The senior managing director of Kroll Bond Ratings, Christopher Whalen, just published an analysis of a lawsuit filed by investors in Fannie Mae and Freddie Mac.

Shareholders are suing over the Treasury Department’s sweep of shareholder profits after Fannie and Freddie were put in conservatorship. 

Just today, Freddie Mac announced it provided another $20 billion to taxpayers. Whalen took note of those payments (italics, his).

“Media and the paid advocates of the equity investors mischaracterize the payments made by the GSEs to the Treasury as a return of capital, when in fact these payments are a return on capital that should continue indefinitely.”

Whalen’s basis for this argument is essentially based on the concept that the government-sponsored enterprises have always been government-sponsored to some extent. Whalen’s note indicates by its title — GSE litigation affirms that Fannie Mae and Freddie Mac are sovereign credits — that this status will never change. After all, at the time of full conservatorship, in 2008, the GSEs held negative net worth. All of the bonds issued after then were made possible by that taxpayer-funded capital injection and, so Whalen posits, arguably any profits are due to those same taxpayers.

Earlier in the summary, the senior analyst also noted that recent court decisions essentially confirm the status of Fannie and Freddie as “creatures of Congress, not private corporations.”

Therefore state laws do not supersede federal authority when asserting the legal protection of private shareholders.

“In this connection,” Whalen writes, “arguments advanced by equity investors about the need to recapitalize the GSEs are, we believe, at odds with the financial reality and thus without merit.”

And, in driving the conclusion home, Whalen makes the final assertion that, in time, the financial media and equity holders will come to realize said statements; that Congress will do as it pleases with Fannie and Freddie for as long as it pleases.

The recognition of sovereign-like status, it should be added, is a net benefit to Fannie and Freddie bondholders, who may presumably be likely clients for Kroll Bond Ratings products. But for the shareholders, Whalen shares his sympathy.

“Equity investors in Fannie Mae and Freddie Mac rightly complain about a lack of due process and transparency in how the affairs of the GSEs have been managed,” he concludes, “but such is life in a liberal democracy.”

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