Senator Toomey Speaks Out Against the Sweep
- May 22, 2015
The Senate Banking Committee approved Chairman Richard Shelby’s financial services regulatory reform bill this week on a party-line vote. The Democrats on the committee and the Obama Administration oppose the bill for a number of reasons but there is bipartisan agreement there are still weeks or even months of negotiations ahead to develop legislation that has a chance of passing in the full U.S. Senate.
Much of the media’s focus is on how the bill, The Financial Regulatory Improvement Act of 2015, would impact Dodd-Frank but our chief concerns are the provisions that would lock in place the illegal Third Amendment Sweep. Section 703 of the bill prevents the Treasury from selling its preferred shares in Fannie and Freddie, basically making the flawed implementation of the conservatorship permanent. During the committee’s hearing, Pennsylvania Sen. Pat Toomey has this to say about the future of Fannie Mae and Freddie Mac:
“This is a straightforward. In my view, Congress should not use GSEs as a pay-for. Now, this bill addresses that but there is a loophole, and the loophole is that every quarter the government sweeps all GSEs profits into the treasury, and once they’re there money is fungible; money gets spent. So, I would like to see us not continue to perpetuate this broken system. I think we ought to build a capital buffer and, importantly, incentivize private capital such as insurance to take the first loss position.”
Congress has a number of options regarding the future of the GSEs, among them from dismantling them entirely to making them less dependent on government backing. Investors Unite takes no position on reforms, except to encourage lawmakers to respect shareholders and to uphold the rule of law. If Congress moves ahead with reforms that codify into law an illegal sweep of company profits, it would send a terrible signal to the financial markets. Another unsettling issue with Chairman Shelby’s proposal is that it would give big banks – those that are considered Too Big To Fail – formal decision-making into the Federal Housing Finance Agency (FHFA). These banks, which have long sought Fannie Mae’s and Freddie Mac’s business, could push smaller lenders out of the market and jeopardize access to affordable housing.
Former FDIC Chairman William M. Isaac published an opinion piece in in American Banker that offers some constructive advice on a “sensible path forward” for the GSEs. Here’s some of what he wrote:
“It’s clear that Congress needs to take action to determine the fate of Fannie and Freddie. These institutions are now entering the seventh year of a conservatorship that was intended to be temporary. But deciding what to do with Fannie and Freddie merits an entirely separate policy discussion and should not be a quick-and-dirty afterthought to an important regulatory relief bill.
“The goal of our housing policy should be to get more private capital into housing finance. Sen. Shelby made this point recently, stating on Bloomberg TV that ‘we need to get Fannie and Freddie back running on their own, without the government’s help.’ But in order for private capital to show up, the government must honor the law and live by the agreements it makes.
“A sensible path forward would be to remove Title VII completely from the Senate bill and to take up GSE reform separately. Given the indications that the Treasury and FHFA have not acted as required by HERA in administering the conservatorship, the Senate Banking Committee should begin the process by conducting hearings on HERA oversight.”
If Congress is beginning to engage on GSE reform, it might be best to start with legislation proposed by Tennessee Rep. Marsha Blackburn that would require the profits Fannie and Freddie currently send to the Treasury to be set aside in a special pool that the GSEs would draw on in case of a significant loss. If lawmakers are truly serious about protecting taxpayers, they would enact this common-sense measure. In the meantime, oversight hearings by Banking Committee on how Treasury and FHFA have implemented HERA would reveal how the law has been followed and how doing so would have made a lot of sense. We know of a couple of former Senate Banking and FDIC staffers who would have some very compelling testimony to offer.