President Obama never was shy about using his phone and pen to achieve what he could not get from Congress on regulatory matters.
But documents revealed last week show the Obama administration may have been willing to get around congressional decisions on spending by using a slush fund of sorts funded by the profits of Freddie Mac and Fannie Mae, the two government-sponsored home loan giants.
Fannie and Freddie are federally chartered enterprises which buy mortgage loans from banks and bundle them into securities that are sold to investors, thus freeing up capital so that banks can make more home loans.
They are government-sponsored enterprises, which means the government guarantees their loans. But they are run as private enterprises, with private leadership, a board of directors and, most significantly for this purpose, investors. They’re even listed on the stock market.
In response to the mortgage crisis of 2008, Congress passed the Housing and Economic Recovery Act, which provided $187.5 billion in government loans for Fannie and Freddie and placed them in conservatorship under the newly established Federal Housing Finance Agency.
But Fannie and Freddie were not in such bad shape after all, and in just a few years, they were turning profits and on course to pay back the government with interest and still have money to pay dividends to their investors.
In 2012, the Obama administration came up with a plan to divert those profits to the Treasury that became known as the Net Worth Sweep. Officials said the profits had to be diverted back into the Treasury because Fannie and Freddie were in a “death spiral” and would have to return for loans, and this money would be used for those loans. In other words, Treasury would take all the profits from Fannie and Freddie and hold them for future loans when they again found themselves in trouble.
But -- the administration knew Fannie and Freddie were healthy for the long term, were unlikely to need any more loans and, in fact, had enough money to pay dividends. The dividends were a problem for the administration because it made it hard to explain why it needed to abscond with Fannie and Freddie’s $241 billion in profits, execute an improper taking against the shareholders, and spend the money without congressional approval. Some even pushed to change accounting methods to make Fannie and Freddie look worse on paper and/or force them to “need” loans to survive.
In 2013, Fairholme Funds, one of those investors, filed suit, charging that, in sweeping the money back into the Treasury rather than pay dividends as required by law, the government exceeded its authority and ignored the law’s requirements that it conserve the assets of the enterprises. The government’s response indicates Fairholme’s accusations are probably dead on.
One of the documents released last week said the proposal to sweep the funds into Treasury would have “three primary benefits:”
It would “eliminate the circularity of Treasury funding the GSE’s dividends payments to Treasury.” It would “…capture all future earnings at the GSEs to help pay back taxpayers for their investment in those firms,” and it would “reduce future draws… so such draws would only be made when needed to fund quarterly net losses.”
The administration could have “eliminated the circularity” by following the law and paying the dividends. There is no legal basis for unilaterally deciding to “capture all future positive earnings at the GSEs” -- in fact, the law specifies otherwise. And the government’s own economists acknowledged future quarterly losses were highly unlikely.
Another document suggested announcing the change on Friday after markets had closed. “Rationale: GSE’s will report very strong earnings on August 7, that will be in-excess of the 10% dividend to paid to Treasury.” In other words, wait till late on an August Friday night -- a media dead zone almost the equivalent of Christmas – to say that, even though the GSEs reported “very strong earnings” earlier in the week, it needed these prudent protections.
The documents released last week were made public only after years of government protest. The government has tried to keep 77,000 related documents from being released publicly and 11,000 from being shared even with attorneys for Fairholme.
The government’s out in this always was to claim that “since we intend to wind down the GSEs over time, the GSEs do not need to retain income in excess of amounts required to pay the 10 percent dividend,” which by making the government the largest investor with preferred stock, meant the money went to the Treasury and not the initial investors, such as Fairholme.
But the administration never offered a plan to wind down the GSEs, and the proposal would make little sense at this point.
What happened here is not hard to discern. The Obama administration had a convenient boogey man in the GSEs and a need for cash because of a recalcitrant Congress. It did not take into account the legal rights of the investors. The courts are slowly coming to this conclusion.
In the meantime, we’re left with another abuse of the public trust by double-dealing government insiders. If that’s not an argument for limited government, what is?