Insertion of Jumpstart Language in Spending Bill Will Not Impede Legal Action Against Sweep
- December 17, 2015
It is regrettable that Congress abandoned transparent legislative channels and inserted itself into the conservatorship of Fannie Mae and Freddie Mac with a monkey wrench provision dropped into a must-pass, catch-all spending bill during a closed-door, last minute negotiation.
What has not changed is this: The net worth sweep is illegal. Shareholders and others will continue to press ahead as their litigation gains momentum. Congress can and should assert its oversight authority and honor its obligations to taxpayers. Investors Unite Founder Tim Pagliara summed up this reality with his statement yesterday.
Based on our own legal analysis, the Federal Housing Finance Agency, as conservator, retains an array of options on what to do with the preferred stock of GSEs created under the terms of the 2008 Housing and Economic Recovery Act. Just as importantly, the language added this week to the omnibus spending bill is silent on the warrants Treasury holds for 79.9 percent of the companies’ common stock. These could be worth well over $100 billion. They could be transferred to the Housing Trust Fund and Capital Magnet Fund, as Dr. Robert Shapiro and Dr. Elaine Kamarck have proposed in a recent paper that mapped a way out of the conservatorship. This would shore up for the long term funds integral to the GSEs’ mission of expanding access to affordable housing for working people. FHFA could also allow the GSEs to issue more common stock, thereby raising additional funds, which would benefit taxpayers. Other experts have demonstrated feasible paths to recapitalization that would be in the broader public interest.
In addition, the spending bill (which could be on the way to the president’s desk by the end of the week) does not preempt a legal settlement in pending shareholder litigation. Last month, the government made what we regarded as feeble case to dismiss the suit filed by investors Gary Hindes and David Jacobs in U.S. District Court in Delaware. In addition, the discovery process continues in a case stemming from a petition by the New York Times to learn more about FHFA’s supposed independence from Treasury in actions related to the Sweep. Federal Claims Court Judge Margaret Sweeney has ruled the government should plan on producing more documents.
Instead of seeking to assume powers that HERA gave FHFA as conservator, Congress should have by now taken up legislation offered by Rep. Marsha Blackburn, R-TN, to put the GSE revenue that Treasury continues to sweep into a separate holding account, instead of allowing the government to use the money any way it wants. Another idea, offered by Rep. Mick Mulvaney, R-SC, would let Fannie Mae and Freddie Mac build up their capital cushions. These would have been more suitable responses than hastily adopting provisions of the Jumpstart bill pushed by Sen. Bob Corker, R-TN.
The Administration and key lawmakers have made clear they want to dismantle Fannie Mae and Freddie Mac. That is their prerogative. However, the law required these institutions would first be put on stable footing. In anticipation of their release from what was expected to be a temporary conservatorship, Congress should have had hearings on how to wind them down, and explored in depth how a successor housing finance system would function and how it would affect aspiring homeowners, taxpayers and investors.
As questions arose about the conservatorship and the Sweep, Congress should have shifted into oversight mode. Former Federal Deposit Insurance Corporation Chairman Bill Isaac called on the Senate Banking to undertake such a review many months ago, but instead we have ended up with ill-conceived Jumpstart language that has never even been subject to a hearing.
If Congress wanted to put the brakes on GSE recapitalization and reform, it should have taken up important policy changes through the regular legislative process and investigated the diversion of tens of millions of dollars of GSE revenues into the general funding stream of government. Instead, it has chosen to lock in place, for at least two more years, flawed and illegal policies.
But that is not the last word in this saga as far as we’re concerned.