Siphoning off the entities’ profits is the opposite of conserving their assets and property, the plaintiffs contend. Gretchen Morgenson
Gretchen Morgenson Column Says
Treasury Misled F&F Shareholders
What’s next, will the Chicago Cubs win the National league playoffs and go onto triumph in the 2014 World Series?
I am referring to Gretchen Morgenson’s astounding article in Sunday’s NYT business section in which this long time GSE critic—in an about face-- declares that the Obama Treasury may have violated the rights of Fannie Mae and Freddie Mac common shareholders, when it failed to make public a crucial Treasury document, written in 2010 and unearthed this past month as Treasury defends itself against various GSE lawsuits. (See link below to Ms. Morgenson’s column.)
The Treasury document discussed the Obama Administration’s GSE policies, including a heretofore unknown plan to not allow the two companies to make any money, profits which might have boost common stock prices.
Ms. Morgenson argues the information would have been material and essential for the public to know at the time the policy was promulgated, since many investors continued buying F&F common stock in 2010 and 2011, when GSE revenue prospects were dim.
“A material fact is an occurrence, event, or information that is sufficiently significant to influence an individual into acting in a certain way, such as entering into a contract.” (Source Legal Dictionary.)
Below is the critical excerpt from Ms. Morgenson’s column:
The memo was addressed to Timothy F. Geithner, then the Treasury secretary, from Jeffrey A. Goldstein, then the undersecretary for domestic finance. In discussing Fannie and Freddie, the beleaguered government-sponsored enterprises rescued by taxpayers in September 2008, the memo referred to “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.’s in the future.”
A glorious 2012 financial turnaround allowed F&F to make huge profits--because so many other investors had abandoned the mortgage finance market—and initiate a now virtually complete process of returning to the Treasury every penny invested in them. (Even though that is technically impossible, under the deal Hank Paulson forced on them, it does exist in a common sense manner.)
One irony here.
F&F preferred shareholders--many of them, but not all, hedge funds--sued both the Bush and Obama Treasury Secretaries over the original 2008 action (Bush)--to put the companies into “conservatorship”--and later, in 2012 (Obama), because Treasury changed Fannie’s and Freddie’s repayment terms from a 10% dividend of their federal debt outstanding to a total sweep of all quarterly profits each generated.
Some 18 of the latter court cases currently are pending.
(Elsewhere, Ms. Morgenson calls this profit sweep dividend change, “punitive.”)
Now the common shareholders, with possibly mammoth investor Bill Ackman leading, may have major cause to go to the trial lawyers, again, and sue Uncle Sam for failing to disclose its plan to cripple F&F revenues.
With the exposure of this document, Morgenson also noted a certain financial perversity in the 2008 conservatorship action, because—under the same statute--Treasury also implemented a warrant policy giving the federal government 79% ownership of Fannie and Freddie, with the warrant values (Uncle Sam’s) going up as common stock values stayed low.
(Hypothetical discussion between Treasury Secretary Jack Lew and his boss. “So, let me get this straight Jack, if Treasury effects this, our warrants go up in value but the common stock doesn’t, right, and we are the only winners?”)
As one prominent observer noted about the bubbling cauldron, sarcastically understating, “the plot thickens!”
Let me enthusiastically welcome Ms. Morgenson, the NYT storied financial columnist, to the “good guys” side of the F&F ongoing discussion, which I hope isn’t a premature acknowledgement and—for her—will be a long term stay.
Come on in, Gretchen, the water’s fine and the story is even better!
(Oh, and if your pen stays sharp and pointed in the right direction, I’ll forget the AEI-driven, hatchet-job book you and Josh Rosner wrote about Jim Johnson and Fannie Mae.)
Who’s Making/Speaking F&F Policy?
HUD Secretary Sean Donovan, last week, spoke on mortgage finance reform predicting prompt Senate action on Banking Committee mortgage legislation.
One observation: That development won't be particularly surprising as this blog predicted that possibility some weeks ago.
But to imply a bill which can pass the Senate could get through the House Banking Committee and onto the House floor, without being “Tea Partied to pieces” is highly unlikely.
But, Donovan--a loyal Admin guy--is just saying what his bosses want.
What surprised me most about Donovan’s comments is that they weren’t being delivered by FHFA’s Mel Watt?
Who—not working in the US Treasury--carries the GSE portfolio in this Administration?
Is it the former 20 year plus, House Banking Committee veteran who had to scuffle to get Senate approval and now oversees Fannie and Freddie, or is HUD, the Cabinet agency which has the lowest profile, no matter which party controls the White House? (It’s been suggested that D’s sends their duds to HUD and R’s shuttle their liberals to those posts.)
Mel Watt might ask, “Why make me sweat and fight for this job, Val….er, I mean Mr. President, if you are going to give my portfolio to the guy whose building is called ‘11 floors of basement?’ ”
On a more positive note, FHFA Director Watt has started reaching out to housing and mortgage finance industry groups, which report positive meetings and kudos for the Director.
What Others are Saying
Al Jazeera feels deeply about Fannie and Freddie.
Chuck Gabriel discusses Donovan comments.
Barclay’s says C-W requires beau coup fresh capital and may need a decade and a half to get it.
Key excerpt from the above referenced report:
“We estimate that $400-450bn of private capital is needed to absorb the credit risk of all $4-4.5trn in government- guaranteed GSE mortgages, assuming a 10% first-loss piece. The private markets cannot raise this amount easily. In our view, a government retreat will need to be spread over at least 10-15 years, not the five years proposed by Corker-Warner.”
Biting the Hand that Feeds the Hand, or..?
In checking on something else, I stumbled upon this surprising story, which is about three months old. But I missed it when it first appeared.
Generally major fundraisers do not dump on the legislative projects of those for whom they raise funds. It could make possible campaign contributors think your candidate is a lightweight.
But that didn’t stop Tim Pagliara, the CEO of Cap Wealth Advisors, and a main Bob Corker (R-Tenn.) cash guy.
Maloni’s Movie Opinions
Leonardo DiCaprio and Jonah Hill deserve best actor and best supporting actor Oscars for “Wolf of Wall Street.”
Lone Survivor is a gritty and excellent movie.