What did they know when they enacted the 3rd Amendment Sweep?
What did they know and when did they know it? That seems to be the big question hovering over the litigation in the Judge Sweeney’s Court. The government says that in mid-2012—after turnarounds in the Los Angeles, Phoenix, Miami and Las Vegas housing markets were apparent — Treasury and FHFA suddenly feared that the GSEs might fall into a death spiral. So, to protect the Fannie and Freddie, they executed the Third Amendment to the Senior Preferred Stock Purchase Agreement.
The deal drained the GSEs of all prospective earnings by way of cash dividends.What did the companies get in return? Possible relief from their pre-existing obligation to pay $4.7 billion in senior preferred dividends each quarter. Whenever GSEs failed to generate earnings to cover the $4.7 billion to make the preexisting payout obligation, they would be relieved of such obligation. Government officials claim they had no idea whatsoever that the GSEs were going to generate $100 billion in earnings in early 2013, because of reversals of non-cash accounting provisions.
Well that makes about as much sense as pork sushi. On what planet would anyone drain an undercapitalized financial institution, in conservatorship, of all equity? It’s a complete perversion of American laws governing bankruptcy and conservatorship. The conservator’s statutory obligation is to restore the GSEs’ soundness and solvency. He may wind down the GSEs’ affairs after he declares that conservatorship has ended and going forward the GSEs are in receivership. But he never announced any such thing because he didn’t want to destabilize the mortgage markets, and because he could not say the conservatorship had failed when its operating earnings were continuing to improve.
The bargain afforded the GSEs no consideration, an essential element of any binding contract, last I checked. No dividend payment is a firm legal obligation to make a cash payment on a date certain. So foregoing that obligation doesn’t meet the definition of consideration.
I think that cuts to the chase. The transaction is exactly what it looks like, a plot to demolish the GSEs without the requisite authority of Congress, which chartered both companies.
It sure sounds like the government doesn’t want to open up a can of worms. Which is why it’s been stalling plaintiffs’ discovery in the Court of Claims.
Let’s not forget, Treasury was perfectly transparent about its intentions on August 17, 2012, when it announced the, “Income Sweep of All Future Fannie Mae and Freddie Mac Earnings.” Treasury would be, “acting upon the commitment made in the Administration’s 2011 White Paper that the GSEs will be wound down and will not be allowed to retain profits, rebuild capital, and return to the market in their prior form.”
One little problem, which is apparent to anyone who read the White Paper and see that Treasury made no such commitment, since it had no legal authority to do so. The 2011 document simply presented policy recommendations to Congress. All recommendations were predicated on Congress abolishing the GSEs.
The White Paper shows that Treasury made an entirely different commitment:
As the market improves and Fannie Mae and Freddie Mac are wound down, it should be clear that the government is committed to ensuring that Fannie Mae and Freddie Mac have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations.
The August 2012 press release is a triumph of Orwellian doublespeak. Draining the GSEs of all equity, said the release, would be:
· Supporting the continued flow of mortgage credit by providing borrowers, market participants, and taxpayers with additional confidence in the ability of the GSEs to meet their commitments while operating under conservatorship.
· Providing greater market certainty regarding the financial strength of the GSEs.
How stupid does Treasury think we are? Answer: Very. How stupid do Treasury’s lawyers think Federal judges are? Answer: Very. Judge Sweeney shows extraordinary patience.
I’ve been told that people in The White House feel that Geithner misled them. Unlike others within the Department of Treasury, Geithner refused to countenance any discussion that might consider the possibility that the GSES might survive. Geithner certainly misled the American people.
Corker’s Very Active, And Heretofore Undisclosed, Trading
From what I’ve seen, The Wall Street Journal story on Bob Corker doesn’t really capture the magnitude of illicit trading he’s been doing. The volume of individual trades that he executed over two-day periods, would leave him scant time for his day job. I think more will be coming. If you’re not familiar with the term, “front loading,” look it up.