Not sure I understand all the doom-and-gloom here. After umpteen years, there is finally a chink in the government's legal armor and a bonafide "win" for shareholders. No, it's not a conclusive victory, just yet, but it is the first positive development in quite some time and could be the trigger for more, over time. Here's an afterthought after reviewing the decision in detail.
FHFA has now been ruled by a Federal judge to be a government entity. A government actor. That means one thing, above and beyond all else to Steven Mnuchin: Fannie Mae and Freddie Mac have become nationalized enterprises and, under conservatorship remain wards of the state. Now take a step backward and compare that position to the best-known example of conservatorship which would be FDIC takeover of failed or at risk banks to attempt to restore them to a safe and sound condition while preserving their assets. Does that sound familiar to anyone, here?
FDIC has never been disputed as an agency of the U.S. Government. Now FHFA has joined that very same club and has equal rights to know and use the secret handshake. Nice. But what else gets invoked in the parallel status of FDIC and FHFA as government actors? Well in FDIC's role, once they take conservator control of a bank, they now OWN the obligations of the bank to its depositors. That means they GUARANTEE the accounts (yes, with limits) and it further means that the nationalization requires those guarantees to be transferred to Federal books and become part of the government's debt. This is the course prescribed by the Congressional Budget Office.
And why does this matter, you ask? It matters because the CBO has previously logged the opinion that the GSE's MBS debt most appropriately belongs on Fed books. This new ruling adds huge impetus to such an opinion by concluding that the FHFA absolutely is a government agency, meaning that any enterprise they nationalize must be accounted for as government debt. Just like FDIC actions require.
This is potentially the catalyst to set Steven Mnuchin and UST in motion to quickly END the conservatorship of Fannie Mae and Freddie Mac to avoid exploding the Debt Ceiling conversation under the Trump Administration's watch. If you were Mnuchin, which would be the better choice: hope for some possibly illusory $100 B gain for converted GSE warrants... or... the risk of getting $5 trillion tacked onto your Federal debt?
I know which route I would choose. Cheer up, everyone. There is no Fat Lady in the house signalling the long-running opera has ended.
