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Don't Cry for the Shareholders of Fannie Mae and Freddie Mac

rcwhalen's picture





 

"There is no distinctly native American criminal class save Congress."

Mark Twain

 

Update 1: Yesterday in The New York Times, columnist Gretchen Morgenson confirmed that the US Treasury has no intention of returning the mounting profits of the federally chartered housing agencies, Fannie Mae and Freddie Mac, to shareholders. In her fine comment, “The Untouchable Profits of Fannie Mae and Freddie Mac,” she reveals that Treasury Secretary Tim Geithner approved a policy that ensures that the “existing common equity holders will not have access to any positive earnings from the G.S.E.’s in the future.”

http://t.co/C6g5Xo5pIz

A number of people have expressed shock and outrage at this shabby treatment of the common shareholders of Fannie and Freddie.  In a post on Twitter in response to a tweet from your humble blogger, former FDIC Chairman Sheila Bair noted: “No sympathy for GSE shareholders here, but this is punitive compared to how AIG, Citi shareholders were treated.”

And of course Chairman Bair is right.  The common shareholders of AIG and Citigroup were not wiped out when these organizations received government bailouts under the doctrine of “too big to fail.”  

Our friend Nom de Plumber, who formerly worked at the Fed of New York and now makes a living in the risk management world, is similarly outraged:  

“If Treasury was so uncertain of GSE future, as it just stated, why did it need to seize surreptitiously such unforeseeable earnings, especially with zero public policy governance and disclosure?  Either liquidate under receivership, or conserve for debt and equity claimants under conservatorship. Treasury did half and half, skimming the earnings but keeping the liabilities off the US balance sheet. It was a revenue grab, violating the Constitution…  The core issue is following the asset conservation and shareholder disclosure rules which you set for others to meet.   Because the GSE are public shareholder companies, their governance is not exempt from federal investor-protection laws.”

Morgenson notes that the public disclosure from Fannie does not mention the Treasury’s intention to retain the earnings of the GSEs for the benefit of the US taxpayer indefinitely.  Freddie, on the other hand, does disclose that Treasury “has indicated that it remains committed to protecting taxpayers and ensuring that our future positive earnings are returned to taxpayers as compensation for their investment.”

There are now a raft of lawsuits pending against the US Treasury, both by common shareholders and investors in the preferred securities of Fannie and Freddie.  All follow the logic of Nom de Plumber and Morgenson, who see the actions of the Treasury as somehow unfair.  The lawsuits seek restoration of earnings and damages.  But while you may be able to justly criticize the Treasury for hypocrisy and inconsistency when it comes to federal securities laws applicable to private corporations, I am not sure that such arguments can be successfully made against agencies of the federal government. 

First let’s consider why Secretary Geithner chose to support a policy of confiscation of the earnings of the GSEs.  First and foremost, Geithner wanted to cripple Fannie and Freddie financially in order to prevent them from being restored to their former status in Washington.  For those who have not read Morgenson’s 2011 book which she co-authored with my friend Josh Rosner, Reckless Endangerment, the GSEs were the tail that wagged the dog of official policy on housing in Washington for years.  

By putting in place the tough agreement whereby the US Treasury injected preferred capital into the GSEs and in return has the right to confiscate all earnings of Fannie and Freddie indefinitely, Geithner sought to cripple these institutions as a political matter.  I rather agree with his judgment, but wish that he had put the two GSEs into receivership during the crisis.  With the higher fees put in place under the conservatorship, Fannie and Freddie look really profitable, at least in a nominal sense.  But if those profits are adjusted for the risk the GSEs take on housing, there are no profits.

Geithner told Congress in 2011: “The Administration is committed to a system in which the private market – subject to strong oversight and strong consumer and investor protections – is the primary source of mortgage credit.”  But the reality is that the U.S. government is the only entity that is willing and able to truly underwrite the risk of the multi-trillion dollar housing market.  

As we saw during the housing boom of the 2000s, when for a brief couple of years private investors did support a large chunk of the mortgage finance market, as soon as the true risks were revealed the private capital ran for the door.  Even commercial banks are unwilling to support more than a tiny fraction of the housing sector’s overall risk with their own capital.

In his book The Death of Liberalism, R. Emmett Tyrrell notes that during the chaos following the 2008 subprime market collapse; “Some institutions went down in flames, and the government backed institutions, Fannie and Freddie, went hat in hand to the taxpayer.”  Chairman Bair is right when she notes that the shareholders of AIG and Citigroup were treated better than are the shareholders of Fannie and Freddie, at least insofar as their ability to benefit from the financial recovery of these firms. But the key point to take away from that comparison is that the GSEs are not private corporations chartered under state law.  

In the United States, the roots of the subprime crisis of 2008 and the political reaction thereto stretch back to the founding of the republic.  In a legal sense, the power of the federal government to regulate finance begins with the 1819 Supreme Court decision establishing supremacy of federal law over conflicting state law.  In McCulloch v. Maryland, the Supreme Court settled a dispute that arose when Maryland sought to tax The Second Bank of the United States, which that was seen as endangering Maryland’s state banks during the depression of 1818.  The landmark Supreme Court decision confirmed that the Government of the Union, though limited in its powers, is supreme within its sphere of action.  The Court said that federal laws, when made in pursuance of the Constitution, form the supreme law of the land.  

As a practical matter, the power of the US Treasury and ultimately Congress over the GSEs is absolute.  The terms imposed by Treasury in return for the bailout are harsh and perhaps even unfair in a narrow sense, but it is far from clear that private shareholders have any power to object or seek redress.  If, for example, Congress passed legislation tomorrow extinguishing the GSEs without any compensation to the private “shareholders” whatsoever, it is clear that there would be no legal basis for objecting to this action.

Likewise, if Treasury were to put the GSEs into receivership, the private stakes could be wiped out and Fannie and Freddie would emerge as they existed when first chartered by Congress.  In a moral sense this would be wrong, but in a legal sense there seems little basis for private citizens to object.  This whole thing gets even more complicated for the common when one considers the "preferred" shareholders that Hank Paulson announced were being wiped out by conservatorship (to prevent a repeat of the Bear bankruptcy threat that got them $10 per share from JPM).  By the Deep Rock decision (equitable subordination) the common is stuck until the preferred (to which the Gov. has largely succeeded as banks went broke) is repaid.

The second issue that is equally powerful is the question of risk.  The whole operational basis for the GSEs was their implicit guarantee from the U.S. government.  Neither of these entities ever had sufficient private capital to achieve the “AAA” credit standing that Fannie and Freddie commanded in the past and still command today.  At best, the private shareholders of the GSEs were free riding on the backs of the U.S. tax payer, collecting supranormal returns for taking little or no risk – or at least we thought.  

For years the common and preferred shareholders of Fannie and Freddie benefited from the pretense that these corporations were, in fact, private for profit entities.  But in the background, federal officials regularly assured their counterparts around the world that the debt issued by Fannie and Freddie had the full faith and credit of the United States.  When push came to shove during the subprime crisis, the implicit guarantee became explicit and the private shareholders of both GSEs paid a terrible price.  But they should not have been surprised.  Morgenson includes an important quote in her piece:

“People disagree about what should happen to the G.S.E.’s,” said Matthew D. McGill, a lawyer at Gibson, Dunn & Crutcher in Washington who represents Perry Capital. “But if the plan is to wind them down, Congress provided a means to do that in the 2008 law — it’s called receivership, and it provides a host of procedural protections to claimants. What the Treasury cannot do is abuse its conservatorship powers to nationalize the companies and then, when it deems convenient, wind them down without the protections enacted by Congress.”

Well, maybe.  The trouble here is that the Treasury is only accountable to Congress, not to the private shareholders seeking redress in the courts.  The GSEs are creatures of the federal government, not the states.  They were “privatized” in name only under the Administration of Lyndon Johnson, more as an effort at fiscal window dressing than as a serious attempt to separate them from the federal government in a financial, operational or risk perspective.  

While private investors in the GSEs may not like the way that they have been treated since the 2008 bailout, there seems little that they can do except waste money on a lot of litigation that seems unlikely to bring relief.  Federal judges do not like second guessing Congress or the Executive Branch when it comes to the exercise of basic Constitutional powers.  For decades, private investors benefitted from the pseudo privatization of the GSEs and reaped enormous returns for essentially doing nothing.  Now those shareholders who were too dumb to head for the door when the music stopped want to be made whole for their losses.  

When considering what is fair to private investors in this situation, the treatment of the investors in the Madoff fraud comes to mind.  The investors are given back their original investments, but none of the pretended gains because the money was never really invested in the first place.  Perhaps such a scheme would be appropriate here.  But the only thing you can really say to investors in a GSE is “caveat emptor.”  When you as a private individual undertake to do business with a sovereign entity governed by politicians, you have only yourself to blame when the U.S. government decides to break its own rules on disclosure and securities fraud.  

This is just another Washington fable which reminds us all of the words of Mark Twain: "History has tried hard to teach us that we can't have good government under politicians. Now, to go and stick one at the very head of the government couldn't be wise."

 


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Tue, 02/18/2014 - 08:11 | Link to Comment Bruce Krasting
Bruce Krasting's picture

If the GSE's are put into receivership (versus concervatorship) then the stock holders would be wiped out as Whalen suggests.

 

But if that happens, then all of the $6 Trillion of debt would fall on the Federal balance sheet.  Debt would go from 17T to 23T in a day.

No one wanted that in 2009 (why Timmy did what he did), and no one wants that today. Probably the best 'reason' why it won't happen.

Tue, 02/18/2014 - 11:05 | Link to Comment pitz
pitz's picture

So we're just looking at a giant accounting sham here?  One that pays its executives millions, yet delivers zero value to the economy?  Fannie Mae and Freddie Mac are poster-childs for the sorts of 'businesses' that shouldn't even exist in the economy.  Their "shareholders" are little more than giant welfare recipients bitching that the welfare might be cut off. 

Tue, 02/18/2014 - 11:42 | Link to Comment Bruce Krasting
Bruce Krasting's picture

Interesting that you say:

 

Their "shareholders" are little more than giant welfare recipients bitching that the welfare might be cut off.

 

Ahh... The US Treasury (AKA - the taxpayers) owns 80% of the common stock of both F&F. That stake is worth $20b or so. If we get the 'Whalen Plan" you can kiss off that 20b in a day.

 

By the end of March F/F will have 'paid back' all of what was lent to them in 2009/10. So what's left is to determine how much money (profit) the taxpayers get paid for bailing them out. I think that number could be as high as $100B, but it could also be zero. Which door to choose?

Hard to turn your back on a quick $100b these days - even in D.C.

Tue, 02/18/2014 - 03:00 | Link to Comment ejhickey
ejhickey's picture

MEMO

FROM :  US GOVERNMENT

TO: FANNIE AND FREDDIE SHAREHOLDER

 

YOU FUCKED UP.  YOU TRUSTED US!

SEE YOU IN THE FUNNY PAPERS, BOYS

Tue, 02/18/2014 - 01:51 | Link to Comment freecrafted
freecrafted's picture

I remember the day when congress announced that as result of negotiations they were raising and usurping most of the GSE's G-Fee. I couldn't believe it. I sat their scratching my head as to how that could possibly be legal. Honestly it is a complete bastardization of markets and the rule of law for the government to be able to defacto nationalize the revenue stream of a company while not paying its shareholders a penny in compensation.

Finally someone actually stands up and calls this bull$hit for what it was. In a lot of ways it worse than the intimidation of GM bondholders since at least they ultimately agreed to be shaken down since they were scared of the alternative.

Tue, 02/18/2014 - 02:44 | Link to Comment GunsKillRandomly
GunsKillRandomly's picture

The shareholders of Fannie and Freddie should get nothing. The companies went bust. There shouldn't even be any shareholders.

Further the profits are complete nonsense. The Profits are of the same nature as the Federal Reserve profits on their bloated bond portfolio.

Let the Federal Reserve reduce their bond holdings and these profits will quickly turn into massive losses. It is bad enough that I have to pay for Fannie and Freddie so housing can be too expensive.

I now have to pay the shareholders who should have been long ago wiped out.

Tue, 02/18/2014 - 06:41 | Link to Comment AdvancingTime
AdvancingTime's picture

The only reason they were not wiped out long ago was to extend the illusion.

Tue, 02/18/2014 - 01:52 | Link to Comment freecrafted
freecrafted's picture

duplicate

Tue, 02/18/2014 - 01:37 | Link to Comment Georgiabelle
Georgiabelle's picture

"The GSEs are creatures of the federal government, not the states.  They were “privatized” in name only under the Administration of Lyndon Johnson, more as an effort at fiscal window dressing than as a serious attempt to separate them from the federal government in a financial, operational or risk perspective. "

Really? I call bull sh*t. You can scare quote the word privatized all you want but it won't alter the fact that the GSE's were incorporated and listed on the NYSE as publicly traded corporations, signallng to investors that both Fannie Mae and Freddie Mac were, in fact, shareholder owned corporate entities. I can't think of any government entities that are listed on the NYSE or NASDAQ, can you? So if the GSE's were actually government entities all along, then the government has defrauded the GSE investors by misrepresenting Fannie and Freddie as shareholder owned corporations, and it can and should be sued on that basis alone. More than any other single action taken during and after the meltdown, the government take-over of Fannie and Freddie destroyed trust in our systems and institutions: trust in the fairness of government, trust in the ability of our legal system to protect us from government over-reach, and trust that the markets operate in a way that does not inherently disavantage small players. There will very likely never again be robust participation in the markets by small retail investors, and deservedly so.    


Tue, 02/18/2014 - 09:00 | Link to Comment Accounting101
Accounting101's picture

Exactly right! Thank you for jamming facts into this discussion. Also, beware of bulllshit about the GSE's being responsible for the subprime debacle. In 2006 Moody's was bitching that Fannie didn't have enough exposure in the subprime market.

Tue, 02/18/2014 - 00:29 | Link to Comment Spungo
Spungo's picture

"How GM bondholders were treated was a red flag."

What's ironic (or intentional?) is that GM's bankruptcy has put the nail in the coffin of American businesses that use union labor. Why? The government showed that the union gets priority over bond holders. What does that mean in the future? Only an idiot would buy bonds from companies that have unions. Borrowing costs explode and those businesses go out of business.
The government also said this about government bonds. Remember Obama said that capping the debt would cause bond holders to not get paid? He's telling the world not to buy government bonds. It doesn't matter if you're the bond holder, you'll get fucked over, so don't buy these bonds.

Mon, 02/17/2014 - 19:48 | Link to Comment Duude
Duude's picture

What is dishonest is the company stock was never pulled from circulation. Leaving it on the market cheated future shaeholders.  Prior shareholders who held on deserve to lose all. If the government had bailed the company out, the stock would have been worthless anyhow. By not pulling the stock, the company owed it to shareholders to brief them on the likelihood of them sharing any future growth.

Tue, 02/18/2014 - 11:55 | Link to Comment LMAOLORI
LMAOLORI's picture

 

DUE DILIGENCE -

1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.

2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party. 

Or Buyer Beware it's the same thing that people taking out loans are supposed to use or the buyers of a used vehicle. If you go to court and tell the judge you didn't know something was against the law he will quickly inform you that ignorance of the law is no excuse.

Mon, 02/17/2014 - 16:13 | Link to Comment Lonewar
Lonewar's picture

Umm, Fannie and Freddie are doing EXACTLY what they were designed and created to do, enable housing lending to continue duing a Financial Crisis. The were created during (Fannie was) the Great Depression as banks at that time refused to lend money to people to buy housing, so there was no mobility of the workforce.

They are doing the same today, as Fannie, Freddie are about 85% of the Loan owners in America. They give banks the confidence to lend to the public, which otherwise would NOT exist (For an example, take a look at small business lending that isnt backed by the SBA, oh thats right, it doesnt exist...)

The reason Timmy boy did what he did was to steal the profits that he knew Fannie and Freddie were going to start producing (As stated in their 2nd Quarter 2012 10Qs, which was prior to the August 2012 theft)

The reason they wanted to steal the profits is so that the administration did NOT have to explain why Fannie and Freddie are making more money now, when housing is sucking wind, than the reported in the years of 2001-2007, during the height of the housing Boom.

They dont want to explain how that money was siphoned off and stolen...

And besides, if the treasury would let them, Fannie Mae could pay off every dime owed to the Feds today, and has had this ability for the last 5 years, as the "Losses" were nothing more than Fannie taking money and building loss reserves with it, funny, considering like 90% of the sub-prime that Fannie and Freddie own was "Credit Enhanced" which means it had Private Mortgage Insurance, which would make Fannie whole on whatever the difference was between the Foreclosed Sales price on the home and the amount owed on the lean...

If the Federal government had placed Fannie and Freddie into receivership, which would have been the RIGHT thing to do, no one would be complaining.

If the Federal government had Nationalized Fannie and Freddie, no one would be complaining.

They didnt do either, they placed them into receivership, which means they expected them to be able to function again in the future. And they did so under extremely onerous terms (80% Common Stock warrants and 10% interest on all money loaned, which is bullshit for a systemically significant financial institution, which should have been given access to the FEDs Term Asset Lending Facility to be able to borrow at 0.125%). So now the Federal government needs to keep to its terms and allow them to pay back the Taxpayer, with interest, the money borrowed, and get out of conservatorship.

Oh, and one thing not mentioned, is that the lawsuits being filed are filed by BIG Hedge Funds, which are managed by members of the Tribe, who stand to gain a LOT of money off of them winning... Heck, the Taxpayers stand to gain a LOT of money if they win...

(Disclaimer, if the lawsuits win, I make enough to retire via Fannie Mae Commons and Preferreds...)

Mon, 02/17/2014 - 17:42 | Link to Comment pitz
pitz's picture

Besides, if/as QE dissappears and is unwound, Fannie Mae's portfolio is going to lose a very large chunk of its value.  Fannie needs to build significant reserves to hedge against this.  It is doubtful that shareholders have any true equity in the 'business'.  The government is being responsible by barring the payment of dividends to shareholders who effectively possess no real equity.  If anything, Fannie is severely under-capitalized relative to the interest rate risk it has taken on. 

Also, the 'private mortgage insurers' themselves aren't very well capitalized either.  So their promises shouldn't be taken at face value either, especially in a housing driven systemic downturn. 

I don't often agree with what the government has done, but throwing Fannie/Freddie "shareholders" under the bus may very well prove to be one of the best things they've done in a long time.  Although explicit nationalization and liquidation back in 2009 would have probably been a better idea, albeit one with significant short-term pain.

Mon, 02/17/2014 - 17:28 | Link to Comment pitz
pitz's picture

Banks most certainly would lend to house buyers if the collateral was actually worth what it was priced at.  I think you've bought into the whole fallacy that the government can do on its own, what the private sector cannot.  The quintessential socialist clap-trap if there ever was one.  The private sector has largely been priced out of participating in the mortgage market because of all of the government subsidies.  Quite frankly, people who have hitched their wagons to such a commie/socialist scam, like you, deserve to lose everything as we return to a free market and consensual transactions between private borrowers and private lenders carried out at natural market clearing rates.  Not this government sponsored/subsidized welfare crap. 

Mon, 02/17/2014 - 19:26 | Link to Comment Lonewar
Lonewar's picture

Pitz,

So, a bank, which creates money out of thin air, wont loan it to people to buy a real tangible asset... that they will get to steal if this money that they created out of thin air, is NOT paid back, with interest...

The private sector BANKS can NOT possibly be priced out of the lending market (Hard Money Loans can though), they literally have NO skin in the game

As for losing everything if we ever have the revolution we desparately need to kill off this Facist Government of ours? If you mean the ~$2,000 I have invested that could potentially turn into $1,000,000, well darn, I will just have to take that risk... It was and always has been a high risk gamble, but I will, by NO means, lose everything...

Mon, 02/17/2014 - 15:05 | Link to Comment b_thunder
b_thunder's picture

First, how much of Fannie's & Freddie's profits are due to the "easy money" and ZIRP?  The answer is ALL OF IT.

Second, it's very likely that next RE crash will take place well before F&F will have been compeltely winded down, and then the profits will turn into 2008-like losses.  I can't blame the Feds for trying to stash away as much F&F profits as they can now, so that during the next RE bust they can say "we're not using the taxpayer $$ to bail F&F out again, we're simply using their past rpofits that we've already expropriated."

 

Mon, 02/17/2014 - 17:45 | Link to Comment pitz
pitz's picture

Yeah they won't be pushing long-term US interest rates down this next time around either.  The market is increasingly showing a revulsion to additional QE.  If anything, government actions have additionally damaged the RE market.  The government is being prudent in forbidding dividends to Fannie/Freddie "shareholders", but really should be firing the executives of the organizations and liquidating the organization to reduce systemic exposure of the taxpayers. 

Tue, 02/18/2014 - 02:16 | Link to Comment Georgiabelle
Georgiabelle's picture

Did you not read the NYT article referenced by the author of this post? Fannie and Freddie are now higly profitable, and those profits are being funneled directly into the U.S. treasury rather than being used to pay off the debt as set forth in the original conservatorship agreement. 

Tue, 02/18/2014 - 12:05 | Link to Comment LMAOLORI
LMAOLORI's picture

 

 

Fannie and Freddie still owe Tarp money and we have over $1.5 Trillion in MBS's on the Fed's books .

 

Bernanke Leaves Fed with Record Balance Sheet of $4,102,138,000,000

snip...

As of Feb. 1, 2006, when Bernanke took over as chairman, the Fed’s balance sheet indicated it owned $748,840,000,000 in U.S. Treasury securities. At that time, the balance sheet listed no mortgage-backed securities. As of Jan. 29, 2013, the balance sheet indicated the Fed owned $2,243,176,000,000 in U.S. Treasury securities and $1,532,224,000,000 in mortgage-backed securities.


Those MBS's btw

(snip)

The Federal Reserve System had embarked on a "quantitative easing" strategy to stimulate the economy, buying $85 billion worth of bonds a month (a program now being tapered). Of that sum, $45 billion would go for Treasury bonds and the other $40 billion would go for Fannie Mae/Freddie Mac mortgage-backed securities

 

AND

The Fed instituted an accounting trick that could move that debt to taxpayers so as a taxpayer who was already forced to bail out all these entities (whether they be individuals,banks,GM or these shareholders) again no tears from me. How much would the shareholders receive if the whole thing collapsed ?

 

Accounting tweak could save Fed from losses

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

 

Obama's Budget Has One Small, Missing Piece.... For $6.3 Trillion Dollars (snip)

Not because we don't care about what's in it, but because we are much more concerned with what is not included, namely $2.8 Trillion and $1.9 Trillion of MBS guaranteed portfolios at Fannie and Freddie, and an additional $782 billion and $809 billion in company debt outstanding for the two GSEs, respectively.


Unlimited credit for GSEs seen as backdoor bailout 

Tue, 02/18/2014 - 11:02 | Link to Comment pitz
pitz's picture

"profitable" only by means of interest rate changes.  Which certainly will be unwound with QE's eventual ending and reversal.  Just watch.

Mon, 02/17/2014 - 15:41 | Link to Comment LMAOLORI
LMAOLORI's picture

 

 

Kind of takes on a whole new level of robbing Peter to pay Paul doesn't it lol - as a taxpayer I won't shed any tears - and to me it just shows you shouldn't get in bed with government (or it will that is if the investors lose the case).

Mon, 02/17/2014 - 15:33 | Link to Comment pitz
pitz's picture

Fannie and Freddie (just like Canada's CMHC) inherently add zero value to the economy.  And actually destroy value as their staff are usually paid highly (and certainly far higher than market).  So it is completely logical that shareholders in such an enterprise will lose the entirety of their investment. 

Mon, 02/17/2014 - 15:03 | Link to Comment LMAOLORI
LMAOLORI's picture

 

 

I think it is IMPORTANT to note the governments role in this because the government gave the banks who originated the loans a backdoor bailout! We will just have to wait and see how it plays out in the courts and it appears investors think it will go in their favor.

Flashback

Corporate Crime, Russia, Peter Orszag and Getting Away with Murder

snip

Case in point: former Office of Management and Budget Director Peter Orszag.

Rosner said that the Orszag case is “one that I find most offensive.”

“It’s not on the level of Timothy Geithner or Hank Paulson, but it’s troubling,” Rosner said.

“Peter Orszag was co-author of a study paid for by Fannie Mae back in 2000 or 2001,” Rosner said. “It argued that Fannie and Freddie are incredibly safe and sound, that the stress test that was going to be employed by the regulator insured their safety and soundness. And that there was something like a one in 500,000 chance that they would end up imperiled. And even if that happened, the cost to the taxpayers would be a few million dollars. That’s pretty much what the paper said.”

“Orszag ends up as the head of OMB. And when the government takes Fannie and Freddie into conservatorship, he says – there is about a five percent chance that the government could be on the hook for more than $100 billion. Wrong again. No one calls him out.”

“Orszag is now the vice chairman at Citibank. I noticed the other day he put out an op-ed on Bloomberg which was clearly positioned to support his current institution. And nowhere does it say that he had anything to do with the government, the GSEs. And that’s just the way Washington works.”

“He obviously was in that position to add three zeros to his income on the other side,” Rosner said. “It’s not about public service. It’s about self service.”

 

Morgenson lamented the lack of criminal prosecution. 

 

Fannie-Freddie Fate Rests in Courts

 

Investors, meanwhile, are betting on the side of the plaintiffs. Some classes of Fannie's and Freddie's preferred stock, a form of senior equity, have doubled over the past six months. While shares are still trading at deep discounts from where they stood before the companies were bailed out, many hedge funds and other speculators began amassing the shares when they traded at even deeper discounts over the past five years. 

Mon, 02/17/2014 - 15:22 | Link to Comment Colonel Klink
Colonel Klink's picture

I believe Orzag is a member of the "chosen" and part of the "club".  Thus he can do no wrong, nor be prosecuted for violations of the law.

https://www.jewishvirtuallibrary.org/jsource/biography/Peter_Orszag.html

Mon, 02/17/2014 - 15:15 | Link to Comment ebworthen
ebworthen's picture

How GM bondholders were treated was a red flag.

Stealing homes and rewarding the complicit banks was another.

If you think you are going to have your individual rights protected in the U.S.S.A. you are delusional.

If you are a TBTF bank or a shill like Dick Bove the Kleptoligarchy and it's storm troopers and kangaroo courts have your back.

Mon, 02/17/2014 - 16:39 | Link to Comment disabledvet
disabledvet's picture

actually this is an interesting comment.
without a doubt the DEBT holders were bailed out while the equity was pretty much annihilated (although there have been some spectacular moves in Fannie and Fred equity this past year which the author failed to point out.)

Is the Treasury "stealing" the profits?
I have no Agenda here that i'm plugging away at so it's a lot easier for me to at least look at the story objectively.

GM bondholders were annihilated! (that would be of the CAR company...not the bondholders in the huge housing speculation GM was doing on the side.)
That wasn't true of Fannie and Fred...which yet again shows what in fact we have here in my view is a SUBSIDY...the purpose being to "create more housing" (both here and in China of course.)

Interestingly a big cause of China's "woes" are price DECLINES...not inflation.
Is it illegal?
Well...it's not like QE was ever legal.
The Constitution has been so shredded here i'm not sure it will ever exist again actually.

Would it be good if Fannie and Fred were taken public again?
Yeah...I think so.
Let's get those liabilities off the taxpayer balance sheet.
The taxpayer is done hand holding General Motors actually...although we lost a ton of money on the deal...all the while with a war going on no less.

It all is so appalling really...beyond frustrating...ENRAGING.
We've gone beyond "zero transparency" to just plain "zero."

http://seekingalpha.com/symbol/FNMA?source=search_general&s=fnma
1000 percent return in one year.
That's better than BitCon!

Mon, 02/17/2014 - 18:17 | Link to Comment pitz
pitz's picture

Its a travesty when any business that creates no value and provides no useful function in society, goes up even a dime in the "stock market". 

Tue, 02/18/2014 - 11:43 | Link to Comment Georgiabelle
Georgiabelle's picture

Without Fannie and Freddie there would be no secondary mortgage market. Without a secondary mortgage market potential buyers would be unable to secure a mortgage and the housing market would collapse. I would say that Fannie and Freddie most definitely create value and provide a useful function in our society.  

Mon, 02/17/2014 - 14:48 | Link to Comment elwind45
elwind45's picture

The central bank knows everything! Just because its shadow doesn't mean its dark. Any capital flowing around ends and then begins from a central bank? There is a lot more funny money(profit from doing nothing) than profit from doing sumpin soaking the globe. If a central bank knows something and isn't tellingwhat it really knows than how much non productive fiat currency is it really producing and how big is the shadow really? Funny how long ago folks thought FED would run out of money and in fact has all the money instead. Sumpin out o nothing?

Mon, 02/17/2014 - 14:32 | Link to Comment elwind45
elwind45's picture

Private in name only? Are you saying that the investors did nothing because they were connected to a scam or they did nothing when in hindsight they should have seen something coming? I remember at least two housing bailout bills prior to the takedown! By doing nothing again "too big to fail" will become the firewall between all three federal government branches?

Mon, 02/17/2014 - 14:08 | Link to Comment 0b1knob
0b1knob's picture

First they came for the bond holders of GM.   I said nothing because I was not a bond holder of GM.

Then they came for the accounts of MF Global.  And I said nothing because I had no account at MF Global.

Then they came for bank accounts of Cyprus.  And I said nothing because I had no account in Cyprus.

Then they came for the retirement accounts with MyRA.  And I said nothing.

<                                      >   (Finish the sequence yourself)

Fun fact about Fannie Mae preferred:   Accounting and tax law made it very attractive for small banks to hold these.  So by making them worthless the government destroyed hundreds of small banks while transferring market share to the TBTF banks.  What's that you say?   That was the idea all along?

 

Mon, 02/17/2014 - 14:42 | Link to Comment kurt
kurt's picture

<Then they came for me>    And I was wackin' to fisting milfs.

Mon, 02/17/2014 - 14:26 | Link to Comment Clint Liquor
Clint Liquor's picture

What's that you say?   That was the idea all along?

Of course, Crony-Capitalism demands that competion be removed. Just ask Warren Buffet about the XL Pipeline.

Tue, 02/18/2014 - 09:54 | Link to Comment fx
fx's picture

So in short, the author says: congress and treasury can do whatever they want to and are above the law and the constitution? That may be so in reality, sad as it is. But from a legal point of view they are not.  The legal discussion in this article is for mot part, utter crap and by and large. the discussion about state law vs. federal law is largely irrelevant. By far the poorest article by rcwhalen that I have ever read. And geithner's intentions? Are you kidding by painting a rather genuine guy here? This crook has only forstered the TBTF's agenda and those of GS in particular.

Mon, 02/17/2014 - 13:43 | Link to Comment pitz
pitz's picture

Housing prices need to drop enough, and mortgage values deflate sufficiently, so that the private sector is taking on 100% of the risk.  Until then, there will be big problems in housing and mortgage finance generally. 

Tue, 02/18/2014 - 00:37 | Link to Comment CheapBastard
CheapBastard's picture

"Housing prices need to drop...60%...."

My house is still an incredibly 320% above the 2002 price. It has to correct at some point.

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