Would
you buy stock in a company that barred you from sharing in its future
earnings? Of course not. Participating in the upside is what stock
ownership is all about.
And yet, as of December 2010, holders of Fannie Mae and Freddie Mac
common stock were subject to such a restriction by the United States
government. They didn’t know it at the time, though, because the policy
was not disclosed.
This month, an internal United States Treasury memo that outlined this restriction came up at a forum in Washington.
The
memo was addressed to Timothy F. Geithner, then the Treasury secretary,
from Jeffrey A. Goldstein, then the under secretary for domestic
finance. In discussing Fannie and Freddie, the beleaguered
government-sponsored enterprises rescued by taxpayers in September 2008,
the memo referred to “the administration’s commitment to ensure
existing common equity holders will not have access to any positive
earnings from the G.S.E.’s in the future.”
The
memo, which was produced in a lawsuit filed by Fannie and Freddie
shareholders, was dated Dec. 20, 2010. Securities laws require material
information — that is, information that might affect an investor’s view
of a company — to be disclosed. That the government would deny a
company’s shareholders all its profits certainly seems material, but the
existence of this policy cannot be found in the financial filings of
Fannie Mae. Neither have the Treasury’s discussions about the future of
the two finance giants mentioned the administration’s commitment to shut
common stockholders out of future earnings. Freddie Mac’s filings do
refer, albeit incompletely, to the administration’s stance, noting that
the Treasury “has indicated that it remains committed to protecting
taxpayers and ensuring that our future positive earnings are returned to
taxpayers as compensation for their investment.” Note that this
reference does not say all earnings.
Lewis
D. Lowenfels, a securities law expert in New York, found this statement
insufficient. “If there is disclosure regarding future Fannie and
Freddie earnings and the administration has a commitment that existing
Fannie and Freddie common equity holders will never receive any future
positive earnings,” he said, “this commitment would be material to
investors and should be disclosed.”
When
the memo was written, plenty of people held these stocks. Regulatory
filings show that 18,000 investors held 1.1 billion shares of Fannie Mae
common stock, while just over 2,100 investors held 650 million Freddie
Mac shares.
Back
in 2010 and 2011, of course, common stockholders of Fannie and Freddie
had little hope of making much money. During those days of rampant
mortgage defaults and losses, investors were warned about the
uncertainty of their companies’ prospects. Fannie and Freddie
shareholders were repeatedly told that the preferred and common stock
would have value only if anything remained after taxpayers were fully
repaid for the rescue. With the amount of that rescue peaking at $189.5
billion, that was a very big “if.” On the day the Treasury memo was
written, the price of Fannie Mae shares closed at 34 cents.
But
the companies staged a turnaround; in mid-2012, they began earning
billions. With interest rates low and banks not lending, Fannie and
Freddie became the only mortgage game in town. By Sept. 30 of last year,
the companies had returned $185 billion to the Treasury.
Failing
to disclose the administration’s hard line on the companies’
shareholders is disturbing for another reason. In bailing out Fannie and
Freddie, the Treasury received warrants — optionlike securities that
rise in value when the shares underlying them do. When investors, hoping
for a housing recovery, flocked to the shares and pushed them higher,
the value of the warrants increased. Fannie’s common stock now trades at
$3.06 a share.
Given
Treasury’s interest in a rising stock price, depriving common equity
holders of future earnings was especially important for investors to
know, Mr. Lowenfels said.
A
spokesman for the Treasury declined to comment. Mr. Geithner did not
respond to an email, and Mr. Goldstein, now a managing director at
Hellman & Friedman, a private equity
firm, did not return a phone call. (After the deadline for publication
of this column had passed, spokespeople for the Treasury Department and
Mr. Geithner offered comments.)
All
of this has come to a boil because Fannie and Freddie have become so
profitable. Yet because of a change in the repayment process dictated by
the Treasury in 2012, the $189.5 billion debt technically remains
outstanding. The profits generated by Fannie and Freddie have instead
gone to the general treasury.
I have been critical
of these companies, but this change in the bailout terms seems
punitive, especially when considering how other bailout recipients were
treated. And it has led to lawsuits against the government from Fannie
and Freddie shareholders, including insurance companies, a mutual fund
and a hedge fund. The plaintiffs contend that the government’s 2012
decision to take all the companies’ profit — just as it was starting to
balloon — was illegal under the 2008 law that rescued them.
After
all, back in 2008, the companies were not put into receivership, the
equivalent of bankruptcy. Rather, they were placed under the care of a
conservator — the Federal Housing Finance Agency. That conservator
was supposed to put the companies “in a sound and solvent condition”
and “preserve and conserve the assets and property” of each entity.
Siphoning
off the entities’ profits is the opposite of conserving their assets
and property, the plaintiffs contend. And they point to a 2009 Treasury
memo stating that the conservatorship of Fannie and Freddie “preserves
the status and claims” of preferred and common shareholders. One of
those claims is surely having access to future earnings.
A
spokeswoman for the Federal Housing Finance Agency declined to comment,
citing the litigation. A spokesmen for Fannie declined to comment as
well. A Freddie Mac official did not elaborate beyond pointing to the
language in its filings.
Perry
Capital, a hedge fund, is one of the plaintiffs suing the government.
Its lawsuit seeks no damages, but asks that the government follow the
2008 law. The 2010 memo was produced by the Treasury in response to this
lawsuit.
Do
the Treasury’s actions amount to a backdoor nationalization of the
companies? A full-fledged takeover would have required Treasury to put
all the companies’ obligations — $4.9 trillion at the time — on the
government’s balance sheet. A nonstarter.
Furthermore,
nationalization would have required the government to provide
compensation to shareholders for what it took. Now the government gets
the benefits of the companies’ profits while avoiding any compensation
payments.
“People disagree about what should happen to the G.S.E.’s,” said Matthew D. McGill,
a lawyer at Gibson, Dunn & Crutcher in Washington who represents
Perry Capital. “But if the plan is to wind them down, Congress provided a
means to do that in the 2008 law — it’s called receivership, and it
provides a host of procedural protections to claimants. What the
Treasury cannot do is abuse its conservatorship powers to nationalize
the companies and then, when it deems convenient, wind them down without
the protections enacted by Congress.”
Fair Game<<
Fair Game<<
Tim Geithner looks like a DONKEY, an A$$ in actuality and that is what happens to 'humans' according to CHINESE reading of the 'character' Tim is Third Generation to HEINZ KISSINGER the Toad of Death to U$A, too, both are Metzitzah b'peh practitioners!
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