Why is the 4th Letter Agreement "borderline criminal"?
Originally, from 2008 to 2012, FnF had to pay a 10% dividend on the government's SPS. FnF were forced to draw the SPS "aid" from the government through accounting fraud (DTA). In the end, the SPS totaled $191 billion on the FnF balance sheets.
In 2012, the NWS increased the SPS dividend to (almost) all of the GSEs' income; the original 10% dividend was eliminated. Almost all earnings were funneled into Treasury's coffers.
In 2019, the NWS was overturned by Mnuchin after a ruling by the 5th Circuit. For about two years, the twins were allowed to keep their profits to build up capital.
That changed in January 2021, when Mnuchin and Calabria issued the 4th Letter Agreement. Officially, the GSEs were still allowed to build book capital (currently $120 billion). However, the government's SPS LP increased by the same amount. To hide this latent fraud, the "official" SPS-LP remains fixed on the official balance sheet at $193 billion, while the "shadow" SPS-LP continues to grow - to now more than $300 billion.
So since Jan. 2021, the GSEs have been forced to continue drawing new SPS LP from the government, even though the 2012 wind-down arguments are now completely obsolete (FnF are earning 25 billion per year).
Officially the GSEs can build capital by keeping their earnings on their official balance sheets - and they could even reach the high Basel III capital levels at some point. But once they get there, the 10% dividend on the "shadow" SPS LP, which may have grown to $400 or even $500 billion by then, will be due again.
If a 10% dividend has to be paid on $400 billion, virtually all of the GSEs' profits will continue to go to the government. This is because the GSEs are unlikely to earn more than $40 billion once the required capital levels are reached. So that is where NWS 2.0 begins.
What is borderline criminal about the construction of the 4th Letter Agreement is that the GSEs still have to draw new SPS LP on their shadow balance sheets, even though they are in solid financial condition (high earnings, solid stress tests) - and there is less reason than ever fabulating about a supposed "death spiral".
