jtimothyhoward
SEPTEMBER 28, 2020 AT 9:29 AM
FHFA has not addressed in any detail the source of or reason for the $326 billion in non-cash expenses added to Fannie and Freddie’s books from the time they were put into conservatorship until the end of 2011, when they began reversing. The best it has done is a version of “well, we thought they were necessary or appropriate at the time.” This story is what I tried to counter in my amicus before the Supreme Court. There are three main prongs to my argument that the large majority of the expenses were artificial: (a) the evident advance planning that went into the companies takeovers, which were not justified by either their financial conditions or the law; (b) the unprecedented use of non-repayable senior preferred stock, linked to the dollar amount of booked losses, as the vehicle for their “rescue,” and, (c) perhaps most persuasively, the fact that all of the losses that were responsible for the December 2011 senior preferred stock outstanding were repaid in an 18-month period, which could only have happened if those losses were temporary or artificial. Based on Calabria’s reaction to the FSOC statement, though, he clearly intends to stick with his story that what FHFA called “peak cumulative capital losses” at the companies during the crisis (which included these book losses) are real, and thus a valid basis for requiring them to hold 4 percent minimum capital. And he, and FSOC, are simply silent about Fannie and Freddie’s actual, historical credit loss rates–including during the crisis– which don’t support or justify anything close to 4 percent minimum capital.
