Fannie and Freddie, Conservatorship Agreement Transparently Violated

A Step Back in Time

In September 2008, Treasury Secretary Hank Paulson, under direction of President Bush seized mortgage giants Fannie Mae and Freddie Mac. Just two months earlier, Federal Reserve Chairman Ben Bernanke had infamously stated that Fannie and Freddie were ‘adequately capitalized’ and ‘in no danger of failing.’ Investors had been encouraged by regulators to buy Junior Preferred Stock within the preceding six months. Shareholders had no idea how bad the situation had become and no reason to believe that regulators had withheld the truth.

In fact, Treasury Secretary Paulson admits that shareholders were deceived with the following text from his book, "On The Brink." He was briefing President Bush on his plan to nationalize the GSEs.

“Mr. President, we’re going to move quickly and take them by surprise. The first sound they’ll hear is their heads hitting the floor .”

Suddenly, the house of cards fell and the regulator became the owner. Shareholders were not bought out, but prices plummeted to pennies on the dollar.

Part of the Conservatorship Agreement, forced upon shareholders, was a promise by the FHFA to "preserve and conserve" these companies' assets. It has been stated multiple times that

"The purpose of conservatorship is to preserve and conserve each company’s assets and property and to put the companies in a sound and solvent condition. The goals of the conservatorships are to help restore confidence in the companies, enhance their capacity to fulfill their mission, and mitigate the systemic risk that contributed directly to instability in financial markets."

However, almost immediately, the companies were turned into massive foreclosure prevention instruments, administering mortgage modification programs and working as a financial backstop to the entire sector. During the height of the crisis, the GSE's market share spiked as private lenders fled the market. As of today, the GSEs have modified over a million mortgages to help homeowners avoid foreclosure (see below).

Back in January 2010, this lead Thomas H. Stanton to state, in a forum hosted by Ralph Nader, "that the terms of conservatorship seems to have been transparently violated as the companies are used in a very tentative way for public purposes rather than to support the private owners."

10% Dividend Violates Conservatorship Agreement

Ever since the Conservatorship of these companies was established, the management and shareholders of these companies have objected to the 10% dividend on the Treasury's cash infusions. While other companies receiving cash injections from the government paid 5%, the dividend at the GSEs was twice as much. Currently, the annual dividend surpasses annual earnings posted by these companies ever in their entire history. This is the reason these companies have been borrowing funds from the Treasury to pay the dividend back to the Treasury. This viscious cycle is contrary to the expressed goals of Conservatorship and is clearly a violation.

• Fractured Committee Debates Housing Finance
• Treasury Will Make Profit on Fannie and Freddie MBS
• Fannie and Freddie, Conservatorship Agreement Transparently Violated
• The Cost of Resolution at Fannie and Freddie
• Recent Supreme Court Cases May Affect GSE Outcome
• Fannie Mae and Freddie Mac Shareholders Organize