Monday, June 20, 2016

Blogging, again (but not as often)



When I grew up during the Cold War era, if you wanted to scare people, you would bellow, “The Russians are coming!” and then go on to describe various atrocities the Soviet military would wreak on the United States. 

In grade school drills for the same reason, they trained us to crawl under desks as protection from nuclear annihilation. Some families would store extra food or water at home, meaning the reserve supplies and they would be incinerated if the Russians ever dropped an atom or hydrogen bomb on us.  Folks were scared because there was a real and fragile balance of terror between the US and the Soviet Union.

It's Them!

Today, in the mortgage finance world, the new but delusional cry is, “The hedge funds are coming.”

It’s been popularized by GSE opponents, media, and some of the major housing trades who fear recapitalization of Fannie and Freddie via some White House executive action.

The threat of hedge funds “benefitting” is supposed to frighten the White House and Congress from supporting any executive effort executive or—in the extreme--it could be a self-defeating outreach to intimidate the courts. (Warning big trade groups, these courts don’t want to be lobbied.)

Chances are most of those raising this alarm know as much about hedge funds as they did/do about the inner workings of the GSEs, which means little.


That anxiety grows from the fact two hedge funds are among 30 Fannie and Freddie investors suing the federal government for its actions. 

Like the allegation “the GSEs caused the 2008 financial meltdown”— the reality free orthodoxy for the GOP and many conservative elements--the hedge fund threat is false as well. 

The very real lawsuits were driven by Treasury’s 2012 decision to change the GSE repayment scheme from a 10% dividend on $187 Billion outstanding to all earned income in perpetuity! 

Pretty dramatic change, especially when Treasury argued it was necessary to go medieval on the GSEs and take all of their earnings because Fannie and Freddie were in a “death spiral” caused by their “bad business model.”

Except neither accusation was true, as recently released court records now show.

Back to, “The hedge funds are coming.”

Let me see, one, two.....

Here is an alphabetical list of the current 30 lawsuits:

1. American European Insurance Company v. Federal National Mortgage Association, et al., Case No. 13-cv-01169 (D.C. filed July 30, 2013)
2, American European Insurance Company v. USA, Case No. 13-496 (Ct. Fed. Cl. filed July 19, 2013)
3. Arrowood Indemnity Co., et al. v. Federal National Mortgage Association, et al., Case No. 13-cv-1439 (D.C. filed Sept. 12, 2013) (Lamberth, J.)
4. Arrowood Indemnity Co., et al. v. USA, Case No. 13-698 (Ct. Fed. Cl. filed Sept. 18, 2013) (Sweeney, J.)
5. Borodkin, et al. v. Federal National Mortgage Association, et al., Case No. 13-cv-01443 (D.C. filed Sept. 20, 2013)
6. Cacciapalle, et al. v. Federal National Mortgage Association, et al., Case No. 13-cv-01149 (D.C. filed July 29, 2013) (Lamberth, J.)
7. Cacciapalle, et al. v. USA, Case No. 13-466 (Ct. Fed. Cl. filed July 10, 2013) (Sweeney, J.)
8. Cane v. Federal Housing Finance Agency, et al., Case No. 13-cv-01184 (D.C. filed Aug. 1, 2013) 
Continental Western Insurance Company v. The Federal Housing Finance Agency, et al., Case No. 14-cv-00042 (S.D. Iowa filed Feb. 5, 2014) (Pratt, J.; Walters, M.J.)
9, Dennis v. Federal Housing Finance Agency, et al., Case No. 13-cv-01208 (D.C. filed Aug 5, 2013)
10. Dennis v. USA, Case No. 13-542 (Ct. Fed. Cl. filed Aug. 5, 2013)
11. Edwards v. Deloitte, Case No.2016-004986-CA-01 (Fla. 11th Cir. Ct.), removed to Case No. 16-cv-21221 (S.D. Fla.)
12. Edwards v. Pricewaterhouse-Coopers, Case No.2016-005875CA-01 (Fla. 11th Cir. Ct.), removed to Case No. 16-cv-21221 (S.D. Fla.)
13. Fairholme Funds, Inc., et al. v. The United States, Case No. 13-465 (Ct. Fed. Cl. filed July 9, 2013) (Sweeney, J.)
14. Fairholme Funds, Inc., et al. v. Federal Housing Finance Agency, et al., Case No. 13-cv-1053 (D.C. filed July 10, 2013) (Lamberth, J.)
15. Fisher, et al. v. USA, Case No. 13-608 (Ct. Fed. Cl. filed Aug. 26, 2013) (Sweeney, J.)
16. In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations, Misc. Action No. 13-mc-1288 (D.C. filed Nov. 18, 2013) (Lamberth, J.)
17. Jacobs, et al. v. FHFA, et al., Case No. 15-708 (D. Del. filed Aug. 17, 2015) (Sleet, J.)
18. Liao v. Lew, et al., Case No. 13-cv-01094 (D.C. filed July 16, 2013) 
19. Marneu Holdings Co., et al. v. Federal Housing Finance Agency, et al., Case No. 13-cv-01421 (D.C. filed Sept. 18, 2013)
20. Pagliara v. Fannie Mae, C.A. No. 12105-VCMR (Del. Ch. Ct. filed Mar. 14, 2016), removed to Case No. 16-cv-00193 (D. Del.)
21. Pagliara v. Freddie Mac, Case No. CL-2016-03860 (Va. Cir. Ct. filed Mar. 14, 2016), removed to Case No. 16-cv-00337 (E.D. Va.)
22. Perry Capital LLC v. [Treasury Sec'y] Jacob J. Lew, [Acting FHFA Director] Edward DeMarco, The Department of the Treasury, and The Federal Housing Finance Agency, Case No. 13-cv-1025 (D.C. filed July 7, 2013) (Lamberth, J.)
23. Rafter, et al. v. USA, Case No. 14-740 (Ct. Fed. Cl. filed Aug. 14, 2014 (Sweeney, J.)
24. Rafter, et al. v. The Department of the Treasury, et al., Case No. 14-cv-01404 (D.C. filed Aug. 15, 2014) ([Lamberth], J.)
25. Reid v. USA, Case No. 14-152 (Ct. Fed. Cl. filed Feb. 26, 2014) (Sweeney, J.)
26. Roberts v. FHFA, et al., Case No. 16-cv-02107 (N.D. Ill. filed Feb. 10, 2016) (Chang, J.) 
27. Robinson v. FHFA, et al., Case No. 15-cv-00109 (E.D. Ky. filed Oct. 23, 2015) (Thapar, J.)
28. Saxton, et al. v. The Federal Housing Finance Agency, et. al., Case No. 15-cv-00047 (N.D. Iowa) (Reade, C.J.)
29. Shipmon v. USA, Case No. 13-672 (Ct. Fed. Cl. filed Sept. 12, 2013)
30. Washington Federal, et al. v. USA, Case No. 13-385 (Ct. Fed. Cl. filed June 10, 2013) (Sweeney, J.)

By my count, I see two hedge funds (Perry Capital, principal Richard Perry and Pershing Square, principal Bill Ackman), plus one equity mutual fund (Fairholme Funds, principal Bruce Berkowitz) and 27 non-hedge fund plaintiffs.

But, hey, why let facts ruin a good attack story, right MBA/NAR/NAHB?

Berkowitz and Ackman have been very vocal in their beliefs that the government’s action was wrong and both have been active in their assertions. And they may have enlisted DC lobbyists to assist them.

Overlooked by the fear mongers, likely intentionally, is that 27 non-hedge/mutual fund plaintiffs, are suing on behalf of many others, including “little people” who never sold their long held GSE stock and are hoping against hope for a financial resurrection/recovery.

Treasury lies


Contrary to Treasury’s 2012 flawed explanation and justification, the core GSE business model worked fabulously and Fannie and Freddie—far from dying--were healthy and on the cusp of a financial recovery while, still, operationally burdened with the federal handcuffs of conservatorship.

In 2013--after the government’s phony bad business model suggestion--the two repaid Treasury from earnings over a $100 Billion toward their fixed debt of $187 Billion (another odd government fillip, Treasury’s financial support agreement—which Paulson extracted from the two GSE boards--mandated no principle debt reduction, no matter how much was repaid).

In the past 36 months, Fannie and Freddie have given back to taxpayers $245 Billion and growing, for their 2008 assistance.

In those 8 years since “conservatorship,” the GSEs also solidified the nation’s mortgage finance system, a massive societal value which nobody has tried to monetize, but which should be a priority mission given the stakes.

What I am suggesting is the government’s 2008 GSE investment, besides bringing in billions to the US Treasury, produced eight years of systemic mortgage market smooth sailing, success, jobs, homeownership, and consumer happiness.

Our US mortgage finance system has worked so well that few in the public, today, see any need to change, only those trying to position themselves to divert to their own coffers the GSEs` income in our $10 Trillion national mortgage finance system.

And in 2008 and 2012, you said....?

Maybe my memory is failing me, but in 2008 and 2012, I don’t remember my Mortgage Banker, Homebuilder, or Realtor friends--or any of those other “don’t recapitalize” financial trade groups--complaining or authoring outraged letters when Treasury first nationalized F&F and then chose to change the original repayment ground rules and gobbled all of their profits.

Where were housing trades then? Were they dumb to the meaning of draining Fannie and Freddie of all of their working capital?

But the moment a rational and thoughtful competing group of pro-housing voices---several civil rights groups, some smaller lender organization and an association of large builders--calls on the Administration to recapitalize the GSEs, up like a Jack in the Box leaps the MBA, ABA, NAR, NAHB, and the NHC, crying “foul, foul, foul” or their interest group equivalent, designed to scare policy makers, “The hedge funds are coming.”

Those major trades never balked at the 2008 conservatorship, they didn’t said “boo,” when Treasury and the FHFA—negotiating with themselves—implemented the “sweep” nor did they demand Congress stop the nationalization of two crucial pillars of the nation’s mortgage finance system.

But they’ve awakened now with righteous finger pointing and fist shaking indignation at some investors who either kept their GSE common and preferred shares or, Omigosh, bought them more recently and then sued when the government likely lied and pocketed GSE investors’ property.

The GSE issue are part of a broader policy discussion about what is good for millions upon millions of Americans who want to use and also work in the nation’s mortgage finance system. As I need constantly to remind people, it’s also about the money.

It's the GSE mortgage finance model that counts, that's where the market fairness resides

Frankly, I don’t care if a few investors—who kept or invested their money in what they thought was an undervalued set of stocks—make profits if the entire GSE system is recognized for what it is, was, and can be, an outstanding mortgage business model is where all Americans— including many of those whose trade groups signed the letter opposing recapitalization— can benefit.

I feel very confident in my convictions that a substitute system, with the nation’s largest banks at the helm shaping consumer decisions, can’t and won’t be broadly beneficial. Simply, banks cheat and cut corners.

So MBA letter signers, is your anger and vehemence aimed at the right villains?

Many among plaintiffs and a growing number of other observers believe that recapitalizing Fannie Mae and Freddie Mac would be a major positive for the nation and the mortgage markets.

It appears some of you don’t agree.

The public’s need for a safe reliable, fair national mortgage finance system isn’t threatened by GSE investors but by the ideological folks--who by stealth and chicanery--took over Fannie Mae and Freddie Mac, in likely contravention of the 2008 Housing and Economic Recovery Act (HERA) and possibly the constitutional prohibition against the government taking private property.

Maloni, 6-20

(These months off haven't changed my typo-prone nature. So, if you see any, plz let me know. Also, if any of you know where my missing cell phone is, please.......)


16 comments:

G. Buckman said...

Bill, glad to see you back at it, even if only occasionally.

Your words of wisdom were surely missed.

Interestingly enough, the largest (of the two) hedge fund holder of GSE commons is Bill Ackman's Pershing Square, but when you consider the government's 79.9% warrants, he owns right at 2% of the common shares. So, as you stated, it's very hard to see how the cries of "the hedge funds are coming" holds any merit at all.

joseph slechta said...

Glad to see you back, sir. I hope swingsetgate is resolved, now.

ada said...

So true. Not to mention the hedge funds only own a small % of the total number of shares. Nice to have you back.

Bill Maloni said...

Thanks friends.

It is laughable when major trade associations complain that others may be "lobbying."

Excuse me, but isn't that what your DC association exists to do?

If not, why have an office in this town? There are more central places, easier to reach than Washington DC.

(To be fair, NAR has major Chicago offices, but a big Washington presence.)

Anonymous said...

Bill Thank you for blog and for your past job at GSE.
This country need more guys like you and Tim Howard
and David Fiderer in housing finance.

Bill Maloni said...

I am sure David will agree with me that the nation needs about a dozen Tim Howards and Fiderer and I'll drive him from meeting to meeting!

I hope everyone into the issues now is reading Tim's blog, because his posts are so substantive--and equally--his answers to readers' questions are equally weighty and so understandable.

https://howardonmortgagefinance.com/

Cam Jam said...

The previous anonymous poster took the words right out of my mouth. Glad to see you posting again, and thanks for all you do to help the cause.

Anonymous said...

Bill,

This is a false statement and a lie: “the GSEs caused the 2008 financial meltdown”

This is the correct statement and is a fact that can be verified.
“Siezure and conservatorship of GSEs caused the 2008 financial meltdown”

This can be verified from full time line published by fed.
https://www.stlouisfed.org/financial-crisis/full-timeline

Look at events before conservatorship and after conservatorship.
Immediately after conservatorship all hell breaks loose.

Top Gov officials were saying all along that the GSE were sound and in good health.
And suddenly FnF were siezed and put into conservatorship shocking the market, and resulted loss of faith in the US markets.



Bill Maloni said...

Anon-I agree with you.

Just to be clear, I was highlighting what GSE critics, wrongly, claim.

Would help if some supportive Congressman or Senator took the summary of that Fed report and put it in the Congressional Record and called attention to it.

That adds to the exposure and brings more attention to the finding.

Tony C said...

I loved this article Thanks. On top of just sealing the owners capital. the vilifying of HF, owners, Anything WS, and even pretty much any private companies NEEDS to end. This admin/media, is a complete joke. they are painting a picture of the so called enemy as anyone successful. News flash thats the hand that feeds them. Success should be idolized not vilified. END NWS

Bill Maloni said...

Thanks, Tony. Frankly, I enjoyed writing this one.

This Admin won't be around much any longer, but I--for one--still would like them to do a policy reversal and approve some form of recap and release.

Anonymous said...

Bill,

Thanks for great article.
Hope to read more article from you.

Bill Maloni said...

Thanks.

Working on that; just not as frequently as before. New one in draft stages, now.

Anonymous said...

What irks me is this public risk / private gains associated with these too big to fail banks. Yes, the FDIC that is leveraged to the hilt supporting depositors while the banks go rouge with synthetic strips and other brazen investment strategies and risk public funds for their private gains. As seen in the 100's of bank failures as opposed to NO failures for fannie and freddie (they never themselves needed a bailout) is stupid. This can not continue. The feds need to reform the FDIC that puts the risk of loss back to the banks and not the tax payers.

Its the absolute greed of the bankers wanting more of the pie and blaming fannie and freddie all while on the federal tit.

Now steps in the greedy government that steals 80% of fannie and freddie and takes off with 100% of the cash flow.

Bill Maloni said...

Anon--

I try to include your very point, i.e. bank violation of US laws and regulatory provisions, in virtually everything I write, whether my blog ( that will be in the next one on which I am now working) or comments on articles in different venues.

I feel if I don't make those facts known, who will??

Serious violations and lots of them, totaling over $125 Billion just in the past six years.

In an email to Michael Bright, former Corker staffer, who went to BlackRock and now is with the Milken Institute and writing along with Ed DeMarco about a "new mortgage finance system," I challenged him that they had plenty of fixes for abolishing the GSEs but what was their prescription for the feckless banks which issued more than $2.7 Trillion in poorly underwritten, falsely rated PLS, just in 2006 and 2007, that very quickly went belly up bleeding red ink everywhere and made the US real estate softening and international event because the banks sold those worthless PLS all over the world.

The banks cost the taxpayers far more than the GSEs, but nothing punitive happened to nay TARP recipient bank.

Despite the facts, few in the GOP believe banks cut corners and cheat or believe that bank abberance matters and only a few D's get worked up enough to consider speaking out.

(Although HRC making Sen. Elizabeth Warren her VP candidate would get a lot of attention and, likely, some action.)

I can live with that, although I sense she is not a GSE fan..

Anonymous said...


We only hear that taxpayers took great risk in investing $142B in FnF which FnF never asked for.

On the other hand Gov provides to the extent of $16T (ref:Harvard article)

(http://harvardjol.com/wp-content/uploads/2016/02/HLL110_crop.pdf
Page 418 Part I. INTRODUCTION
In an effort to stabilize the collapsing economy, the federal government spent an estimated $16 trillion to “bail out” hundreds of large private institutions—ranging from banks, to auto manufacturers, to insurance companies.)