Comment this morning from jtimothyhoward
jtimothyhoward
April 27, 2017 at 10:30 am
I may not be correct, but I do have an analysis of what’s been going on with the March 31 net worth sweep payments. I believe, consistent with what Joe Light is reporting, that Watt WAS seriously considering allowing Fannie and Freddie to retain the earnings they reported for the fourth quarter of 2016, rather than paying them to Treasury. The evidence for that was the way the March payments were treated in the companies’ fourth quarter and full year 2016 earnings press releases and 10Ks—with Freddie suddenly referring to a “scheduled” sweep payment (it had never used that modifier before) and Fannie changing its table of “Treasury Draws and Dividend Payments” to no longer include the payment to be made in the coming quarter. Both of those changes were deliberate, and would not have been made without FHFA approval. I also think that at the time Fannie and Freddie’s earnings were announced Watt had the support of Mnuchin in allowing the companies’ sweep payments to be retained.
What changed that was the February 21 ruling from the DC District Court of Appeals that FHFA and Treasury were within their legal rights in imposing the net worth sweep. The (in my opinion) torturously reasoned majority decision upholding the sweep came as a surprise to almost everyone who was following the legal cases, and it changed the calculus behind what to do with the sweep payments. With the appellate court effectively saying that the $10 billion in combined first quarter sweep payments legally belonged to the government, neither Watt nor Mnuchin had a good public (or political) argument for allowing that money to stay with the companies as capital, so the sweep payments were made as scheduled.
I do not believe that Mnuchin has changed his view on what needs to be done to end the government’s control of Fannie and Freddie. As I said at the time of the appellate court ruling, however, that ruling complicated the process for getting to where I think Mnuchin wants to go. He can’t reform, release and recapitalize the companies without settling the lawsuits, but a settlement now would look like a giveaway to the plaintiffs, given the appellate court decision. In his statements since the February 21 ruling Mnuchin has pushed the timing of dealing with Fannie and Freddie into the second half of this year (and perhaps beyond) that. I believe that at least in part that is to see if developments in other court cases involving the sweep—Jacobs-Hindes in Delaware, Collins in Texas, or the appeals of the Saxton and Robinson lower court decisions—produce an outcome that better justifies initiating settlement talks with the plaintiffs.
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