By defying and rewriting the terms of conservatorship, the U.S. government acts as a destabilizing force, notes William Isaac, former FDIC Chairman.

Fannie Mae Freddie Mac FHFA Federal National Mortgage Assctn Fnni Me (FNMA) Bove

In an article published in The Wall Street Journal, William Isaac, former chairman of the Federal Depositor Insurance Corp. points out FHFA could have put Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) into receivership instead of conservatorship.

Government’s violation of law by seizing profits of Fannie Mae, Freddie Mac

William Isaac points out over the past two years, the federal government has violated both the letter and the spirit of the law by illegally seizing profits of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

In May, it was reported that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) would pay $5.7 billion in dividends to Treasury bringing total payment to $126.8 billion compared to $116.1 billion cash infusion that it has received since the government intervened to keep company solvent. Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) too indicated that it would pay $4.45 billion, bringing total dividends to $86.3 billion, compared to the $71.3 billion bailout that it received.

William Isaac notes under the law, the Federal Housing Finance Agency could have put the two GSEs into receivership, though it placed them into conservatorship, largely to reassure foreign investors who owned mortgage-backed securities.

However, he points out that instead of ‘conserving the enterprises’ assets and property’ for shareholders, the Obama administration moved in 2012 to confiscate the entire profits of the two GSE’s and wind down the mortgage giants.

Government against disclosure

The former chairman of FDIC highlights that in its May 30 filing by the government in the U.S. Court of Federal Claims the FHFA has come out with its own definition of ‘conservatorship’, as it argued against disclosing relevant information. He criticizes the government’s argument against disclosure as it said such a disclosure could “create market perception that the Enterprises are not financially viable”, and that “this would have a negative impact on sales of debt and mortgage-backed securities”.

The former FDIC chairman notes by taking all of the enterprises’ profits, the government has left them undercapitalized and permanently unable to rebuild their capital.

He wonders if the administration plans to wind down Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) with no recourse for investors or to nationalize them in creating a new federal housing entity, where will the capital come from to finance the new system. Moreover, he wonders which investor would put capital into something so uncertain and so unprotected by law as the GSEs have proved to be.

The former FDIC chairman highlights that if the rule of law is not followed, future investment in banking institutions will be deterred, much to the detriment of the financial system and economy.