here is the full article
Treasury Abuses the Rule of Law With Fannie, Freddie
The legal question with the Treasure, Fannie and Freddie involves the rule of law and the willingness to honor contracts.
Aug. 21, 2014 5:34 p.m. ET
Regarding the article "White Flag for Frannie Investors" (Heard on the Street, Aug. 12), the title should be "Time for the U.S. Government to Surrender." I disagree with the thrust of the article, which is that the decline in the last quarter's payout from Fannie Mae FNMA +0.26% and Freddie Mac has shrunk the difference between the 10% dividend payable under the 2008 Senior Preferred Stock Purchase Agreement and the larger sums owing under the dividend sweep required by the 2012 Third Amendment.
First, one quarter doesn't resolve the valuation issue. It is the long-term prospects that determine how much money is at stake. Second, if that financial difference turns out to be as small as the article suggests, the government has no need to put forward a blizzard of dubious objections to excuse the Federal Housing Finance Agency from its clear statutory mandate, as conservator, to facilitate the orderly resumption of private market funding or capital market access for Fannie and Freddie. The government should surrender not because the stakes are low, but because it is wrong on the merits. The legal question involves the rule of law and the willingness to honor contracts. Get that right and the money can take care of itself.
Richard A. Epstein
Chicago
The writer is a law professor who has advised several institutional investors on the Fannie-Freddie litigation.
In 2008, the Treasury lured private investors into Fannie and Freddie, at an extremely risky moment, with the promise of a return if the entities returned to profitability. Once they started to generate a profit, the Treasury, with the stroke of a pen, changed the rules of the game and decided that all profits should go to the government's coffers. Such a theft of private property sends the wrong message to potential investors. If the government can turn around and deny companies the right to benefit from the risk they took, then who will invest in housing finance? This sends a terrible message to investors throughout the entire economy at a time when we are trying to move beyond a weak recovery.
The debate shouldn't be about the size of those profits, but about the very principles at stake which underline our economy—protection of property rights, keeping our word to investors and not changing the rules in the middle of the game.
Ken Blackwell
Director
Coalition for Mortgage Security
Cincinnati
