Wednesday, December 17, 2014

FHFA's Permanent Conservatorship Ignores the Law

FHFA's Permanent Conservatorship Ignores the Law


As Michael HKrimminger, former General Counsel for the FDIC

http://www.americanbanker.com/bankthink/fhfas-permanent-conservatorship-ignores-the-law-1071687-1.html

Not only does HERA provide this discipline, it also imposes duties on the FHFA as conservator. In this role, the FHFA is instructed to return Freddie and Fannie to "a sound and solvent condition" and to "preserve and conserve the assets and property" of the companies. The FDIA includes the same instructions. The FDIC has always treated conservatorships as short-term solutions leading to the recapitalization and return of the failing bank to full private control, or to a receivership and payment of creditors and stockholders.
The continued diversion of Freddie and Fannie's profits to Treasury misuses HERA as well as ignores the international standards underpinning all insolvency frameworks. This is important because one foundation of corporate finance, and our system of commercial laws, is that insolvency law assures creditors that the remaining value of the company will be paid out under defined priorities. If this standard is ignored, as it has been through the Treasury sweeps, it will undoubtedly affect future investment in housing finance and the financing costs for businesses.

The FHFA is ignoring the basic duty of a trustee: to protect the interests of all creditors. By keeping the companies in conservatorships and diverting their cash to Treasury, the FHFA effectively prefers one creditor over all others. While Treasury provided critical up-front funding to the GSEs, it has now been well-compensated under the original agreements. It cannot simply strip the companies of cash in perpetuity.
Every sound insolvency process, including HERA and the FDIA, repays the funding provided but then pays all creditors the remaining value. In bank resolutions, once the FDIC's cash outlay is repaid, the FDIC receives no more money. The continuation of the sweeps through the conservatorships is a violation of every principle established in bankruptcy and in the more than 80 years of FDIC bank resolutions. And it has no support in HERA.

Michael H. Krimminger  former general counsel to the FDIC.




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