Thoughts on Delaware Amicus Curiae Brief

Yesterday, the firm of Ross Aronstam & Moritz filed a motion with the U.S. District Court for the District of Delaware for leave to file an amicus curiae brief in the Jacobs and Hindes case, which I authored. That motion, along with the accompanying brief, can be found here:

This brief follows the amicus I submitted (with the Coalition for Mortgage Security) in the appeal of the Perry Capital case in the D.C. Circuit last July. Both offer facts and evidence to rebut the assertion that Fannie Mae and Freddie Mac were in such dire straits prior to the mortgage crisis that Treasury had to rescue them at “enormous risk” to taxpayers, and then give them $187 billion in senior preferred stock to save them from “mandatory receivership and liquidation.”

The notion that Fannie and Freddie failed catastrophically and had to be rescued by Treasury always has been spun from straw, but near-universal acceptance of this tale has made eliminating the companies a sine qua non of any serious proposal for mortgage reform. Since the companies had failed so spectacularly, what possible argument could there be for keeping them around in any form?

Mirroring what we see all too frequently in the political arena these days, opponents and critics of Fannie and Freddie (and supporters of large banks) have been able to get enough of their advocates to repeat a fictitious account of the financial crisis so often and so emphatically, in venues sympathetic to their interests, that large numbers of otherwise sensible and objective people have come wholeheartedly to believe a narrative that has no basis in fact and is easily and convincingly refutable. This narrative has become entrenched in media reporting, and likely would have continued to go without major public challenge had it not been for the lawsuits filed against the government for the August 2012 Net Worth Sweep. These suits created a high profile forum for exposing what actually did happen with Fannie and Freddie.

As I write in the Delaware amicus, the flaw in Treasury’s plan to use temporary or artificial non-cash expenses to drive up Fannie and Freddie’s book losses and force them to take an unneeded $187 billion in senior preferred stock—which, because Treasury made that stock non-repayable, resulted in perpetual required payments to Treasury of $18.7 billion per year—was the very fact that these expenses were temporary or artificial. At some point they would cease, and many would come back into income. Treasury had no plan for dealing with that when it happened. The Net Worth Sweep gave Treasury the outcome it sought—the resulting earnings were paid to it, and not retained by the companies as capital—but Treasury did not have a credible defense for the actions it had taken. And after the lawsuits were filed, it had to respond to adversarial plaintiffs, not like-minded journalists.

When the questions came, Treasury’s answers did not pass the laugh test. Start with its decision to take over the companies in 2008. Treasury called that a rescue.

Except, if it was a rescue, why would Treasury Secretary Paulson have boasted to President Bush, “The first sound they’ll [Fannie and Freddie] hear is their heads hitting the floor?” Why had there been a paper about nationalizing Fannie and Freddie circulating at Treasury six months before that happened? Why would both the Fed and the Treasury have declined to use their existing authorities to make secured, riskless loans to the companies, had they ever been needed? Why would Paulson have held a secret meeting with hedge fund managers in July 2008 to tell them Treasury was considering putting Fannie and Freddie in conservatorship and wiping out their shareholders? Why would Treasury have inserted a clause in the GSE reform bill that made Fannie and Freddie directors immune from shareholder lawsuits if they gave in to pressure and let the government take the companies over for no statutory reason? Why would Paulson withhold from the companies’ CEOs and directors the terms of the “rescue” he was insisting they agree to? And what possible reason could there have been for making Fannie and Freddie take non-repayable senior preferred stock to offset even temporary shortfalls in their capital?

You can’t explain any of these developments if this was a real rescue; you can explain all of them if it was a policy-driven seizure of two shareholder-owned companies’ assets. And to take seriously Treasury’s stated reason for the Net Worth Sweep, you’d have to believe that no one there could parse a financial statement.

I put out close to 60 quarterly earnings reports as CFO at Fannie Mae, and after each one I saw how investors and security analysts went through the report’s details to try to understand what drove the company’s performance that quarter.

I can imagine a similar set of investors and analysts going through the initial quarterly releases of Fannie and Freddie following their conservatorships. Their first reaction on seeing the headline loss number would be, “Where did that come from?” They would check the business fundamentals—the changes in net interest income, guaranty fees and miscellaneous fees on the income side, and credit-related losses and administrative costs on the expense side—and conclude, “Those actually look fairly good.” Then they would discover the sources of loss: huge jumps in loan loss reserves, the absence of any tax shelter because of the existence of a reserve against deferred tax assets, write-downs of non-agency mortgage-backed securities to levels reflecting current market illiquidity, and the other book losses.

Whatever they may have thought about those losses, they would know four things about them: they were non-cash charges, most were one-time events, most were based on estimates of future losses, and many might reverse themselves.

Some version of this analytical routine would have played out after each quarterly earnings release from the second half of 2008 through the end of 2011. Each time, analysts would have seen non-cash losses continuing to drag down the operating results. Soon they would be asking themselves, “How long can this go on?” At some point the companies would not be able to keep taking losses in the current period assuming those losses might be realized in the future. Analysts would know that when Fannie and Freddie stopped taking non-cash losses, and began to draw on their mammoth loss reserves to absorb current quarter credit costs, they would be profitable again. And if some of their previously estimated book expenses did not materialize, they would be exceedingly profitable.

A summer intern at a regional brokerage firm would have understood this, but Treasury wants us to believe that nobody there did. It wants us to believe that in August of 2012 it entered into the Net Worth Sweep for the good of the companies, and that the subsequent torrent of $170 billion that flooded into Treasury coffers—overwhelmingly driven by the absence or reversal of Fannie and Freddie book losses recorded earlier—took it completely by surprise.

Sorry, Treasury. Because of the lawsuits, you’re now in a different game. Your actions, and your defense of those actions, no longer are being adjudicated only on the editorial pages of the Wall Street Journal; they also are being adjudicated in courts of law. There facts matter, and there you almost certainly will lose.



52 thoughts on “Thoughts on Delaware Amicus Curiae Brief

  1. Don’t get me wrong. I literally understand why the losses were allowed to be reversed. What’s remarkable is the coup de grace is obviously a smoking gun that made daddy’s little dividend possible. Oh, that the courts would connect the dots. It was almost a perfect crime.


  2. Thanks, Tim. I see more clearly your scenarios. The first one seems to suggest to me that all that was required under the 10% regime (i.e. pre NWS) was that the dividend get paid yet not principal reduction of the “infusion” whenever possible. Yet if infusion was to be paid down as quickly as possible (only leaving money left over for normal business operations) I don’t see how that intent, if indeed it was the original intent, could comport with the GSEs retaining any chunk of money after a favorable ruling on the NWS, without first paying down the infusion in full. If the Treasury wanted its money back, how could they allow capital to be retained, let alone retained to pay interest only without reducing principal?

    The second scenario seems more in play in my mind but with one small question lurking. It was never clear, at least to me, whether the 10% was to be going toward principal. Don’t many consider it a minimum payment toward reducing the original debt on infusion? If not, then what’s all this talk been regarding repayment having exceeded original infusion by billions?

    It’s been my understanding (and hope) that payments from the sweep now well exceed infusion plus any additional borrowing that the GSEs incurred in order to pay 10% quarterly dividends. Accordingly, it’s been my hope that if NWS is struck, the debt has been paid in full and there’s leftover for recapitalization.

    Thank you for your patience in lisping to me in sincere condescension. You’re most kind.




    1. Ron: Just to tie this topic up, Treasury deliberately designed the Preferred Stock Purchase Agreements so that the 10 percent dividend payments never reduced principal, and there was no way the companies could pay down that principal without a specific action by Treasury (i.e., terminating the commitment to support the companies). We can speculate as to why Treasury would design a stock purchase program that did not allow it to recoup its outlays of principal. I have a view on that, which is that it wanted to accomplish exactly what took place: the ability to use non-cash charges to run up the companies’ “draws” of non-repayable senior preferred stock to extremely high levels (they got up to $187 billion), creating the perpetual requirement for them to pay Treasury an annual after-tax dividend of $18.7 per year, which was more than they would likely to be able to earn on a sustainable basis. I think Treasury expected that to keep the companies insolvent for long enough for Congress to pass legislation that eliminated them, and when that didn’t happen Treasury’s plan began to unravel, with the return into income during the 2012-2014 period of huge amounts of non-cash expenses that had been written off earlier, triggering Treasury’s reaction of imposing the Net Worth Sweep. That’s where we now are, with a flurry of lawsuits challenging the sweep.


  3. Tim, I’m not quite following your response to Sue. If funds generated by NWS are returned in full, your fear is that 18 billion in interest per year will deplete the funds quickly; then the continued burden of the same annual fee will eventually give way to an inevitable downturn in revenue.

    Why can’t the money be returned to the treasure in terms of “paid in full,” or just retained by the treasury as the same? Without debt the 10% becomes zero. What am I missing?


    1. Ron: My understanding is that there are two possibilities for “unwinding” the net worth sweep, should a judge decide it is unlawful. The first is simply to return to the companies all quarterly NWS payments made in excess of the roughly $4.7 billion quarterly dividend requirement pre-sweep. Those would go on the balance sheet as retained earnings, but then slowly get eaten away every quarter that Fannie and Freddie’s combined net income (or, to be technically correct, their “comprehensive income,” which includes changes made directly to their equity accounts) was less than the $4.7 billion dividend owed Treasury. I figure in a steady state the companies’ combined quarterly after-tax net income would be about $3.5 billion, so the capital returned in the NWS settlement would bleed out at a rate of about $1.2 billion a quarter. Not terrible, but still a drain on capital, and not consistent with the buildup they would need as going concerns.

      The other alternative is that the judge could require that the quarterly NWS payments in excess of $4.7 billion be used to pay down the senior preferred stock outstanding (a judge, apparently, could require that, even though the terms of the Preferred Stock Purchase Agreements stipulate the senior preferred stock only can be repaid if Treasury terminates its commitment to support the companies). A few months back I did a calculation of how rapidly, and by how much, the $187 billion in senior preferred outstanding would get paid down if the excess NWS proceeds were returned that way, and although I don’t have those figures here with me my recollection is that by now the outstanding senior preferred stock would be paid down to around $40 billion. That’s a much more manageable dividend burden– $4.0 billion or so per year, versus the original $18.7 billion. The companies could live with that on an ongoing basis.

      Is that what you were looking for?


  4. Dear Tim
    I have been reading the comments above regarding the condition of “termination of Treasury’s commitment” for the preferred to be redeemed. Since you are so kind to answer questions, here I have one: What can shareholders expect after the NWS is stopped by a Court? Because if the NWS is void but the Senior Preferred remain in place yielding 10% (that is 18 Billions) the GSEs never will be profitable again. Is it right? My question comes because I see that everyone is challenging the NWS but not the SPSA, nor the accounting fraud that triggered the draws of 187 Billions, nor the usurious rate of 10%. What is the strategy behind the lawsuits? Can the Courts consider the SPSA paid and redeemed in spite of the condition of “termination of commitment by Treasury.” Or do you think that all these lawsuits will be amended later in order to challenge the interest rate?
    Thanks in advance for your answer.


    1. Sue: You’ve asked an excellent question, and hit on a critical point. As to what shareholders can expect if the NWS is either ruled void or overturned, my understanding is that the remedy will be up to the judge making the ruling. He or she could require the swept funds to be deducted from Treasury’s liquidation preference—reducing the amount of senior preferred stock outstanding—or they could simply require that the proceeds from the sweep be returned to the companies as retained earnings. The former would be vastly preferable from the standpoint of Fannie and Freddie as going concerns, because it would reduce the amount of their annual dividend payments. And that gets to the point you made. If Treasury’s liquidation preference is not reduced, the companies’ $18.7 billion annual after-tax dividend payment will overwhelm what they can earn as going concerns. Most of the lawsuits can’t be amended to challenge the terms of the 2008 PSPAs, because the statute of limitations has run out. But there is the Washington Federal complaint in the Federal Court of Claims, which challenges the 2008 takeover and has been stayed pending rulings in the Net Worth Sweep suits. I’ll have more to say about the Washington Federal action in a post in the not too distant future.


      1. Hi Tim,
        Thanks for sharing your insight and analysis. One quick question. Does statute of limitations apply to self-dealing expropriations and accounting fraud? Thanks for your help


        1. I can’t answer that question factually (although my understanding is that the statute does apply to these ations). If there is a reader who knows the answer perhaps they could add their response.


          1. Tim, Thanks for your reply. I do believe, and a jury will too, that certain provisions of HERA violates the Fifth Amendment to the Constitution – “nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.” I am at a loss to understand why plaintiffs’ lawyers are not making this argument as the Constitution is the Supreme Law of the land. I would think that unconstitutionality has no statute of limitations.


  5. If you accept that the 30-yr mortgage is the main way that the middle class builds wealth in America, and that the 30-yr mortgage is a path for millions of aspiring, hard-working Americans to join the middle class, than I don’t think it is an exaggeration to see the undoing of the GSEs as an attack on the middle class, and perhaps even on the American Dream.

    I would venture as far as to say that by removing the 30-yr mortgage while not having a good substitute you change the social fabric in America for many generations to come.

    And I haven’t seen presented any realistic, workable substitute.

    By unleashing predatory banks on the aspiring middle class, you certainly will not create a more harmonious society. I’d expect that this would have an impact on violence, crime, drug abuse, etc. As an outsider looking at what I’d still call the the greatest country in the history of the world, it would certainly be saddening to see so much unnecessary suffering.

    As a European, with all our social program, I think it is fair to say that we view life in the USA as grimmer (a rougher fight for survival, more competitive) than what we have over here. So, unless you are planning to introduce the same social programs we have here, I don’t see how you can remove the 30yr mortgage without going down the path of more tension in society.

    I commend you for dedicating your time to shine light on this important issue facing the USA.

    “The only thing necessary for the triumph of evil is for good men to do nothing.”
    -Edmund Burke


    1. I could not agree more with Mickey’s forward looking perspective. I take the same approach but from a homeowner’s perspective, looking back at our history. My rough calculations, based on combined total GSE assets of 5T (avg 3T), the private/public enterprises have saved homeowners $3.4T dollars over the last 75 years, undiscounted, in lower mortgage interest rates [3T * 1.5% * 75yrs] that have allowed for greater consumer spending power. I’d venture to say the 1.5% is a bit conservative and it represents the difference between GSE backed mortgages and a fully private market mortgage rate. This is a strong example of government helping the middle class which should be celebrated. How can they be eliminated or replaced with an unproven model that ultimately is destined to help banks rather than the middle class.


  6. Let me caveat the following with (1) I’m not a lawyer, (2) I’m European, and (3) I’m often wrong:

    I agree with the above interpretation of the Gov’t prefs terms, but think it is important to keep in mind:

    (A) Gov’t holds warrants for 80% of the companies. This will have more/any value if the gov’t prefs are redeemed.

    (B) US Gov’t isn’t in the business of owning preferred securities in financial institutions. Perhaps on my side of the pond I could see this happening – but not in the US.

    (C) Gov’t, to attract private equity capital to Fannie and Freddie (through a capital raise, perhaps a la Shapiro/Kamarck Plan) will, in my opinion only succeed if the gov’t prefs are redeemed. Who will put up equity for a not-reformed F&F if there is $100bn+ 10% (after tax!) prefs outstanding?

    (E) It is Congress/Admins job to reform housing finance, and create a system that benefits that vast majority of the American people. I.e. Capitalize Fannie and Freddie and let them do their job of helping every American family who should and wants to own a home have access to that. In my humble opinion, there can be no reform without redeeming the gov’t prefs. If you believe that (i) investors will win court cases, (ii) F&F will not be wound down, and (iii) conservatorship will eventually end, then I think you end up looking at reform and gov’t prefs redemption.

    So, I congratulate you on your beautiful country, and leave Winston Churchill to sum up my thinking on (eventual) reform of F&F.

    “You can always count on Americans to do the right thing — after they’ve tried everything else”


    1. Mickey: I am in total agreement with you as to what the administration (including Treasury) should do; the issue as I see it is that nobody in a key position there has been willing to take on the institutional opposition to Fannie and Freddie—not just at Treasury, but also at the National Economic Council, the Office of Management and Budget (whose 2017 budget again calls for the elimination of the companies) and elsewhere—and stand up to the big banks and their supporters, who since the late 1990s have been fighting to get control of the U.S. secondary mortgage market for themselves.

      I tend to be an optimist, and am hopeful that if not this administration a future one will take an objective view of mortgage reform—based on actual facts about the pros and cons of the alternatives that exist, not the misinformation being spread by Fannie and Freddie opponents—and support reforms that are best for homebuyers, our financial system and our economy. A ruling against the Third Amendment sweep in one of the court cases may be a catalyst that puts us on the road to this outcome; we’ll just have to wait and see.

      Liked by 1 person

  7. Ok, thanks. I think this is material to the plaintiffs’ position in many of the cases. It’s much better for the Plaintiffs I think to have a Designation that (A) contemplates a redeemable Preferred (not perpetual), even if subject to “termination of the Commitment,” than (B) contemplates a perpetual Preferred…


  8. Tim-

    Thanks so much. It might be worth checking into this one again, as i think this is still unclear, and probably important to your readers…

    For clarity, based on my understanding of the docs, the 10% Preferred shares (prior to the Third Amendment) were, in fact redeemable (though only after termination of the Commitment – which i agree has not yet occurred, and only after first paying any accrued and unpaid divs and fees).

    I’m a lawyer too, though maybe not as good a reader of “legalese” as I thought! By the way – for clarity and consistency – “PSPA” stands for the Preferred Stock Purchase Agreement and the “Certificate of Designation” is the certificate filed with the state that creates the preferred security itself (the shares of which are purchased via the PSPA).

    My reference to Section 3 of the Certificate of Designation has nothing to do with the PSPA. Section 3 of the Cert. Designation is pretty clear (I think) that the 10% Preferred is redeemable – though, you are absolutely correct that this is so only after termination of the Commitment (which, again, i agree has not occurred yet). And, I also agree with you that prior to termination of the Commitment, the Preferred shares cannot be redeemed, but accrued and upaid divs and fees added to the liquidation preference can be paid down.

    What you wrote is not necessarily inconsistent with what i just wrote – frankly I’m not sure what you meant. But what i am sure of is that what i just described is in fact a redeemable security (though only after termination of the Commitment – and i understand getting to “termination” is a bit squirrley in and of itself).

    Do you agree with this? Again, i will say that you and others have stated that the Preferred is “perpetual” (which is synonymous with “not subject to redemption or pay down”) – this is where my confusion comes in, because, as i just described, Section 3 of the Designation states clearly that the Preferred shares are subject to redemption (unless something in the pre-Third Amendment PSPA changed this?). Of course, the Third Amendment changed everything because all profits go to the divs, which makes pay down moot..

    Thanks Tim!


    1. WB: When I mentioned “Section 3” I was referring the Certificate of Designation for the senior preferred, and should have been more precise about that.

      I think if we have any disagreement it’s only a semantic one. The senior preferred stock is not repayable by the companies; it’s only repayable if Treasury ends the Commitment, which it has no incentive to do. This feature is what makes the PSPAs unique. In my view they were deliberately crafted to allow Treasury to do precisely what it did: have FHFA use temporary and artificial book losses to force Fannie and Freddie to quickly draw mammoth amounts of senior preferred stock, which, at a 10 percent annual after-tax dividend, created a crushing burden only Treasury could alleviate.


      1. Ok, gotcha I think. So “termination of the Commitment” is the key… what you are saying is that the feature that made the Preferred Shares issued to Treasury “perpetual” and “non redeemable,” – even prior the the Third Amendment 100% sweep – is that redemption under Section 3 of the Certificate of Designation is subject to “termination of the Commitment” which is within Treasuries control.. And because Treasury will not allow termination of the Commitment, there is effectively no ability to repay/redeem the Preferreds.. Correct??

        Liked by 1 person

  9. Tim-

    Great amicus and discussion. Question: It is oft stated, including by you, that the 10% Preferred was not repayable (even before the Third Amendment). Yet, the Certificate of Designation for this Preferred specifically provides in Section 3 – “Optional Pay Down of Liquidation Preference” that:

    “Following termination of the Commitment….the Company may pay down the Liquidation Preference of all outstanding shares of the Senior Preferred Stock pro rata, at any time, in whole or in part, out of funds legally available therefor, with such payment first being used to reduce any accrued and unpaid dividends previously added to the Liquidation Preference pursuant to Section 8 below and, to the extent all such accrued and unpaid dividends have been paid, next being used to reduce any Periodic Commitment Fees (as defined in the Preferred Stock Purchase Agreement referred to in Section 8 below) previously added to the Liquidation Preference pursuant to Section 8 below.”

    Clearly, after termination of the Commitment, though divs and fees have to be paid first, thereafter the Preferred can be redeemed pursuant to this provision (Section 3), no? Section 3 goes on to say that prior to termination of the Commitment, the Liquidation Preference can be paid down, but in that case only to the extent of accrued and unpaid divs and fees.

    The PSPA is often cited as source of the “perpetual” nature of the Preferred – but I don’t see anything in the PSPA that trumps the language of the Designation…

    What am I missing (clearly something) – please clarify this for me?

    Thank you again for your great work and shedding light…


    1. WB: The question of the non-repayment feature of the PSPAs came up when I did the Perry amicus last July, and I checked it with some of the lawyers in that case. They confirmed that according to Section 3 of the PSPAs, before the termination of Treasury’s commitment (and it has not yet terminated), Fannie and Freddie only could redeem those amounts added to the liquidation preference from in-kind dividend payments or in-kind payments of the periodic commitment fee (of which so far there have been neither). And while there is a provision that requires Fannie and Freddie to use the proceeds from any shares of capital stock to pay down the liquidation preference, section 5.2 of the PSPAs also requires Treasury consent before the companies can issue or sell equity securities. The Third Amendment did not change any of these provisions.

      It would be nice if the lawyers were wrong on this, but I don’t think they are.


  10. Hello Howard, Thank you for your brilliant Amicus Curiae. Not only should the shareholders argue to reverse NWS, they must also argue to reverse the PSPA which is forcibly imposed on the GSEs when there was no need for a ‘loan’ (which could never be repaid). Even if NWS were reversed, the defendants could still make a windfall profit and control the GSEs for ever because of the warrants. The warrants are null and void since the PSPA was forced upon the GSEs. I hope the plaintiffs will pursue the argument to null and void the warrants.


  11. Mr Howard:
    Thank you so much for your commitment with what is truth and you determination to fight the crime perpetrated against America by Paulson et all.
    I will print your Amicus and will send it with a letter to my Senator and Representative .
    I invite all the shareholders to to the same , so we make sure that every Congressmen knows the truth.


  12. From Google groups Seysmont 18/11/2014

    Let’s assume the US Treasury wants GSE’s under the boot, and it’s not ideological?

    Lets see what we have? We have the US Treasury Secretaries under two different regimes have a strong desire to get rid of GSE’s.

    GSE’s are the biggest and most successful agency debt program the US. The smaller programs were destroyed before the GSE’s. Sallie Mae, SBAs. All those things were agency debts. All those things competed with US treasury debt. SBA’s have a kicker that targets different investors than treasuries, and Sallie Mae also don’t compete with treasuries anymore. I think GSE’s are in the state they are in because the UST needs all the market it can have in US treasuries, and not the cheaper alternatives than US Treasuries. For all we know QE was another avenue of selling US Treasuries first and boost to the asset values second. UST is basically selling US Treasuries and US Treasury Secretary is the top US Treasury salesman in the land. If you assume that UST was behind the GSE’s sezure, and UST is not ok with releasing GSE’s as is out of conservatorship, things start to make sense.

    Lets go back to 2008. Then Paulson realized US needed a lot of money to recover from the crisis, and he preemptively seized control of GSE’s to make sure US funding ability would be unchallenged. That would be the the reason for controlling the viable alternative to the treasury buyers. GSE bonds are primary competition to the treasuries, because they are identical cash-flow wise, yet cheaper alternative to the treasuries. GSE’s bonds are the result of GSE’s holding portfolios of MBS securities, and those really had to go first no matter what, as GSE’s were preparing to buy distressed MBS and increase issuance of agency bonds. US Treasury couldn’t have that happen, so portfolio was first to go, and needed to be vilified, and GSE’s had to be stopped at any costs from intervention in the mortgage markets. The FED would do it instead, as the FED doesn’t need to issue any bonds to buy assets, just print currency backed by the assets. It was a perfect solution at the time, and that’s why Paulson was primarily against the GSE’s portfolio business. Whether or not they’ve lost money or not was secondary, the agency bonds were a direct threat to the US Treasury. The only way he could have stopped GSE’s from doing what the GSE’s perceived as their charter was to take them over. It was possible the Treasury knew the ability of the market for their paper to take in all the agency bonds and it felt it would be detrimental to the issuance of the Treasuries back then. At the time UST principal stood at around $8T, and I don’t remember what GSE’s bonds were. But everyone knew the borrowing would go through the roof, and GSE’s had no place in cutting in front of the treasuries for the potential buyers of the Treasuries. All Central Banks stopped buying GSE’s bonds and MBS and started buying US Treasuries. The treasury found new market depth. At the time it was possible nobody thought we would have $18T debt and the interest rate would not be maintainable at high rates. Currently we can’t afford higher interest rates anymore. But there is a clear reason why UST was dead set against GSE’s and needed the control of GSE’s. To completely wipe them out could have caused other issues that could have exacerbated the crisis and resulted in more borrowing to cover the hole blown by absence of GSE’s in the housing finance market market. The FED could easily replace the GSE’s in supporting MBS market with no byproduct of issuing the loans.It seemed like an ok solution to Paulson, and he went ahead and executed it.

    The demand for high grade USD denominated debt is high, but even that has its limit. The void that was left after the the blow up of PLS AAA paper was getting filled by the agency MBS, but agency MBS if structured still offer alternative to the treasury buyers. So the final solution would involve some “new” system, whose primary purpose would be to create anything different from US treasury paper. Agency CMOs could be an alternative to the treasuries, thus they had to go. CMOs were neutralized by the terrible accounting, and out of MBS CMOs are also competitors to the US Treasuries, thus they were stopped by the unique to GSE’s change in accounting rules. CMOs are de facto dead, and unstructured pools of mortgages (which is MBS right now) are not a desirable investment vehicle as the cash-flows are not investor friendly, thus not a valid alternative to the treasury buyers. But even those apparently present threat to the US Treasury.

    I’m not saying things happened exactly like that, and it’s a first draft of my thoughts on the matter, but it answers the question who done it. Why? Because of fixed demand for US treasuries? What solution would satisfy the Treasury? The MBS that don’t compete with US Treasury for ever expanding flow of treasuries and a relatively fixed demand for the treasuries. Unfortunately the solution is lacking, but it explains the resistance to give up on the idea. Maybe they can’t even give up, because things are really that bad. They want to add features to disqualify the treasury investors from investing in agency MBS, but then the supply of such investors becomes a problem. My guess is the problem is the US Treasury, so the solution for them may not even exist.

    What do you think about this speculation?


    1. Kurt: First of all, let me say that if I had a limit on the length of comments on this site–which I don’t, yet–this comment would have exceeded it (so for other readers, please try to keep comments shorter).

      I think you’re correct about Treasury’s (and Paulson’s) concerns about Fannie’s and Freddie’s portfolio businesses. With no PLS in 2008, Fannie’s and Freddie’s MBS were going to have to handle most of the demands for mortgage financing. More MBS issues by the two companies would have widened spreads of MBS relative to other fixed income securities, giving the companies an incentive to issue more of their debt and, in buying the MBS other investors were less willing to take, thus grow their portfolios. Paulson didn’t want that. It’s telling that one of the elements of the PSPAs was to shrink Fannie’s and Freddie’s portfolios by 10% per year until they reached $250 billion, even though those portfolios hadn’t been the cause of any losses at the companies, but rather were a source of income. But I don’t know that I’d go much further than that. Specifically, I don’t think Treasury’s continued opposition to Fannie and Freddie stems from the fact that it believes Treasury’s future debt issues would fare better in the market if some other type of mortgage financing supplanted Fannie and Freddie MBS issuances. The markets for straight Treasury debt and prepayable mortgage-backed securities are quite different– which is why Fannie and Freddie were able to make a business out of selling (Treasury-like) agency debt and using the proceeds to buy mortgages and MBS. Treasury has succeeded in winding down that business, and I don’t think it’s looking to do any further engineering in the mortgage markets with the goal of improving the market for its own securities.


      1. Tim-

        Great amicus and discussion. Question: It is oft stated, including by you, that the 10% Preferred was not repayable (even before the Third Amendment). Yet, the Certificate of Designation for this Preferred specifically provides in Section 3 – “Optional Pay Down of Liquidation Preference” that:

        “Following termination of the Commitment….the Company may pay down the Liquidation Preference of all outstanding shares of the Senior Preferred Stock pro rata, at any time, in whole or in part, out of funds legally available therefor, with such payment first being used to reduce any accrued and unpaid dividends previously added to the Liquidation Preference pursuant to Section 8 below and, to the extent all such accrued and unpaid dividends have been paid, next being used to reduce any Periodic Commitment Fees (as defined in the Preferred Stock Purchase Agreement referred to in Section 8 below) previously added to the Liquidation Preference pursuant to Section 8 below.”

        Clearly, after termination of the Commitment, though divs and fees have to be paid first, thereafter the Preferred can be redeemed pursuant to this provision (Section 3), no? Section 3 goes on to say that prior to termination of the Commitment, the Liquidation Preference can be paid down, but in that case only to the extent of accrued and unpaid divs and fees.

        The PSPA is often cited as source of the “perpetual” nature of the Preferred – but I don’t see anything in the PSPA that trumps the language of the Designation…

        What am I missing (clearly something) – please clarify this for me?

        Thank you again for your great work and shedding light…


  13. Mr. Howard thank you for this website and thank you for your first [and THE first] mapping of this situation that made sense [and still does].

    Thank you for helping me stay strong and believe this investment. I truly do not see how any court can deny the facts you have presented. I hope the many hard working plaintiff efforts are made stronger by your unselfish contributions.

    Liked by 1 person

  14. Can you get some whistleblowers? You know a lot of insiders. Wide open the gates and let it flood. There isn’t even flood insurance that could cover it.


  15. Tim,
    Thanks, very well written amicus.
    In your amicus you have tried to be polite.

    You repeatedly mention that FnF were put in to conservatorship as a result of well and long planned Gov policy dating back to year 2000.

    But when we talk about public policy, we assume that it is a open public document based on legal framework and for greater public good. Otherwise it is called conspiracy against public.

    If some small group of people (private officials or public officials or lobbyists) plan to ignore/violate laws and harm the private shareholder companies and shareholders to promote their ideologies and/or benefit themselves then it is NOT called public policy.

    Public officials were very open and clear about their intentions to punish FnF and FnF shareholders. Seizing FnF and putting FnF in conservatorship along with back breaking SPSPA, 80% warrants and ultimate sweep were clear punishments decreed by Emperor Hank and his successors. It was done for long held political ideological reasons against affordable housing and to benefit the other private companies.

    If FnF were defective business models and bad public policies, then the right way was to change them thru public debates and changes to laws. But they knew that better than that.

    The intention was to use chaotic 2008 crisis, distrust and confusion to achieve their long standing wish to NOT only destroy the systematically important national institutions FnF and the ownership of FnF shareholders but also benefit their private corporate masters. This intention turned worst financial crisis in to worst financial meltdown. SPSPA resulted in the abuse of taxpayers money to harm the taxpayers and benefit the same FIs that caused the financial crisis.

    They have kept on changing their narratives with impunity on
    1. Why FnF were seized and put under consrevatorship
    2. Why SPAPA was imposed on FnF when FnF never needed it
    3. Why accounting and regulatory standards were changed specifically to harm FnF
    4. Why charge punitive interest rates and 80% warrants for free
    5. Why 100% sweep of profits and also why plans to make FnF insolvent in year 2018
    6. Why treat FnF differently when compared to other worst offending FIs
    7. Why punish only FnF shareholders when compared to other worst offending FIs

    It looks like “protecting taxpayers” has been used to trump all laws, all reasoning, all logic and trust expected of public officials.


  16. Hail the new website.

    Tim Howard (“the real one”) is one of the most knowledgeable financial services experts in the nation, whose work will be a boon to those who care about these complex issues which have been so distorted by GSE opponents.

    Tim is not a “political animal,” in any classic sense, but there are some “housing policy posers” in this administration and elsewhere “inside the Beltway,” who might feel uncomfortable about his coming website pronouncements.

    Liked by 2 people

  17. Jaw dropping insight on Treasury’s motives. Could you elaborate one step deeper into the root motivation by Treasury(H Paulson) to take GSEs into conservatorship? Is there any validity to my observation that Paulson already had a plan to divest the GSEs to the major banks when he left GS to head up Treasury? The collapse of the PLS market in 04 may have caused a detour but it seems as if The Plan was always there. In other words, transfer the secondary mortgage business to the major banks which would have created shareholder growth value. All at the expense of GSEs shareholders. Thanks in advance.

    Liked by 1 person

    1. James: I don’t know what Paulson’s motivation was for taking over Fannie and Freddie, and it’s possible we’ll never know. I doubt, however that he came to Treasury from Goldman with a plan to turn the companies’ operations over to the banks. If I had to speculate, I would say that after the private-label securities market (which Treasury and the Fed had supported as a superior means of mortgage finance) collapsed in 2007, Paulson was unwilling to rely on Fannie and Freddie as shareholder-owned companies to produce the results he wanted for the financial system and the economy at a time the housing market was in free-fall. I also believe there was an element of “don’t let a good crisis go to waste” operating here: Paulson saw the turmoil in 2008 as an opportunity to disguise a takeover of the two companies as a rescue– thereby achieving a long-held Treasury objective of reducing or eliminating their roles in the financial system– and he took it.

      Liked by 1 person

      1. Can you elaborate on why there is a long-held Treasury objective to eliminate the GSE’s? They are one of the few functioning public-private partnerships that actually serve their purpose well. GINNIE & FHA combo are much less efficient and more expensive, and PLS have fatal flaws in conflict of interest and the risk being limited to the trust. Why would US Treasury want to get rid of something that is functional with no replacement, when they know that under long enough government contrlo they will degenerate into GINNIE/FHA style agencies? And GINNIE to my understanding still relies on the GSEs. It can’t be just the political motivation, can it? It sounds really silly that these people are so ideology driven and yet in charge of the Treasury. It can’t end well.


        1. Serge: I think Treasury’s historical opposition to the GSEs is rooted their federal charter, which it believes is a dangerous combination of shareholder ownership (with a profit incentive to take risk), a “special relationship” with the U.S. government (the implied guaranty), and inadequate regulation (i.e., by other than a bank regulator). In the 1990s and early 2000s Treasury claimed its main concern was Fannie’s and Freddie’s mortgage portfolios, but those portfolios now are being rapidly reduced, while Treasury’s opposition is not. I agree with you that Fannie and Freddie are one of the few public-private partnerships with demonstrated records of success. What I find puzzling about Treasury’s continued opposition to them is the extreme double standard it applies to them and banks. Banks always have had a “special relationship” with the federal government: every time they’ve gotten into trouble as an industry—which has been multiple times in the last several decades—the Fed has dropped short-term interest rates (to the detriment of individuals with interest-bearing savings accounts) to “re-liquefy” them and bolster their profits. The 2008 financial crisis showed that banks are sheltered from the normal effects of private market discipline, and that the largest in fact are “too big to fail.” Unlike Fannie and Freddie, which were taken over and had their shareholders (almost) wiped out, the biggest banks got bailed out with no lasting consequences, and only have gotten bigger since then. Whether it’s politics, ideology, or favoritism for its regulatees, however, Treasury doesn’t see these things the way you and I do.


  18. Tim, thank you. The elephant in the room to me is what happened to the $1 trillion in mbs that Fannie held for itself that has vanished. Even if it was bought by the fed and given to the treasury the numbers don’t add up.


    1. Ryan: I don’t think there is any mystery about Fannie and Freddie’s holdings of MBS. The MBS haven’t “vanished”; they’ve either repaid or refinanced, or were sold by the companies. Since the conservatorship, both have been required to significantly shrink their portfolios, and they have done that.


      1. Sorry, vanished, was not the correct word to use. I understand the mechanism of shrinking a portfolio, my fear is these premium assets were sold at a significant discount.
        It is sad if you think about it, the one institution that provides middle class Americans the opportunity to obtain real assets in a dollar devaluation environment is under such attack by both a (R) and a (D) admin.
        Thank you Tim for fighting this fight. Your brief was excellent.


  19. I saw your remarks on the SCS White Paper. It sounds like overall you agree with the original Adam Spittler and Mike Ciklin paper as well as the Dr. D. Larry Crumbley paper, just not the White Paper. My understanding is that your frustrations are not unique in this White Paper and that the cash flow analysis was not right but the other two papers are right and the overall premise is pretty much right.


    Click to access A-Forensic-Look-at-the-Fannie-Mae-Bailout-Parts-I-II-III-FINAL-20150616.pdf

    Click to access Special-Report-8515.pdf

    Not Right:

    Click to access White-Paper_Treasury-Fannie-Mae-FINAL.pdf

    That’s my understanding anyway — by the way you’re awesome. You have a great legacy if you ask me.


    1. Glen: Thank you for your kind comments. My two major problems with the Spittler, Ciklin and Smith “White Paper” were that it based much of its analysis on Fannie Mae’s cash flow statements–which are not the right starting points and led the authors down paths that resulted in inaccurate observations and conclusions–and that it accepted at face value the unsubstantiated and unverified contention that Fannie and Freddie were forced by Treasury to purchase $40 billion per month in toxic mortgages. Other than that (and that’s a lot), I thought they made some useful points and did good work.


  20. Enjoyed reading your latest Amicus Brief, but question one point. You state that the Boards of Directors for Fannie and Freddie consented to the conservatorships, i.e. voted to accept. In a blog post of my own – – I note discrepancies in Hank Paulson’s version of events as written in his book (commonly believed and repeated) compared to events outlined in his official calendar as posted on Treasury’s website.

    I realize you were not at Fannie Mae at the time of the conservatorship. However, I am interested in your comments regarding why two versions of the same event exist. Thanks in advance.

    Liked by 1 person

    1. fanofred: Thank you for your comment. In the Delaware amicus, I was purposefully general in describing Fannie’s and Freddie’s assent to the conservatorships; all I said was that the companies “gave in to conservatorship.” That they certainly did, in that the conservatorships ultimately were not contested. (After the companies were taken over, a couple of large institutional investors seriously considered filing suit against the government, but with Lehman in the process of melting down they decided not to pursue the matter. But that’s another story.) So saying that I “state that the Boards of Directors for Fannie and Freddie consented to the conservatorships, i.e., voted to accept” isn’t accurate; I don’t. It may well be that no vote was taken by either Board. I have not spoken with the principals (and at the time of the takeovers I was not allowed to, because of my own legal issues), so I simply don’t know.

      Liked by 1 person

      1. Thanks for your prompt reply. I apologize for misinterpreting your statements in the Brief. Needless to say, I do not believe Paulson’s version of events where he states that the Boards consented. If he was trying to state the Boards did not put a legal fight and equates that to “consent,” that’s misleading and disingenuous at best and an outright lie at worst. Again, his version of events in his book do not correspond to the official Treasury calendar. Must be a reason for that…

        Thanks for fighting for the truth!

        Liked by 1 person

  21. Wow! Just ready your brief. It is chilling. Thank you for taking the time to share this. I was aware of most incidents (having read the books you reference), but your coherent presentation makes a very powerful message. I suppose the gov’t will be given the benefit of the doubt about its actions in 2008 (to paraphrase Bethany McLean). Perhaps I’m wrong, but it is hard to prove legally the abuse that the GSEs were exposed to in 2008. What I will hope for is that your brief will get a wider audience (perhaps Hollywood can help?) than hardcore GSE fans. That will perhaps help Washington in coming up with common sense reform for them. Also, I hope the judges on the various cases will read your brief as context to the 3rd amendment, and as you write, see the 3rd amendment as yet another policy decision (but this time illegal) to take from shareholders and give to government. Brilliant work. Loved your book Mortgage Wars! Thanks again, and I look forward to reading the court rulings in a not to distant future.

    Liked by 1 person

  22. Please write more often, and if possible please try to bring other former FnF executives together on one platform to fight out the lies…


  23. Thank you for fighting for the truth!! Your amicus brief was brilliant! A must read for anyone curious of what really happened in 2008.


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