It All Comes Down to Money

May 4, 2016 at 9:29 am Leave a comment

There are two reasons governments nationalize corporations:  (1) The company is losing money and it is considered too important to fail; or (2) it is making lots of money and the government wants to get its hands on it.  Fannie and Freddie have had such a roller coaster ride since 2008 that they have been victimized by both impulses.  Since credit unions have a vital stake in the future of the secondary market, they shouldn’t shy away from voicing their opinion.

Yesterday, Freddie Mac announced a $200 million loss for the first quarter.  It attributed the loss to those blasted GAAP accounting rules.  (If only companies could come up with their own financial statements without accountants getting in the way, the economy would be so much stronger.) Specifically they explained that interest rate volatility, combined with the way they book their derivatives, made things look worse than they actually are. Yada, yada, yada. http://www.freddiemac.com/investors/er/pdf/2016er-1q16_release.pdf

Freddie’s announcement raises questions about the continued wisdom of an aspect of US housing policy, which has thus far received too little attention.  In September, 2008 the Government handed the GSEs a lifeline and $187 million was drawn from the treasury.  Congress also empowered the FHFA to act as conservator or receiver of Fannie and Freddie, and to take over the rights of any stockholder, officer, or director.  The Government originally took preferred stock; but, starting in 2012, the Government started sweeping all GSE profits exceeding capital buffers.  Considering that the GSEs have made lots of money in recent years, this was a good deal for the Government.  In fact, it was such a good deal that the Treasury is being sued by private stockholders claiming that the Government is taking money that belongs to them.  Perry Capital LLC v. Lew, 70 F. Supp. 3d 208, 217-18 (D.D.C. 2014).

But, does this policy make sense if the GSEs are losing money?  “This development reinforces my concern over current federal policy regarding the GSEs, who have more than fully repaid the funds they borrowed during the 2008 financial crisis,” said Rep. Michael Capuano, D-Mass.  He is a member of the House Financial Services Committee, who has emerged as a level headed voice of reason on housing policy and was quoted in this morning’s American banker as saying. “Despite this, they must continue sweeping all their profits to the Treasury Department. The policy needlessly prevents them from building a capital reserve, which leaves taxpayers vulnerable in the event of a future crisis.” http://www.americanbanker.com/news/law-regulation/freddies-quarterly-loss-renews-cries-to-end-profit-sweep-1080807-1.html

Political News

A lot happened yesterday in NYS politics.  Long-serving Southern Tier State Senator Thomas W. Libous, whose career terminated following a federal perjury conviction, passed away after battling prostate cancer.

http://www.nytimes.com/2016/05/04/nyregion/thomas-libous-powerful-new-york-senator-felled-by-scandal-dies-at-63.html?ribbon-ad-

Hugh Farley has announced he is leaving the State Senate after 40 years.  For decades, Farley was one of the most influential banking policy makers as Chairman of the Senate Banks Committee.

And, of course, Sheldon Silver was sentenced to 12 years in jail, in addition to a hefty fine, and ordered to pay restitution of over $5 million.

Entry filed under: General, Mortgage Lending, New York State, Political. Tags: , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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