On March 19, 2008, OFHEO (at Treasury’s behest) eased capital restraints on the GSEs in exchange for the agreement of the GSEs to raise significant capital at some undetermined point in the future. This change exacerbated the accumulation of high-risk holdings by the GSEs. Requiring the GSEs to take such risky steps reveals, in hindsight, that the Government was laying the groundwork to impose a conservatorship apart from whether conservatorship could be lawfully imposed under HERA. As detailed by author Timothy Howard in The Mortgage Wars, the former CFO of Fannie Mae later stated that Treasury Secretary Henry Paulson’s “action to not just allow but actually encourage Fannie Mae and Freddie Mac to add new mortgages with no firm commitment to raise capital to back them is understandable only if by then he had concluded that Treasury would be able to use the road map from the GSE insolvency paper . . . to put the GSEs into receivership or conservatorship.”
43. Although not publicly revealed until 2011, throughout the summer of 2008, the Government continued to destabilize the GSEs through press leaks and leaks to Wall Street executives and hedge fund managers that GSE conservatorship was imminent. This included a meeting between Secretary Paulson and Wall Street executives before the passage of HERA in which Secretary Paulson revealed that the GSEs would be placed into conservatorship. Barron’s published a second article based on information from White House sources predicted an imminent takeover of the GSEs on August 18, 2008. As discussed below, the Government takeover did not occur immediately as Secretary Paulson tried to suggest in the leaks. Furthermore, there were no statutory grounds to impose a conservatorship. But these leaks, as the Government intended, caused GSE share price to drop significantly. This is classic governmental conduct preceding a governmental nationalization or massive expropriation.
