fulfill their public mission because of investments made
by private citizens—often very ordinary citizens who invested their life savings, or small
institutions who were told by their regulators to invest in these entities. These private
investments were made not only in good times but also when the Companies faced financial
distress in 2007."
"Treasury still
would have gotten most of the $125 billion in excess value. But Treasury wanted absolutely all
of it, and did not want private shareholders to receive anything, no matter how profitable the
Companies might become. That is what motivated the Net Worth Sweep."
Power corrupts absolutely!
He's a regular Joe: "15. Plaintiff Joseph Cacciapalle is a citizen of the state of New Jersey, and is a
holder of Fannie Mae 8.25% Series S Preferred Stock, Fannie Mae 8.25% Series T Preferred
Stock, and Freddie Mac 8.375% Series Z Preferred Stock. Mr. Cacciapalle purchased Fannie
Mae Preferred Stock in January 2008, purchased Freddie Mac Preferred Stock in February 2008,
and has been a holder of Fannie Mae Stock and Freddie Mac Preferred Stock continuously since
then. He is recently retired, and purchased these securities to be a source of stable income in his
retirement."
Once the government pulled these shennangins on August 17, 2012, I instinctively knew that it was unlawful and started buying more! I have been accumulating since then and by bringing these bad governmental actors and their actions to the light of day, justice will be served! Stay long and strong!
So MANY smoking guns: "An internal Treasury document prepared on July 30, 2012, stated that the Net
Worth Sweep should be announced shortly after August 7, when Treasury anticipated the
Companies would “report very strong earnings . . . that will be in excess of the 10% dividend.”
On August 1, a Treasury official similarly emphasized that the Net Worth Sweep should be
announced in mid-August because the Companies’ “[e]arnings will be in excess of current 10%
dividend.” FHFA’s Mr. Ugoletti reported a “renewed push” from Treasury to implement the Net
Worth Sweep on August 9, 2012—the same day that Fannie’s CFO told Treasury that it was
likely that her company would soon be in a position to make an accounting decision that would
add tens of billions of dollars to its earnings. And on August 17, 2012, Mr. Ugoletti wrote to Mr.
DeMarco and other FHFA officials that “other than a transitory buffer,” the Net Worth Sweep
“does not allow the Enterprises to build up a retained surplus, which may give the impression
that they are healthy institutions.
127. That the Net Worth Sweep was not intended to advance any legitimate interest of
FHFA as conservator is further demonstrated by the fact Treasury was the driving force behind
the initiative. Indeed, FHFA agreed to the Net Worth Sweep only at the insistence and under the
direction and supervision of Treasury. The Net Worth Sweep was a Treasury initiative and
reflected the culmination of Treasury’s long-term plan to seize the Companies and see that they
were operated for the exclusive benefit of the federal government. Indeed, Mr. Parrott has
testified that the Net Worth Sweep was imposed through a “Treasury-driven process.” It was
Treasury that informed the Companies just days before the Net Worth Sweep that it was
forthcoming, and a meeting addressing the Net Worth Sweep was held at Treasury during which
a senior Treasury official announced the changes. Secretary Geithner apparently believed that
even before the Net Worth Sweep was imposed, “we had already effectively nationalized the
GSEs . . ., and could decide how to carve up, dismember, sell or restructure those institutions.”
Plaintiff’s Corrected Post-Trial Proposed Findings of Fact 26.2.1(a), Starr Int’l Co. v. United
States, No. 1:11-cv-779-TCW (Fed. Cl. Mar. 2, 2015), ECF No. 430. And Treasury officials
intimately involved in the development of the Net Worth Sweep testified that they could not
recall Treasury making any backup or contingency plans to prepare for any possibility that
FHFA would reject the Net Worth Sweep proposal."
An oldy BUT a goody from Jimmy the Parrot:
"118. Communications involving White House official Jim Parrott provide further proof
that the Net Worth Sweep was intended to advance the policy objectives discussed above. At the
time of the Net Worth Sweep, Mr. Parrott was a senior advisor at the National Economic
Council, where he led a team of advisors charged with counseling President Obama and the
cabinet on housing issues. He worked closely with Treasury in the development and rollout of
the Net Worth Sweep. Indeed, the day after the Net Worth Sweep was announced, he emailed
Treasury officials congratulating them on achieving an important policy goal: “Team Tsy, You
guys did a remarkable job on the PSPAs this week. You delivered on a policy change of
enormous importance that’s actually being recognized as such by the outside world . . . , and as a
credit to the Secretary and the President. It was a very high risk exercise, which could have gone
sideways on us any number of ways, but it didn’t.” What Treasury had accomplished, Mr.
Parrott’s emails make clear, was maximizing Treasury’s profits and guaranteeing that Fannie and
Freddie would be unable to rebuild capital and escape conservatorship:
x In an August 13, 2012 email, Parrott wrote that “[w]e are making sure that each of these
entities pays the taxpayer back every dollar of profit that they make, not just a 10% dividend,” and that “[t]he taxpayer will thus ultimately collect more money with the
changes.”
x In an email to a Treasury official on the day the Net Worth Sweep was announced, Mr.
Parrott stated that “we’ve closed off [the] possibility that [Fannie and Freddie] ever[] go
(pretend) private again.”
x That same day, Mr. Parrott received an email from a market analyst stating that the Net
Worth Sweep “should lay to rest permanently the idea that the outstanding privately held
pref[ferred stock] will ever get turned back on.” He forwarded the email to Treasury
officials and commented that “all the investors will get this very quickly.”
x At 8:30 a.m. on August 17, Mr. Parrott wrote an email to Alex Pollock, Peter Wallison,
and Edward Pinto offering “to walk you through the changes we’re announcing on the
pspas today. Feel like fellow travelers at this point so I owe it to you.” Pollock, Wallison,
and Pinto had written a policy paper for the American Enterprise Institute in 2011
recommending that “Fannie Mae and Freddie Mac should be eliminated as government-
sponsored enterprises (GSEs) over time.”
x Also on August 17, Mr. Wallison was quoted in Bloomberg saying the following: “The
most significant issue here is whether Fannie and Freddie will come back to life because
their profits will enable them to re-capitalize themselves and then it will look as though it
is feasible for them to return as private companies backed by the government. . . . What
the Treasury Department seems to be doing here, and I think it’s a really good idea, is to
deprive them of all their capital so that doesn’t happen.” In an email to Wallison that
evening, Mr. Parrott stated, “Good comment in Bloomberg—you are exactly right on
substance and intent.”
In another email to Wallison that evening, Mr. Parrott wrote that, “[d]ividend is variable,
set at whatever profit for quarter is, eliminating ability to pay down principal (so they
can’t repay their debt and escape as it were).”
x Mr. Parrott also wrote on August 17 that, “we’re not reducing their dividend but
including in it every dime these guys make going forward and ensuring they can’t
recapitalize.”
119. Mr. Parrott, who has left the White House and is now with the Urban Institute,
told The Economist that “n the aftermath of the crisis there was widespread agreement that
[Fannie and Freddie] needed to be replaced or overhauled.” A Funny Form of Conservation, THE
ECONOMIST, (Nov. 21, 2015), http:goo.gl/gJVJrN. The Net Worth Sweep ensured that the
Companies’ return to profitability did not threaten this goal.
120. In short, the Government’s Net Worth Sweep is designed to raise general revenue
and further the policy goals of the Agencies at the expense of the Companies and their
shareholders, and it thereby imposes on the Companies and their shareholders a disproportionate
burden that, in all fairness, should be borne by the public as a whole."
BUT BUT BUT, WHAT ABOUT THE DEATH SPIRAL!
"But this “death spiral” explanation is belied
by the following facts, in addition to those discussed above regarding the Net Worth Sweep’s
true purposes.
122. First, given Fannie and Freddie’s return to profitability, there was no imminent
risk that the Companies would be depleting Treasury’s funding commitment—that risk was at its
lowest point since the start of the conservatorships. Indeed, a memo prepared by Treasury staff indicates that on June 25, 2012, FHFA Acting Director DeMarco informed Treasury Secretary
Geithner and Under Secretary Miller that he saw no “urgency of amending the PSPAs this year”
because Fannie and Freddie “will be generating large revenues over the coming years, thereby
enabling them to pay the 10% annual dividend well into the future.” Communications within
both FHFA and Treasury in the months leading up to the Net Worth Sweep indicate that the
Companies’ bond investors regarded Treasury’s funding commitment as sufficient. And on
August 13, 2012, a Treasury official observed that an explanation that the Net Worth Sweep was
needed because “the 10 percent dividend was likely to be unstable” was one that “[d]oesn’t hold
water.”
123. Second, as explained above, the original terms of the PSPAs entitled the
Companies to pay Treasury’s dividends in kind with additional stock, thus avoiding the need to
make draws on Treasury’s funding commitment to finance cash dividends they could not
otherwise afford. Furthermore, an internal Treasury memorandum from 2011 acknowledged that
any threat to Treasury’s funding commitment from dividend payments potentially could be
addressed by “converting [Treasury’s] preferred stock into common or cutting or deferring
payment of the dividend (under legal review).” Memorandum from Jeffery A. Goldstein,
Undersecretary, Domestic Finance, to Timothy Geithner, Secretary, United States Treasury, 3
(Jan. 4, 2011). In other words, the problem the Government was purportedly trying to solve with
the Net Worth Sweep, a cash dividend too high to be serviced by earnings, could be addressed by
other means already known to Treasury, such as cutting or deferring payment of the dividend. Of
course, given the payment-in-kind option, the purported problem was wholly illusory. An
internal Treasury document explicitly recognized this point: “To the extent that required
dividend payments exceed net income, FHFA, as conservator, could consider not declaring.."
Interesting, PRIOR TO THE IMPLENTATION OF THE 3RD AMENDMENT, THERE WOULD HAVE BEEN A COMMITMENT FEE OF ZERO:
"Given the Companies’ return to
profitability, the market rate for the periodic commitment fee in 2012 and after would have been
zero."
Uncle Sugar, DID YOU EXPROPRIATE THE SHAREHOLDERS PRIVATE PROPERTY FOR YOUR OWN EXCLUSIVE USE, INTO PERPETUITY?
"As a Staff
Report from the Federal Reserve Bank of New York acknowledged, the Net Worth Sweep
“effectively narrows the difference between conservatorship and nationalization, by transferring
essentially all profits and losses from the firms to the Treasury.” W. Scott Frame, et al., The
Rescue of Fannie Mae and Freddie Mac at 21, FED. RES. BANK OF N.Y. STAFF REP., no. 719"
"These massive influxes of cash began to arrive just when the government was
confronting the statutory debt ceiling and accompanying political deadlock. See Jody Shenn &
Ian Katz, Fannie Mae Profit May Swell Treasury Coffers as Debt Limit Looms, Bloomberg (Apr.
8, 2013), http://www.bloomberg.com/news/articles/2013-04-08/fannie-mae-profit-may-swell-
treasury-coffers-as-debt-limit-looms. And because they were characterized as “dividends,” and
not a redemption of Treasury’s Stock, the Pay It Back Act allowed the cash to be used for the
government’s general operating expenses rather than only for debt reduction. See 12 U.S.C. §
1719(g)(2); 12 U.S.C. § 1455(l)(2); 12 U.S.C. § 1455 note."
"The effect of the Net
Worth Sweep is thus to force the Companies to operate in perpetuity on the brink of insolvency
and to prohibit them from operating in a safe and sound manner. Indeed, HERA itself recognizes
that a fundamental aspect of the Companies’ soundness is the “maintenance of adequate capital.”
12 U.S.C. § 4513(a)(1)(B)(i). "
"Allowing Fannie and Freddie to rebuild their capital levels, however, would
make that political decision more difficult to explain and sustain. The Economist stated the
obvious in reporting that the Net Worth Sweep “squashe[d] hopes that [Fannie and Freddie] may
ever be private again.” Back to Black, THE ECONOMIST, (Aug. 25, 2012 http:goo.gl/1PHMs."
GREAT POST! I feel like a kid in a candy store! Here's a gem:
"Like Treasury, FHFA was in possession of information showing that the
Companies would soon generate substantial profits, thus making it inevitable that they would
release their deferred tax asset valuation allowances. On July 13, 2012, Bradford Martin,
Principal Advisor in FHFA’s Office of Conservatorship Operations, broadly circulated within
FHFA minutes from a July 9, 2012 Fannie executive management meeting. The recipients of the
email included Acting Director DeMarco and Mr. Ugoletti. The minutes stated that Fannie
Treasurer David Benson “referred to the next 8 years as likely to be ‘the golden years of GSE
earnings.’ ” Projections substantially similar to those shared with Treasury on August 9 were
attached to the email containing the following slide:"
Uncle Sugar, did you take our profits to fund NONAPPROPIATED GOVERNMENT SPENDING!
"it would have to release the valuation allowance it had established for
them. FHFA knew this; indeed, FHFA accountants were monitoring the Companies’ deferred tax
assets situation, and FHFA knew that the Companies’ audit committees were assessing the status
of the valuation allowances on a quarterly basis. Indeed, in an August 14, 2012 email, an FHFA
official indicated that both Companies had discussed the issue of “re-recording certain deferred
tax assets that had been written off” during their most recent Board meetings “based on the view
that they were going to be profitable going forward.” In addition, Ms. McFarland testified that in
July 2012 she would have mentioned the potential release of the valuation allowance at a Fannie
executive committee meeting attended by at least one FHFA official, and she also testified that
FHFA was on notice of the statement she made to Under Secretary Miller on August 9, 2012
regarding the potential release of the valuation allowance."
THAT'S A BAD UNCLE SUGAR! BAD UNCLE SUGAR!
"The agenda for a meeting indicates that by May 2012 Treasury and Grant Thornton were
discussing “[r]eturning the deferred tax asset to the GSE balance sheets” and that Treasury
planned to discuss this issue with FHFA and the Companies in early June. And a Grant Thornton
document sent to Treasury on June 29, 2012 recognizes that two “key issues” for determining the
value of Treasury’s investment in 2012 were “whether and when the GSEs will return their
deferred tax assets to their balance sheets” and “whether and when the GSEs will become
taxpaying entities.”"
"88. In sum, by August 2012 the Agencies knew that Fannie and Freddie were poised
to add tens of billions of dollars of deferred tax assets to their balance sheets and to reverse
billions of dollars of loan loss reserves. Thanks to these inevitable accounting decisions, coupled
with Fannie’s and Freddie’s strong earnings from their day-to-day operations, the Companies
anticipated that they would be able to pay their 10% dividends to Treasury without drawing on
Treasury’s funding commitment in the future, and dividend payments on the Government Stock
did not threaten to erode Treasury’s unused funding commitment.
89. In addition to the release of loan loss reserves and deferred tax assets valuation
allowances, Fannie and Freddie also had sizeable assets in the form of claims and suits brought
by FHFA as conservator relating to securities law violations and fraud in the sale of private-label
securities to Fannie and Freddie between 2005 and 2007. In 2013 and 2014, the Companies
recovered over $18 billion from financial institutions via settlements of such claims and suits.
The Companies, FHFA, and Treasury knew in August 2012 that the Companies would reap
substantial profits from such settlements."
Seems like he was close to Obama. Wonder why he left?
https://obamawhitehouse.archives.gov/champions/promoting-citizenship-in-the-workplace/jonathan-plutzik
Google v Oracle was the last case from October, looks like 4 left from November and 6 from December.