Pagliara Op-Ed: Government’s Sweep of Fannie and Freddie Profits Puts Taxpayers at Risk

Looking for a good read today? Check out IU Executive Director Tim Pagliara’s op-ed in The Hill, a Capitol Hill (Washington, DC) publication whose primary audience is Congress, its thousands of staff members and Administration officials – all of whom should have a deep concern about the interests of taxpayers, the rule of law and  healthy markets.

As the headline suggests, the focus of Pagliara’s op-ed, as evidenced by its headline, is how the U.S. Treasury’s illegal net sweep is putting “taxpayers at risk.” He writes:

“During the 2008 financial crisis, public officials in Washington took extraordinary steps to contain a systemic collapse of the global financial system. However, despite the gravity of the moment and the urgency for action, Congress deliberated carefully on its actions and never wavered from its duty to act in the best interest of taxpayers.

“ …That’s why it is so confounding that the federal government has asserted that it is acting within its authority as it continues a practice begun abruptly by the Treasury Department in 2012 to lay claim to revenues of Fannie Mae and Freddie Mac and use them for a variety of budget needs. What is called the ‘Third Amendment sweep’ effectively prevents Fannie Mae and Freddie Mac from building a financial buffer for the proverbial rainy day. It is all but certain that the rainy day will come and when it does taxpayers will once again be asked to put the two entities, as Government Sponsored Enterprises (GSEs), on sound footing.”

He also discusses Systemically Important Financial Institutions (SIFI), asserting that  Fannie Mae and Freddie Mae should be defined as such, considering the risk to the market  should either of these entities tip into failure. In the wake of the 2008 financial crisis, the government stepped in to steady the GSEs with a $187 million bailout loan (which has been  repaid- and then some!). This action tells us how important the government considers Fannie and Freddie. Consider that, according to a June 2013 FHFA report, Fannie and Freddie backed 4 out of every 5 mortgages and guaranteed a combined $1.7 trillion in new mortgages in 2012 – that’s 77 percent of all new mortgages that year. So why aren’t the GSEs considered either global or domestic SIFIs?

We’ve noted in this space before the Fannie Mae’s CEO Tim Mayopoulos “sounded the alarm” about the undercapitalization and how it is draining of the company. In his op-ed Pagliara reminded readers of Mayopoulos’s warning during a media call announcing Fannie Mae’s fourth quarter earnings: “The fact that we don’t have a significant amount of capital increases the likelihood that Fannie will need additional capital from Treasury at some point.”  

The Senate Banking Committee has announced it will hold a hearinga next week on the threshold for SIFIs so Pagliara’s op-ed in a widely-read Washington publication is timely and will help underscore for lawmakers how the illegal profit sweep and de-capitalization of the GSEs imperils taxpayers and undermines market stability.