Welcome to Carney-World, Where Facts Are Optional

In his piece for the Wall Street Journal today (“Investors are Casualties in Battle Over GSEs”), John Carney got some key facts wrong.  He writes: 

“It is simply not the case that all of their [Fannie and Freddie] capital is spent on ‘executive branch prerogatives.’ Rather, the dividends remitted by them to the Treasury are spent in the same way as nearly all of the federal government’s general revenue.  That is, in accordance with laws passed by Congress and signed by the president.”

Perhaps John Carney thinks that merely by stating something, he can will it to be true.  But to claim that the federal government isn’t spending the money that it is taking from Fannie and Freddie on projects of its own discretion is just false.  According to a paper by Dr. Clifford Rossi, a former senior risk management expert at Fannie and Freddie, in 2011 the Administration used proceeds from Fannie and Freddie to finance its payroll tax cut proposal.  Rossi writes:     

“In 2011, a levy of 10bps on top of existing g-fees was imposed as part of the Congressional compromise on the Payroll Tax Cut. In this case mortgage borrowers are subsidizing the payroll tax cut which amounts to a redistribution between them and those subject to the payroll tax.”

So it’s very clear that the money being siphoned out of Fannie and Freddie through the illegal Third Amendment Sweep is, in fact, being put toward other uses, and it’s inaccurate to state otherwise. 

Carney also references “in accordance with laws passed by Congress.”  Well, speaking of the law, that brings us to HERA, which FHFA and the Treasury very clearly violated in 2012 by changing the terms of the conservatorship to allow the government to sweep 100% of Fannie and Freddie’s profits. 

Michael Krimminger, former senior policy advisor to the FDIC and deputy to the Chairman for Policy and General Counsel, and Mark Calabria, former senior advisor on the professional staff of the Senate Banking Committee authored a white paper released by Investors Unite last week that addresses this very fact. The paper’s title states the matter clearly: “The Conservatorships of Fannie Mae and Freddie Mac: Actions Violate HERA and Established Insolvency Principles.” Calabria and Krimminger should know, as they were both involved in the drafting of HERA.  Here’s an excerpt from their paper: 

“The drafters of HERA never envisioned, nor intended, for Treasury to maintain a large equity stake in the companies. Treasury assistance was meant to be temporary, in the nature of debtor-in-possession financing. HERA also makes clear, as was intended by the Banking Committee, that FHFA maintain sole authority over when the Companies would enter or leave conservatorship. There simply is no authority for Treasury in this regard.”

Also this:

“Under the FDIA, as under HERA, conservatorships were intended to be relatively short-term proceedings designed to achieve either the rehabilitation of the failing bank with its full return to ‘sound and solvent’ operations under private control or the relatively prompt appointment of a receiver.

Perhaps most instructive for John Carney is this passage about the Third Amendment Sweep:

“Treasury has transformed the concept of conservatorships from ‘preserving and conserving’ to one of diverting value back to Treasury far in excess of the funds put into the Companies and conducting housing policy through the Companies’ predominant position in the current housing finance system.”

We hope that Mr. Carney will read HERA at some point.  In fact, we recommend that all policymakers and media following this very important case read the statute.  The case of Fannie and Freddie is about the rule of law.  No matter what one thinks about Fannie and Freddie, there shouldn’t be any dispute over enforcing the laws passed by Congress.