Tuesday, January 21, 2014

Richmond Times

Richmond Times

Once on government life support, the two GSEs have become spectacularly profitable and valuable.

Posted: Tuesday, January 21, 2014 12:00 am
James Miller III

More than five years have passed since Fannie Mae and Freddie Mac were taken into conservatorship by the Treasury Department in response to the outsized role they played in the financial meltdown of 2008. It was a meltdown that, in a single year, wiped out not only the two government-sponsored enterprises (GSEs), but also one-fifth of the country’s accumulated wealth.

It didn’t have to be that way. The two GSEs had been under constant pressure from the Dodd committee in the Senate and the Frank committee in the House (yes, the same “Dodd-Frank”) and from the Federal Housing Administration to increase the proportion of mortgages they securitized from low-income families — including families who could not reasonably be expected to be able to repay the loans. Just before the collapse about half of such mortgages were of this type. When the markets fully comprehended that the GSEs’ mortgage-backed securities were substantially more risky than before, it was too late.

In the ensuing five years, the financial outlook of Fannie and Freddie has shifted dramatically: Once on government life support, the two GSEs have become spectacularly profitable and valuable. They have paid back the $188 billion taxpayer-funded bailout from 2008, and they are poised to post multibillion dollar quarterly profits for the foreseeable future.
Despite this turnaround, some policymakers are approaching GSE reform as if it were still 2008. The value Fannie and Freddie have built up over the years should be recognized and preserved in the private sector, not confiscated by the federal government.

Unfortunately, that’s exactly what would occur if the Senate were to pass the bill sponsored by U.S. Sens. Bob Corker and Mark Warner.

Their legislation would wind down the GSEs, but transfer all the value to the federal treasury. In doing so, their legislation would trample the rule of law and destroy private-sector value on a large scale. Rather than maximizing value for all stakeholders — the government, taxpayers and GSE investors — it could have significant adverse effects.

To begin with, Corker-Warner would overturn the usual process for restructuring an enterprise, which involves a court-orchestrated division of the enterprise’s assets. Under Corker-Warner, Fannie and Freddie shareholders would get nothing, despite the fact that government regulators had previously assured investors these shares were rock-solid investments.
What kind of signal would such an action send to the investment community? Right now, there is uncertainty enough in the business world, with a flood of new federal regulations as well as Obamacare to contend with. And add to that an additional risk that if the firm doesn’t perform in certain ways it could be confiscated by the federal government?

Corker-Warner would have government take everything at once and forgo a reliable stream of revenue in the future. Presently, the government owns 79.9 percent of the common stock in Fannie and Freddie. This implies not only annual income to the U.S. Treasury, but preservation of a $20 billion asset that many believe can only increase in value. Of course, one might hope the government would sell off its shares of the enterprises, but either way there would be no disruption in mortgage markets.

And finally, since Corker-Warner would establish a formal government guarantee for the GSEs’ securities (there is none now), it would put taxpayers on the hook for at least $5 billion in GSE liabilities.

The decision to put all this value in jeopardy and shortchange investors is a curious one for Warner, given his background. “I was a venture capitalist a lot longer than a politician,” he said recently. “If I put $180B into GSEs in ’09, I’d expect a lot more than a 1-to-1 return.” But there’s a difference between a 1-to-1 return and total confiscation.

It was my honor to serve as a Gilmore appointee on the Board of Visitors of George Mason University the year Warner was elected governor. Some on the board viewed Warner’s election as a threat to all we had worked to achieve at George Mason. “Don’t worry,” I said, “Mark Warner is a smart businessman; he will increase the capital that is George Mason, not squander it.” And so he did, by among other things appointing some splendid new board members. Warner should follow the same principle with Fannie and Freddie.
A far better approach to reforming Fannie and Freddie would be to follow the rule of law in such matters and provide for a process that maximized value for the economy and all stakeholders, including the U.S. government.

How could this be accomplished? Through a proceeding akin to what is commonly called bankruptcy. Indeed, maximizing and preserving value is the purpose of bankruptcy — which offers an impartial, orderly workout process, presided over by a judge. It’s transparent, above politics and consistent with the rule of law.

The shareholder value of Fannie and Freddie was completely wiped out once — due in substantial measure to impossible demands on the GSEs made by the federal government. Corker-Warner, while well-intentioned, would do it again.


bankruptcy is out of the question. these are profitable companies that are 100% shareholder owned. The Govt. owns 0.1% of the shares. only 1 million senior shares out of 1.2 billion common. and senior shares will be paid back almost double in about a month. THE COURT will see this and the truth will come out on THE BANKS Fraud and Fannies witch hunt upon them by the politicians.

Maybe word in Va is finally getting out. I read on the board that Freddie Mac is based here and for the life of me can't think of a reason why Warner would jeopardize his political career in a move that would close down or wind down a big corporation in Virginia. What an idiot. Good post!

5 stars, and i hope corker and warner and jeb hensarling start reading these great articles that explain the violation that has occured to Fan and Fred and their shareholders, thank you

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