Editors' pick: Originally published Wednesday, Feb. 10.
It's time for the Federal government to make a decision about Fannie and Freddie -- to let them die a gradual death or to help them resurrect.
The government's disingenuous measures that have kept the lending institutions afloat have been unlawful and dangerous for taxpayers and for the organizations' investors. Congress should insist that Fannie and Freddie be wound down through receivership or be allowed to recapitalize and resume operations.
The ongoing litigation brought by private shareholders against the government for its alleged looting of Fannie Mae and Freddie Mac has finally started receiving media attention. Respected financial journalists have highlighted the contradiction between the Federal Housing Finance Agency's (FHFA) decision to give the U.S. Treasury all of Fannie's and Freddie's profits in perpetuity with Congress's mandate under the Housing and Economic Recovery Act of 2008 (HERA) that the FHFA act as conservator to restore the companies to sound condition.
In exchange for providing the companies $187 billion in capital, the Treasury received preferred stock paying a quarterly dividend of 10% of the companies' profits, and 79% of the common stock in the form of warrants. This arrangement was a great deal for Treasury and was totally appropriate.
Taxpayers deserved to be compensated for the risks taken.
In 2012, around the time that Fannie and Freddie returned to profitability, the FHFA unilaterally changed the terms of the conservatorship to give the Treasury all of the companies' profits in perpetuity-now over $240 billion and climbing, although HERA explicitly stated that the FHFA's job as conservator was to restore the companies and preserve their assets.
This action by the Administration created the worst of all worlds. Instead of trying to restore the companies to health, as HERA requires, the government's actions stripped Fannie and Freddie of all their capital. The result: They again pose a substantial risk to taxpayers.
When faced with litigation and demands from the public to know why it took this action, the government initially told the courts that the profit giveaway was intended to save the companies and avoid an upcoming "death spiral." But documents released in litigation have proven that assertion to be false. The truth, it seems, is that the profit giveaway was intended to facilitate the companies' demise while providing windfall profits for the Treasury. As former Treasury Secretary Geithner colorfully testified, the government actually wanted to dismember the companies.