Weekly Market Assessment
The Big Lie Part 3: Stuck in Purgatory
"We are going to kill the companies (Fannie Mae, Freddie Mac), drive a stake through their hearts, we’re going to salt the Earth, so they can never grow back.” This is what one judge reviewing the case in the D.C. Court of Appeals, had to say about what the U.S. Treasury’s intentions are with respect to Fannie Mae. This quote from Judge Ginsburg best suits the current situation of what is happening to Fannie Mae in conservatorship! This perfectly explains what the polar opposite of conservatorship is supposed to accomplish.
To say that Fannie Mae is a ward of the Government is an understatement and has been for 8 long years! In 2008, the world was on the brink of complete financial collapse. The backbone to the American economy lies in the housing market, and the biggest most misunderstood company at the heart of feeding this giant is Fannie Mae. So to avoid complete collapse, confidence had to be restored into these two giants and putting them into conservatorship was the solution.
Conservatorship is a legal process in which a person or entity is appointed to establish control and oversight of a company in order put it in a sound and solvent condition. A conservator is the person or entity appointed to oversee the affairs of a company for the purpose of bringing the company back to financial health. It is supposed to be temporary and rehabilitative. Does “driving a stake through their hearts…so they never grow back,” sound like rehabilitative?
In July 2008, Congress enacted the Housing and Economic Recovery Act of 2008 (HERA). HERA established the Federal Housing Finance Agency (FHFA) as ―an independent agency of the Federal Government to supervise and regulate Fannie Mae. Housing and Economic Recovery Act (HERA), entrusted FHFA to be the conservator of Fannie Mae. This was to ensure that there was a clear separation from Treasury (agency providing the bailout funds) and the regulated entity Fannie Mae (company receiving the funds)
Below is a chart to give a quick view of the banks that received a bailout, numbers are in billions. Interesting to see that Fannie and Freddie have returned the most from the bailed out banks but still remain in Government control.
Pursuant to the Governments Federal Housing Enterprises Financial Safety and Soundness Act, under the “Powers of the Conservator” the conservator or FHFA may take all actions necessary and appropriate to (1) put the Company in a sound and solvent condition and (2) carry on the Company’s business and preserve and conserve the assets and property of the Company.
Now, knowing the above, how can one justify taking all of a company’s earnings and leaving them with basically nothing in retained earnings sound like a sound and solvent condition? The Government went a step further and titled the amendment "Full Income Sweep" now known as the Net Worth Sweep! How can anyone defend that a conservator is acting as a fiduciary to a company when they are sweeping all profits away from the company and into a government slush fund?
I will quote directly from the Governments rule book for conservatorships and receiverships: “The Safety and Soundness Act and HERA grant FHFA broad authority as Conservator to manage the conservatorship estate, including the authority to restrict capital distributions that would cause a regulated entity to become undercapitalized. As one of the primary objectives of conservatorship of a regulated entity would be restoring that regulated entity to a sound and solvent condition, allowing capital distributions to deplete the entity's conservatorship assets would be inconsistent with the agency's statutory goals, as they would result in removing capital at a time when the Conservator is charged with rehabilitating the regulated entity. Under the Safety and Soundness Act and HERA, FHFA has a statutory charge to work to restore a regulated entity in conservatorship to a sound and solvent condition, and to take any action authorized by this section, which FHFA determines to be in the best interests of the regulated entity or FHFA.”
So if capital distributions would cause the regulated entities to become undercapitalized, then what would it mean if all the capital was taken in perpetuity? Also let’s not forget that the profits that the Government sweeps from Fannie Mae, do not go to pay down the $116 billion it got in the bailout. How can it ever emerge out of conservatorship with terms like this! This is what makes the Net Worth Sweep so wrong and against all principals of being placed into conservatorship! It is the antithesis of soundness, solvency, preserving, conserving, rehabilitating which are all the things the statute requires a conservator to do! How do you rehabilitate a company any way, if you are taking away all of their profits?
This is by far the most backwards thing to occur in capital markets and for that reason has attracted large institutional money managers, and hedge funds along with lawsuits contesting the legality of the Net Worth Sweep. There is not a single financial institution in the United States, let alone the two biggest, that are allowed to operate with zero capital. (David Thompson) This situation is not occurring to some small bank in the middle of nowhere, this is happening to the largest financial institution in the United States!
So why was the Net Worth Sweep enacted? From here on it gets very interesting and a famous saying comes to mind that everyone as a child has heard before and for some reason politicians seem to have forgotten this early life lesson. It goes, "Oh what a tangled web we weave when we practice to deceive." The lies that have been fed to the public are finally being corrected and the story that is coming to light is much different than the original. The following assessments will materially show how the government is using Fannie Mae and Freddie Mac as piggy banks for the United States Treasury!