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Investments

Did Treasury plan to shortchange Fannie, Freddie investors?

As more layers peel away, a pattern forms

circular inclined plane

A report on TheStreet.com Tuesday focusing on the potential for conflict of interest in Blackstone serving as an advisor to the U.S. Department of Treasury missed a much bigger story.

The Street, which cited Investors Unite as the source for the presentation, didn’t notice that the 2011 presentation in question is a textbook example of the documents that Investors Unite believe will come out in the discovery process that was just granted to plaintiffs in the case of Fairholme v. The United States.

Investors Unite, a coalition of retail investors in the GSEs who have been shut out of the equation since Fannie Mae and Freddie Mae were placed in conservatorship, says that they believe discovery in that case will produce thousands of documents like the 2011 presentation, as well as emails, notes and other records that will show a pattern of intent to keep investors in the GSEs from their share of the profits.

Investors Unite won a major victory just last week when a federal judge ruled that the FHFA could not limit discovery to a mere few months of documents, but rather must provide a wide range that the investor group thinks will show the government has long planned to deny shareholders their rights even after the GSEs were profitable again. (More on Investors Unite and the debate over the future of the GSEs here.)

“Investors Unite welcomes this process, and we're eager to find out whether or not it yields insight into whether the Sweep was an accidental confiscation (did Treasury know the entities would be wildly profitable?) or an intentional one,” Investors Unite said after the story came out. 

An unnamed spokesperson for Treasury downplayed the revelation, saying, "Treasury did not issue a request for proposals, and no contract was awarded." 

But that raises a host of questions from Investors Unite and, frankly, this writer.

For instance, if this presentation came from an unsolicited pitch, as Treasury claims, then why wasn't it with FHFA?  

Why was Treasury taking the meeting with Blackstone in the first place?  

Was Treasury calling the shots, and not the FHFA, which is actually the entity prescribed by HERA statute as the official conservator of the GSEs? 

If there really was no request-for-proposal, did Treasury enact the Third Amendment sweep without seeking any outside input or advice?

Did Blackstone make other presentations to Treasury?

And a big one for open record and transparency advocates, regardless of what position one takes on this kerfuffle — why wasn’t this presentation part of the administrative record?

But then there are The Really Big Questions.

Was this a matter of hapless good fortune that the entities became profitable shortly afterward?

Or, more nefariously, was the sweep a result of deliberate calculations arising from presentations such as Blackstone's, that the GSEs would soon be throwing off profits?

Consider the following:

  • A Treasury press release saying the need for wind down is implicit.
  • The plan to put them into a government conservatorship was meant to be temporary, although it is likely to be years before a long-term replacement structure takes shape. Here’s where former Secretary of Treasury Timothy Geithner lays out the plan in February 2011.
  • Excerpts from the Perry brief asking for Summary Judgment.

“By the end of this month, FHFA, charged by statute with a mandate of conserving and preserving the assets of Fannie Mae / Federal National Mortgage … and Freddie Mac / Federal Home Loan Mortgage Corp …, will have sent $158 billion from the Companies¹ treasuries to the government’s Treasury pursuant to the Net Worth Sweep, $130 billion more than Treasury previously would have received under the 10% fixed dividend provided in its stock agreements.”

“Treasury and FHFA would have this Court believe that they had no idea the Net Worth Sweep would give Treasury such a windfall. The Net Worth Sweep was needed, the agencies say, to save Fannie Mae and Freddie Mac from a 'downward spiral' caused by borrowing money from Treasury to pay Treasury a cash dividend that could have been paid in- kind, without any borrowing. In their view, the massive transfer of wealth to Treasury is just a happy (for the government) coincidence.”

Finally, the timeline from one of the first lawsuits over the issue.

  • July 2008: Congress passes the Housing and Economic Recovery Act (HERA), creating the Federal Housing Finance Agency (FHFA), and providing the option to place Fannie and Freddie into conservatorship or receivership.
  • September 6, 2008: the FHFA chooses to place Fannie Mae and Freddie Mac into conservatorship. This left approximately $34 billion of privately held preferred shares outstanding.
  • September 26, 2008: Treasury enters into preferred stock purchase agreements (PSPAs) with FHFA to purchase senior preferred stock of both Fannie Mae and Freddie Mac and to receive warrants for 79.9% of the common stock of each company.
  • May 6, 2009: The First Amendment raises the maximum aggregate amount of funds permitted to be invested by Treasury into Fannie Mae and Freddie Mac from $100 billion to $200 billion.
  • December 28, 2009: The Second Amendment removes the cap on funds available through 2012 to provide stability in the mortgage market.
  • December 31, 2009: Treasury's statutory authority to set the "terms and conditions" of Fannie Mae and Freddie Mac security purchases expires.
  • November 2010: Two years after the rules of conservatorship are established and after Treasury's authority to set the "terms and conditions" of security purchases expires, Perry Capital begins to purchase Fannie Mae and Freddie Mac securities for its institutional clients.
  • August 2012: Treasury and FHFA revise PSPAs via Sweep Amendment from 10% annual dividend to quarterly sweep of all profits. Further, these payments will not redeem the senior preferred stock or otherwise reduce the balance owed by Fannie Mae and Freddie Mac, essentially wiping out private investors, and liquidating, rather than conserving, the companies.
  • 2012: Both GSEs become profitable.
  • June 29, 2013: Fannie Mae and Freddie Mac pay a combined $66.4 billion payment to Treasury. With these payments, Fannie Mae has now paid $95 billion of the roughly $116 billion it has received, while Freddie Mac has repaid roughly $37 billion of the $71.3 it received.
  • 2014: Fannie Mae and Freddie Mac are expected to fully pay back the taxpayers plus 10% interest.

Was the Treasury planning all along to shut shareholders out even after the GSEs got profitable?

The Fairholme lawsuit – and all they get in discovery – may very well answer that.

But just looking at what’s already there, it’s hard not to draw some damning conclusions.

When you hear hoofbeats, you think of horses, not zebras.

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