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.."
