We bailed you out and now you want what! Part III

Fannie and Freddie: Illegal takeover or conservatorship?

When Treasury Secretary Hank Paulson decided the government needed to take over Fannie Mae and Freddie Mac in August of 2008, he too had a choice: Under the law governing the federally chartered mortgage giants, he could either put them in receivership, under which they would be shut down and their assets used to pay off their creditors, or put them into conservatorship, under which the government would attempt to stabilize them and nurse them back to financial health. He chose conservatorship but urged Congress to take steps to ensure they never again emerged in a form giving shareholders all the profits and taxpayers all the risk.

The argument that finally caught Judge Wheeler’s attention, though, was more narrowly legalistic: the law authorizing the Fed to make emergency loans to private firms mentions charging interest but contains no explicit authority to take compensation in the form of stock.

“If we’re right on that, we win,” Boies said in an interview last week. “If we aren’t, we lose.”

By basing his case on a challenge to the Fed’s authority, Boies told Wheeler that he doesn’t need to consider how things have turned out for AIG shareholders since the rescue. He need only ask the narrower question, what was AIG’s stock worth on that day in September 2008, when the stock was “illegally” transferred to the government? Based on that day’s trading price on the New York Stock Exchange, that would be about $23 billion.

Not so fast, replied the Justice Department lawyers.

For one thing, they said, there was no coercion — AIG directors voluntarily agreed to hand over the stock. Their choice that day was clear: They could either accept the Treasury’s terms and wind up with 20 percent of something, or decline help, go bankrupt and get 100 percent of nothing. Reluctantly, they chose 20 percent of something.

And as to the $23 billion loss that Greenberg and other shareholders claim to have suffered, government lawyers pointed to the same stock market tables but drew a different conclusion. In the hours before the rescue terms were announced, AIG stock was trading as low as $1.25. After the announcement, the stock had tripled to $3.75. Greenberg should be thanking the government, they said, not suing it.

But what seemed to government lawyers like a slam-dunk argument seemed irrelevant to Wheeler. If the government didn’t have the authority to take the stock in the first place, he asked during final arguments, then doesn’t the law require the government to return it?

Both Paulson and the man who succeeded him, Timothy Geithner, have testified that it never occurred to them during the crisis that Fannie and Freddie might one day be able to fully repay the government or that there would be anything left over for shareholders by the time the conservatorship ended. But things turned out differently than they expected.

Because of the success of the government rescue, and the near-total retreat of private lenders and guarantors from mortgage finance, Fannie and Freddie returned to profitability and solvency by the end of 2012 — perhaps not coincidentally, at the very time the government swept all of their profits into the Treasury.

What Paulson and Geithner also didn’t anticipate was that, despite a bipartisan consensus that the mortgage giants should be wound down, Congress would be unable to agree on a system to replace them. Democrats and their industry allies insist that some limited form of government guarantees are necessary to ensure the availability of affordable 30-year mortgages at fixed rates. Tea party Republicans are just as adamant they will not agree to any government guarantees that once again put taxpayers on the hook.

While it is three hedge funds — Perry Capital, Fairholme Fund and Pershing Square Capital, led by William Ackman — that have sued the government, the outcome will likely affect all shareholders. These include a number of small banks that were encouraged by the Paulson Treasury to buy preferred shares in the months before Fannie and Freddie’s downfall, and tens of thousands of small, individual holders of common stock, including many former employees and retirees in the Washington area. Their claim is that Congress and the White House are using Fannie and Freddie to fund the federal budget.

But James Parrott, a fellow at the Urban Institute, says the idea that these companies will ever emerge from conservatorship and be able to earn profits for their shareholders is a fantasy. Parrott, who advised the Obama White House on the sweep, says that even if Fannie and Freddie were allowed to use current profits to pay back the Treasury’s $187 billion investment, they would still have to raise hundreds of billions more to have the capital to operate independently.

Other government officials say Fannie and Freddie’s profits are themselves a fiction, because they would not exist but for the government standing behind all of their financial obligations. If the Treasury were to charge them anything close to a market rate for its guarantee, there would be no profits.

But that’s always been the case for Fannie and Freddie. From the beginning they were set up to be a unique hybrid: government-backed enterprises with private shareholders and private capital. Until Congress comes up with another arrangement, say lawyers for the shareholders, the profits are real and the shareholders are entitled to use them to pay down the Treasury’s investment and begin recapitalizing the company and paying themselves a dividend. By some estimates, that could happen in the next several years if profits continue at current levels.

Government lawyers and officials dismiss such speculation. Under the law setting up the conservatorship, they argue, Fannie and Freddie’s shareholders are entitled to nothing. They have no right to sue in court. They are not entitled to vote on any corporate decisions. They are not entitled to a penny of the companies’ profits or any proceeds from the sale of company assets. Not now, not ever. In effect, the government is claiming the right to operate Fannie and Freddie however it wants, for as long as it wants, until it’s ready to close them down for good.

In an opinion last fall, Judge Royce Lambert of U.S. District Court in Washington ultimately ruled that that was what Congress intended when it wrote the laws governing Fannie and Freddie but acknowledged that such a sweeping assertion of government powers may “raise eyebrows or even engender a feeling of discomfort.” It will now be up to Sweeney and the Court of Claims to decide whether what Congress intended amounts to an illegal and unconstitutional taking.

One thing is already known, however. In deciding whether shareholders or taxpayers will profit from government bailouts, judges Sweeney in the Fannie and Freddie case and Wheeler in the AIG case are unlikely to have the last word. With so many billions of dollars at stake, their decisions are almost certain to be appealed all the way to the Supreme Court.

For Dennis Kelleher, a former Senate staffer and corporate litigator who heads an advocacy group for financial sector reform, it’s all just another example of Wall Street’s “indefensible arrogance. . . .Wall Street lives in an alternative universe where at all times it’s heads I win, tails you lose.”

Comment:

So what have we got here?  We have greedy ungrateful banksters who think they were short changed in the bailout - a bailout they should never have had in the first place.  The only reason they got that money is because they were so big that everyone in the government was either scared those companies wouldn't be able to "donate" to their campaign funds anymore, or were scared sh*tl*ss at what might happen to the economy if they did fail.

We have other Judeo-Capitalists who are crying unfair when the government nationalized (sort of) their precious corporations which put SOME limits on their profiteering.  Now they not only want full control of their companies back but they want to be reimbursed for any profits they missed out on.

Comrades, I have to confess that sometimes they boggle my mind.  I can't truly conceive of being so rich and so greedy that I could demand what they are demanding.  If I were drowning in debt, if I couldn't make my mortgage payments and credit card bills, and someone came along and paid my mortgage completely off - even if he said as a condition that he would be half owner but I could still live there - and also paid my credit cards off, not only wouldn't I even THINK of demanding - or even asking - for more, I would kiss his ass in gratitude for what he did for me.

I guess that as someone who is just an ordinary working man, I still understand the concept of gratitude and being thankful for what I have.  That's something the One Percent have long since forgotten - if they ever understood it in the first place.

Dan 88!

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