Monday, February 23, 2015

Submitted by John Carney of the Wall street journal: His words and how he is wrong.

I will post in bold to what John has to say about fannie and the US treasury

http://www.futureofcapitalism.com/comments/8458

Submitted by John Carney (United States)Feb 23, 2015 10:42
I do think you are missing something. We're in agreement that property rights are property rights, and that the profitability of a certain piece of property doesn't diminish the rights of the holders.
ALL property right do not diminish the rights of holders per the US constitution.

The question with respect to Fannie Mae, however, is about whether the net profit sweep was a one-sided deal in which Treasury got a right to future profits in exchange for nothing at all. 

The treasury did TAKE the right to 100% of profits and in NO way does it own 100% of Fannie or Freddie!

The government's argument all along has been that the company did, in fact, get something in exchange: namely, the right to pay a lower dividend on the government's stake when profits are slim.

This has not happened once since the 3rd amendment, but did happen multiple times before fannie and freddie became obviously profitable again.

In the past, when profits were inadequate to pay a quarterly installment of the 10% of Fannie's dividend, the company was obliged to draw additional funds from the Treasury's commitment. This happened a number of times prior to the summer of 2012, when the deal was changed.

By looking to the past to find true reason for sweep, we can all see fannie or freddie would not have needed another draw and would have been able to pay the then 10% and still have money over to start rebuilding.

Each draw made further dividends more difficult to pay, since they added to the aggregate draw and therefore the amount due under the 10%.

Again we know there would have been no further draws and that this reasoning was based on future profits that Treasury wanted to grab, namely the $100 billion in DTA that should have never been written down in the fist place and were FAKE losses imposed on Fannie and Freddie in the early conservatorship to proove how bad these two private corporations were bad and to direct the finger pointing away from the Failing banks at the time and redirect the hate towards the FHFA controlled Gse's. There could and would be a run on banks, but there could not be a run on fannie or freddie as they are not directly in contact with the consumers. IE bank accounts.

What's more, each draw brought the company closer to hitting the limit on the Treasury's commitment. That is, closer to the point where no new money was available to bail out the company. Sometime before they hit that limit, there certainly would have been a market crisis, as no one would purchase the securities issued by the companies if they believed they might lack the capital to support them. Since the company's capital is almost exclusively the government backstop, keeping that at a healthy level is the key to its survival.

I agree no one would buy fannie MBS if the backstop was removed at the time, but at that time the biggest purchaser of GSE MBS was QE and the FED. Im sure the money would flow and nothing stopped the limit placed on the treasury from going up if it needed, which as we all know would not have happened!

The 2012 deal preserved the backstop from being eaten away by the need to draw down to pay the 10% dividend. It means that rather than taxpayers always receiving 10% from the company, taxpayers can receive less when profits fall short. In exchange for accepting the risk of lower payments in tough times, the Treasury gets potentially higher payments in good times.

Potentially higher payments, YES! Like $100 billion in DTA write downs!

The enormous accounting driven profits of 2013 obscured this reality. Many believed the companies were now so profitable that there was no chance they would ever fall short of being able to pay the 10% dividend. If that were true, the deal would indeed seem one-sided.

Do you write about the false write downs, And how this distorted the real amount that Fannie and Freddie needed? without the $100 billion the FHFA forced fannie to FAKE write down there would have been no need for a bailout at all! Fannie and freddie combined had well over $70 billion dollars at the time of takeover! The truth is F&F never lost that money, it was all accounting. Just as you give credit to the accounting for the 2013 profits, it was the accounting that lost money in FHFA takeover!

The fourth-quarter results show that this was an illusion. We had a relatively healthy housing market, where prices remained steady and defaults remained low, yet both Fannie and Freddie's profits fell short of 10% of their draws from the Treasury. So this quarter they are paying the government less than they would have owed under the original deal.

The original deal is dead and cannot be returned. You act like the former agreement would be in place if the sweep is removed, it will not. The former was removed by the 3rd and will not be reinstated to fulfill this delusion of $230 billion paid back is not more than $188 paid out.  Do JP Morgan and Citibank pay 100% of their profits to the Treasury? NO they do not! Although I will agree that maybe they do, since the DOJ has sued them repeatedly and has never lost on behalf of fannie and freddie for the MBS that THE BANKS sold to fannie and freddie that were complete junk and fraud! 

That proves both that there is a benefit to the company to the net worth sweep and that the short-fall of profits is more than a theoretical possibility. It is has happned and it is something that is very likely to happen again in the future.

If the Treasury is allowed to keep TAKING 100% profits of the two, I agree with you, It may happen again in the future!

There are huge differences between Fannie Mae and any other publicly held company. First, Fannie was chartered by the federal government. 

This charter does not give up property right of shareholders under the constitution. This just simply means it is a Federal corporation versus a State corporation. Nothing else. This does not say the federal government owns it. 

Second, the government was authorized by a Congressional statute to bailout the company and to put it into conservatorship or receivership. 

As long as it was under certain circumstances, coercion is not one of the reasons. Even though it is obvious that is how the treasury and FHFA took over F&F.

Third, Fannie still enjoys a multi-billion dollar line of credit from the U.S. Treasury.

Does the wall street journal want this line of credit? In exchange 100% of its profits? Any takers anywhere?

Fourth, no one would buy a dime's worth of Fannie's paper without that line of credit.

This was not true for the first 70 years of Fannie business model and only after 2008 and the BANKS wanting to take out the world with fraud could this be said as true. Your statement therefor is false as Fannie did not have this backing for decades and did just fine.

If any other company found itself in a similar situation, dependent on an explicit government backstop for its ongoing operations, then I would expect that shareholders would also receive nothing. 

Again would Citibank want this backstop? They did not give up 100% of all future profits for the over $200 billion that they received from TAXPAYERS. 

All of the equity of Fannie was wiped out in the crisis. All that remains are the shares, which trade despite being fundamentally worthless. None of the current holders of the pre-crisis shares contributed new captital to the company. That all came from Treasury. So the government's equtiy and backstop is responsible for all of the profits of Fannie. No one else has a claim on those profits.
I hope that clarifies why the fourth quarter results severely undercuts the argument that this is expropriation.

Did the government buy out my fifth amendment rights with this deal? Has the constitution been tossed in the garbage and the Treasury decides who pays what to who? I live in the USA where there is a right to property and a backroom deal of both the takeover and the 3rd amendment sweep between just two individual bureaucrats can certainly not trump the US CONSTITUTION and MY property rights. The law of the land is not HERA, it is not the third amendment sweep, It is my individual fifth amendment rights and was written specifically for this day when the Government oversteps what is not its property. Use of our first amendment rights is also not governed by the Treasury, although it may be at the WSJ?      

This was a follow up post by a poster:
Submitted by Adam (United States)Feb 23, 2015 11:20
One of the items that i think is missing is what really happened during the bailout. As I am sure you are aware the credit market seized. Very simply you have what you feel to be liquid securities that you have earmarked to pay operating expenses that become no longer liquid for a reasonable fair market value. We can all agree this is what triggered the crisis yes? Now take this to the Nth degree with all of the banks and investment banks that are undercapitalized and no longer can generate cash without selling current assets at well below reasonable fair market value all over the country and world. MBS and CDO's are now selling at pennies on the dollar and financial institutions are boardering on solvency from the perspective of not being able to generate cash to make payroll for this simple reason. How does the Federal reserve fix the problem? They create demand at 100c on the dollar by taking over AIG and the GSE's under the guise of them being insolvent. Now banks and other financial institutions can sell these securities back (remember the government now owned the board and senior management) at 100c and help the institutions to pay their bills until the credit market unfroze. Would this not be the biggest bang for the buck? I personally think it was genius. If you want proof follow the cash. In a normal bailout scenario the company would churn cash. If that was the case, how did Fannie manage to pay back such massive amounts of cash in 2013 and 2014? The answer is simple. The securities they purchased were written down significantly as they paid well over market price creating GAAP write down of AFS securities. Once the housing market recovered these assets appreciated in price returning the balance sheet to significant GAAP solvency. The question is where did the GSE's generate the cash to pay back 230b in really two years? The answer is simple and obvious. They never spent the bailout funds from the Treasury. If they would have churned the cash they never could have generated this level of cash flow from operations as you so succinctly stated above.
While I would agree with you if the bailout was one of operational failure. This was a bailout of Political creation to inject liquidity into financials by purchasing their previously valuable liquid current assets for pre crisis pricing. Take a look at Q1 2009 bank earnings sometime and look at the massive trading gains. The facts are in the numbers, not in the symantics and political posturing.

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