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Fact Checking John Carney

To paraphrase an old saying, Wall Street Journal reporter John Carney never lets the facts get in the way of a good column.

His latest distortion– a response to the recently released paper co-authored by William Isaac and former Senator Bob Kerrey—is that recapitalizing the GSEs is a “bad deal” for taxpayers.  The Isaac-Kerrey paper has a central thesis:  While the government had every right to drive a hard bargain in its restructuring of Fannie Mae and Freddie Mac, once it makes a deal, it needs to live up to that deal.  Its decision to change the terms of the deal by enacting the third amendment sweep sets a bad precedent, and has led to dangerous exposure for the taxpayer by leaving Fannie and Freddie undercapitalized. 

Carney doesn’t agree with the paper, and that is his right.  But in trying to rebut the paper, he gets facts wrong.    

So here’s a quick rebuttal back to Carney from Investors Unite:

 – Carney is wrong in claiming that Fannie and Freddie can’t rebuild capital.  HERA allows Director Watt to suspend dividend payments to the federal government for this purpose.  

 – Carney is also wrong to say that allowing them to rebuild capital is allowing them to come back to life without addressing the flaws that previously existed.  First, HERA addressed these flaws and the entities have been reformed.  Second, it’s still up to policymakers (specifically FHFA) to determine the outcome of the conservatorship.   

 – Carney’s logic that the sweep protects the taxpayer more than allowing Fannie and Freddie to rebuild capital makes no sense.  We don’t allow any large institutions to operate with no capital.  Why are Fannie and Freddie any different?  

 – Carney’s Buffett analogy is not really a good one; Buffett put money into Goldman Sachs before the Treasury acted.  So that really isn’t an example of private capital working alongside government.  

Investors Unite is pleased to be having this debate.  Not long ago, nobody was talking about the lack of capital at Fannie and Freddie – a direct result of the third amendment sweep and the government’s decision to strip them of 100% of their profits.  Now everybody is talking about capital, and that’s a good thing for investors, and for the American taxpayer.