President Obama never was shy about using his phone and pen to achieve what he could not get from Congress on regulatory matters. But documents revealed last week show the Obama administration may have been willing to get around congressional dec...
July 29, 2017
Obama Looted Fannie Mae and Freddie Mac
President
Obama never was shy about using his phone and pen to achieve what he could not
get from Congress on regulatory matters.
But
documents revealed last week show the Obama administration may have been
willing to get around congressional decisions on spending by using a slush fund
of sorts funded by the profits of Freddie Mac and Fannie Mae, the two
government-sponsored home loan giants.
Fannie
and Freddie are federally chartered enterprises which buy mortgage loans
from banks and bundle them into securities that are sold to investors, thus
freeing up capital so that banks can make more home loans.
They
are government-sponsored enterprises, which means the government guarantees
their loans. But they are run as private enterprises, with private leadership,
a board of directors and, most significantly for this purpose, investors.
They’re even listed on the stock market.
In
response to the mortgage crisis of 2008, Congress passed the Housing and
Economic Recovery Act, which provided $187.5 billion in government loans for
Fannie and Freddie and placed them in conservatorship under the newly
established Federal Housing Finance Agency.
But
Fannie and Freddie were not in such bad shape after all, and in just a few
years, they were turning profits and on course to pay back the government with
interest and still have money to pay dividends to their investors.
In
2012, the Obama administration came up with a plan to divert those profits to
the Treasury that became known as the Net
Worth Sweep. Officials said the profits had to be diverted back into the
Treasury because Fannie and Freddie were in a “death
spiral” and would have to return for loans, and this money would be
used for those loans. In other words, Treasury would take all the profits from
Fannie and Freddie and hold them for future loans when they again found
themselves in trouble.
But --
the administration knew Fannie and
Freddie were healthy for the long term, were unlikely to need any more loans
and, in fact, had enough money to pay dividends. The dividends were a problem
for the administration because it made it hard to explain why it needed to
abscond with Fannie and Freddie’s $241 billion in profits, execute an improper
taking against the shareholders, and spend the money without congressional
approval. Some even pushed to change accounting methods to make Fannie and
Freddie look worse on paper and/or force them to “need” loans to survive.
In
2013, Fairholme Funds, one of those investors, filed suit, charging that, in sweeping
the money back into the Treasury rather than pay dividends as required by law,
the government exceeded its authority and ignored the law’s requirements that
it conserve the assets of the enterprises. The government’s response indicates
Fairholme’s accusations are probably dead on.
One of the documents released last
week said the proposal to sweep the funds into Treasury would have
“three primary benefits:”
It
would “eliminate the circularity of Treasury funding the GSE’s dividends
payments to Treasury.” It would “…capture all future earnings at the GSEs to
help pay back taxpayers for their investment in those firms,” and it would
“reduce future draws… so such draws would only be made when needed to fund
quarterly net losses.”
The
administration could have “eliminated the circularity” by following the law and
paying the dividends. There is no legal basis for unilaterally deciding to
“capture all future positive earnings at the GSEs” -- in fact, the law
specifies otherwise. And the government’s own economists acknowledged future
quarterly losses were highly unlikely.
Another
document suggested announcing the change on Friday after
markets had closed. “Rationale: GSE’s will report very strong earnings on
August 7, that will be in-excess of the 10% dividend to paid to Treasury.” In
other words, wait till late on an August Friday night -- a media dead zone
almost the equivalent of Christmas – to say that, even though the GSEs reported
“very strong earnings” earlier in the week, it needed these prudent protections.
The
documents released last week were made public only after years of government protest. The
government has tried to keep 77,000 related documents from being released
publicly and 11,000 from being shared even with attorneys for Fairholme.
The
government’s out in this always was to claim that “since we intend to wind down
the GSEs over time, the GSEs do not need to retain income in excess of amounts
required to pay the 10 percent dividend,” which by making the government the
largest investor with preferred stock, meant the money went to the Treasury and
not the initial investors, such as Fairholme.
But
the administration never offered a plan to wind down the GSEs, and the proposal
would make little sense at this point.
What
happened here is not hard to discern. The Obama administration had a convenient
boogey man in the GSEs and a need for cash because of a recalcitrant Congress.
It did not take into account the legal rights of the investors. The courts are
slowly coming to this conclusion.
In the
meantime, we’re left with another abuse of the public trust by double-dealing
government insiders. If that’s not an argument for limited government, what is?
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