July 31, 2017 by Jerome Corsi
WASHINGTON, D.C. – Two articles published Tuesday, July 25, by John Carney in Brietbart.com on Tuesday, here and here, argued a partisan, one-sided, pro-government position regarding the decision of the Obama Treasury Department to institute the “Net Worth Sweep” confiscating all earnings from Fannie Mae and Freddie Mac, while ignoring the information critical of his apologetic treatment that was revealed in the government documents released by the Department of Justice on July 19, to comply with a U.S. District court order.
What Carney argues boils down to a contention that the documents released on July 19, 2017, under court order issued by U.S. Court of Federal Claims Judge Margaret in case involving Fairholme Funds [Fairholme v. United States, No. 13-465 (Fed. Cl.)], a company owning shares of the mortgage giants, “show that when the government in 2012 changed the terms of the bailouts provided to Fannie Mae and Freddie Mac it had good reason to fear that over time the housing finance giants would dangerously deplete their backstops from the U.S. Treasury.”
Carney then argues that to avoid this pitfall, “Treasury officials came up with a scheme to change Fannie and Freddie’s dividend from a fixed 10 percent to an adjustable dividend that would rise and fall with their profits, guaranteeing that the companies could always meet their obligations to the federal government.”
While Carney is correct in that several of the documents released July 19, 2017, do state this argument, what he fails to discern is that the government has resisted making these documents public for years precisely because the documents prove key officials in the Obama administration, including top officials in Treasury and the GSEs implemented the “Net Worth Sweep” despite knowing the arguments they were using to justify the NWS were specious and completely without basis in financial facts and figures.
That is why the Fannie Freddie litigants have celebrated the July 19 document release –precisely because these documents prove Obama administration officials were determined to confiscate all GSE earnings, and were willing to implement the “Net Worth Sweep” despite being aware of reliable and verifiable data that refuted the argument Fannie Mae and Freddie Mac being financially crippled in the 2008 collapse of the sub-prime mortgage market – the very argument the documents prove the Obama administration contrived to justify the most massive and egregious theft of shareholder dividends in U.S. corporate history.
Carney evidently missed a memo Black Rock issued on Aug. 25, 2008, in which Black Rock advised Freddie Mac that while the GSE was running a substantial risk of falling short of current surplus capital requirements and possibly statutory minimums, “long-term solvency does not appear endangered – we do not expect Freddie Mac to breach capital levels even in stress case.”
This strongly suggests that but for erroneous accounting decisions, Freddie Mac never needed a government bailout, not even at the height of the sub-prime mortgage meltdown crisis.
On June 25, 2012, FHFA Acting Director Edward DeMarco met with Treasury Secretary Geithner and Treasury Under Secretary for Domestic Finance Mary Miller to discuss the financial status of Fannie and Freddie.
A memo prepared by Treasury staff on that day memorialized the discussion, noting that “[t]hrough weeks of negotiating terms of possible amendments to the PSPAs, [Mr. DeMarco] never questioned the need to adjust the dividend schedule this year. Since the Secretary raised the possibility of a [principal reduction] covenant, DeMarco no longer sees the urgency of amending the PSPAs this year.”
One of Mr. DeMarco’s stated reasons for being willing to delay the PSPA amendments was that “the GSEs will be generating large revenues over the coming years, thereby enabling them to pay the 10% annual dividend well into the future even with the caps.”
A Treasury memo dated July 31, 2012 noted that Fannie Mae’s second quarter earnings were “much stronger than we thought/expected,” such that even after dividends Fannie Mae still had $2.8 billion of net worth and Freddie had $11 billion of net worth”
Carney cites Mario Ugoletti who when questioned by lawyers for investors in 2013 claimed the size of the bailout had grown so large that “it appeared unlikely that either of the enterprises would be able to meet that amount consistently without drawing additional funds from Treasury.”
Again, what Carney ignores, is that despite Ugoletti’s concern, the GSEs never missed a dividend payment to Treasury, not even under the “Net Worth Sweep,” with the GSEs paying cumulative dividends to Treasury through the end of the second quarter 2017 that totaled $270.783 billion dollars.
Josh Rosner, the managing partner at Graham Fisher & Co. in New York City and a staunch defender of shareholder rights, also pointed out in an email that the newly released Treasury document, dated June 25, 2012, recapped a meeting between then Treasury Secretary Geithner and then Acting Director of the Federal Home Finance Agency (FHFA) Ed DeMarco, that Carney relies upon to make his argument, without appreciating that DeMarco in the meeting told Geithner “the GSEs will be generating large returns over the coming ears, thereby enabling them to pay the 10 percent annual dividend well into the future even with the caps.”
Rosner also pointed out that Carney conveniently ignored the fact the GSEs were entitled to PIK (Payment in Kind) the dividend by paying with additional securities or equity rather than cash. Additionally, the GSEs could defer dividends in a quarter where the FHFA director decided not to declare a dividend, with the amounts added to Treasury’s ultimate liquidation preference.
Carney also ignored, Rosner noted, Ugoletti’s 2015 deposition in which he testified on page 52 that the GSEs could either pay a quarterly 10 percent dividend to Treasury in cash, or a deferred dividend paid at 12 percent and added to the liquidation of preference.
In another failing, Carney fails to take seriously the decision of Congress in passing the Housing and Economic Recovery Act of 2008 (HERA), that established the FHFA, and gave the agency the authority to place the GSEs into conservatorship or receivership, as well as the subsequent FHFA decision to take Fannie and Freddie into conservatorship on Sept. 6, 2008.
These two decisions established an affirmative responsibility for the Obama administration (and now for the Trump administration) to preserve the GSEs, not liquidate them with a revised Preferred Stock Purchase Agreement that established a NWS Obama administration officials knew would result in the slow liquidation of Fannie and Freddie.
On Aug. 13, 2012, four days before the “Net Worth Sweep” was announced, Jim Parrott, then a senior advisor at the National Economic Council and the White House official perhaps working most closely with Treasury in crafting the “Net Worth Sweep” wrote a memo making it clear his intention was “making sure that each of these entities [Fannie and Freddie] pays the taxpayer back every dollar of profit they make, not just a 10 percent dividend.” [Underlining in original document.]
Parrott’s memo of Aug. 13, 2012, went on to note that under the “Net Worth Sweep,” Treasury “ultimately collect more money with the changes,” i.e. by abandoning the 10 percent dividend to make the Treasury “dividend” equal all Fannie and Freddie earnings. [Underlining in original document.]
Parrott concluded the memo of Aug. 13, 2012 by commenting, “With the overall set of changes we have removed any doubt about the long-term fate of these entities: they will NOT be allowed to return to profitable entities at the center of our housing finance system, but instead wound down and replaced with a system driven by private capital and lower risk to the taxpayer.” [Capital letters in original document.]
Parrott’s memo leaves no doubt the goal of the Obama administration was to close down Fannie and Freddie by allowing the NWS to “wind down” – a euphemism for “close down” – each of the GSE of the capital required for prudent operation.
Rosner’s email argued “the key issue is of property rights and the water flow of monies through the capital structure.” He noted that in placing the GSEs into FHFA conservatorship, the Obama administration did not wipe out the debt, subordinated debt, junior preferred stock, or equity of the GSEs. “As a result, any income beyond these obligations should flow down the capital structure,” he emphasized.
Yet in a newly released U.S. Treasury document that was addressed dated Aug.15, 2012, demonstrated to Rosner the government had no intention of respecting property rights, as the document stated unequivocally: “By taking all of their profits going forward, we are making clear that the GSEs will not ever be allowed to return to profitable entities at the center of our housing finance system.” [Underlining and italics in original document.]
In neither of these two articles does Carney express any understanding that HERA established the legitimacy of shareholder rights by insisting the FHFA must manage Fannie Mac and Freddie Mae not to liquidate them, but by allowing them to retain sufficient capital to return once again to profitability, including the ability to pay all shareholder dividends as earned.
As Infowars.com has previously reported, on Aug. 10, 2015, the Business Insider published an article noting that in a conference call with investors, Bill Ackman, an investor in Fannie and Freddie, attacked John Carney, a reporter at that time writing for the Wall Street Journal, for writing the “most factually inaccurate” and “frankly embarrassing articles about Freddie and Fannie, calling Carney’s coverage of Fannie and Freddie in the newspaper’s “Heard on the Street” column a “disaster.”
In the various jobs he has held in his writing career, Carney has consistently supported Sen. Bob Corker, Republican – TN, by attacking Fannie and Freddie while supporting legislation Corker introduced with Virginia Democratic Sen. Mark Warner in 2013 aimed at shutting Fannie and Freddie down.
Before starting his latest assignment with Breitbart.com, Carney took pains to disguise his years of publishing articles bashing Donald Trump, going so far as to erase from his Twitter archive dozens of tweets he had published supportive of President Obama and Secretary Clinton that were derisively critical of Donald Trump’s 2016 presidential campaign.