Rep. Ed Royce Continues His Attack on Shareholders, Favors Running Fannie and Freddie with No Capital
- June 19, 2015
During a House Financial Services Committee hearing this week on the Financial Stability Oversight Council, Royce, in an exchange with Treasury Secretary Jack Lew, continued his anti-shareholder bias and also demonstrated his lack of understanding of basic math.
A video of the exchange, posted by Rep. Royce’s office, can be found here, and we’ve pulled some of the notable excerpts below:
“One of my colleagues asked if the GSEs have repaid the money that they have borrowed from the American taxpayer. The simple answer that my colleague tried to illicit, I think, is that the payments they have made to the government now exceed the rescued funds that they received. But, Mr. Secretary, I think you agree here, this is not the real answer nor the real question. The real question is have they repaid their debt to the American taxpayer, and for that answer I think we can go to the Federal Reserve Bank of New York… The New York Fed said that taxpayers are entitled to substantial risk premium…The false narrative that is perpetuated is that the taxpayers have been repaid, it’s time to end conservatorship, and return the GSEs to the control of shareholders. From your comment earlier, I assume you disagree with this narrative…”
Yes, taxpayers are entitled to significant compensation for the risk borne in the $187 billion bailout of Fannie and Freddie, just as they are entitled to recompense for the $426 billion dollars in bailouts of the big banks and auto industry authorized under the TARP program. What Rep. Royce fails to mention, however, is that the GSE’s are already far and away America’s most profitable bailout, having returned over $40 billion to date in profit on top of what the Treasury invested. The “real question” here, for which we have yet to receive a “real answer,” is, “Why does the government continue to let taxpayers bear all of risk at the point of first-loss under the guise of repayment?” Secretary Lew kind of acknowledges this in his response:
“I totally agree… the risk is being borne by taxpayers on an ongoing basis and the conservatorship is not over….So I think that the right thing is to do GSE reform and get on to a new restructured system, but it is not the right time to be talking about ending the conservatorship and paying dividends.”
Secretary Lew is correct that taxpayers are bearing risk, but he should note that they are really doing so on an increasing basis. Because, of course, as mandated in the Treasury’s own Senior Preferred Stock Purchase Agreement with FHFA, the GSEs are unable to retain any capital brought in as earnings and their existing capital buffers are being systematically erased until they hit zero in 2018. With less and less capital to absorb potential losses, the taxpayer is exposed to more and more risk. Capital, not dividends, is what we’re taking about. It’s what we have been talking about since last October and is what seemingly everyone else, excluding the participants in this exchange, is talking about, too. Even the FHFA hinted at it earlier this week in its annual report to Congress:
“The conservatorships of the Enterprises, combined with Treasury’s commitment of financial support, have stabilized the Enterprises, but have not restored them to a solid financial condition…Directing the Enterprises’ operations as the conservatorships lengthen presents its own set of challenges for FHFA. In particular, it is critical that the Enterprises dedicate appropriate resources to maintaining safe and sound operations in the face of uncertainty regarding the long-term prospects of the Enterprises’ operations and charters.”
The FHFA’s summation that the conservatorship has stabilized the companies but not returned them to sound footing is, of course, a statement of the obvious because of the endless Third Amendment Sweep. It is akin to the government enrolling you in a program to quit smoking only to mandate that you must wear a nicotine patch for life, and then reporting that you no longer use cigarettes but are still an addict.
There is simply no way that large financial institutions, even ones as profitable as Fannie and Freddie, can be considered financially “sound” when they are not allowed a buffer to absorb disruptions in the market. Yet, the Treasury seems perfectly content to offer up taxpayers as the means to absorb those disruptions, so long as the money keeps flowing in from the GSEs. This policy, which flies in the face of HERA’s mandate to restore the companies to “sound and solvent condition,” is every bit as reckless as it is illegal.
Politicians and policymakers cannot let their visceral anger for the role that the GSEs played in the financial crisis, whatever they think it was, prevent them from making sound policy decisions and respecting the rule of law. There is broad, bipartisan acknowledgement that the perpetual conservatorship is untenable, but there is also broad consensus that we are far from Congressionally-enacted GSE reform.
If the Treasury is sincere in its desire to protect taxpayers and allow for the availability of mortgage credit, then there is only one sensible short-term solution, and that is to allow the GSEs to retain capital as a buffer against losses like any other large financial institution. To not do so is an explicit endorsement of keeping the taxpayer on the hook for fluctuations in the mortgage market.