Gary Hindes, a Fannie Mae Shareholder, Says if a Future Draw from Treasury Happens, It Should be Considered "A Return of Stolen Money"

On September 6, 2008, the federal government seized Fannie and Freddie (the "GSEs") and placed them into conservatorship.  "The original takeover wasn't the 'bailout' it purported to be; it was a stick-up," Hindes asserts, pointing to the fact that while both companies had recently been incurring losses due to the housing downturn, they still had the highest capital ratios in their histories, were flush with cash, and had successfully tapped the public securities markets just three days earlier, selling $5.7 billion of bonds rated AA+ by S&P and AAA by Fitch.  The debt was unsecured, and the offering was oversubscribed.

Shortly after seizing control and ousting their CEOs, the Federal Housing Finance Agency ("FHFA"), purporting to act as conservator, ordered the companies to book several non-cash accounting charges, ultimately resulting in Treasury's purchasing $187 billion of preferred shares (bearing a 10 percent dividend rate) so they could maintain a positive net worth.  (AIG and the banks which received federal assistance under the Troubled Asset Relief Program would be charged half that.)  By the summer of 2012, however, the housing market had turned around, the accounting entries had to be reversed, and Fannie and Freddie suddenly became massively profitable.  Within days of the announcement of robust second quarter earnings, the conservator agreed to change Treasury's 10 percent coupon to a new dividend rate equal to 100 percent of the companies' net worths – in perpetuity.  By the end of the current quarter, it is estimated that the government will have received over $100 billion more from the GSEs than the $187 billion it provided them.  But the terms of the agreement struck between FHFA and Treasury mandate that none of the $287 billion can be used to retire Treasury's preferred shares.  Hence, the government's position is that the two companies will continue to owe $187 billion – and must give it all their profits for the rest of time.  

"It was a mafia-type 'loan' from the beginning," Hindes says.  "What responsible board of directors – or in this case, a 'conservator', no less – would borrow $187 billion and agree that no matter how much money they repay the lender, not a dime can be applied towards principal?  I mean, who does that?  And here's a reality check for you:  who borrows that kind of money and pays it all back in just four years?  Answer:  someone who never needed it in the first place.  It was 'cookie jar accounting'."

Under the terms of the FHFA/Treasury deal, both companies were to have seen their capital drained down to zero by year-end 2017.  However, on December 21, Treasury agreed to allow each company to maintain $3 billion in capital.  Everything above that will be swept to the government – in perpetuity.

"The idea all along was to saddle them with a concrete life preserver so that they could not 'escape, as it were'," Hindes said, quoting from an August 18, 2012 White House email to a Treasury official.  "And so far, it's worked."

SOURCE Gary Hindes, CEO of The Delaware Bay Company, LLC