Fannie Mae, Freddie Mac Payments Don’t Benefit Taxpayers by Glen Bradford
The Third Amendment net worth sweep does not sweep money to taxpayers. I am a taxpayer. I have not received payment from the sweep. You have not either. The Wall Street Journal and the Washington Post voice the popular opinion and have a large audience. It’s difficult to tell what’s what when what is published by reputable sources raises more questions than answers.
You may find yourself, as I have, realizing that you are surprised by what is happening. This happens when I am wrong. This happens when the assumptions that I was using to derive conclusions were assumptions that I wished were true instead of assumptions that were actually true. If I am wrong, please reach out to me and set me right. In this case, I think that the way that I could be best put right is if I am missing some way that two of the world’s most profitable companies can be taken over by the government.
The biggest problem with starting to understand Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) is to be able to filter out the difference between the truth of what is actually happening from what is being reported as the truth. What is actually happening is that there are billions of dollars being stolen from private investors. This has been ongoing for years now. Since the amount of money at stake is in the hundreds of billions, activists have stepped in to do the right thing and they will profit handsomely for the justice that they are serving.
Before I dive in, I want to point out something on the Investors Unite call with Ralph Nader, Tim Pagliara and Richard Epstein. For those of you unfamiliar, I am a member of Investors Unite and Investors Unite is a coalition of private investors that are committed to the preservation of shareholder rights.
Tim Pagliaria is a father of two and formed Investors Unite. Ralph Nader, an American political activist with a Fannie Mae and Freddie Mac equity stake pre-dating the crisis, opened the call and spoke briefly about the illegal nature of what has transpired. The bulk of the call, however, was Richard Epstein, a professor of Law at NYU, who walked listeners through the specifics of how the legal system works and touched on specific views shared by Lamberth that are abhorrent misunderstandings of the law.
Investors Unite Call Observations
The first observation is that Richard Epstein did an excellent job explaining the misclassification of the 12%PIK payment option as a penalty payment. Lamberth is wrong. This is not a penalty payment. I have studied this in great detail and this is not being talked about enough, so here I am talking about it first.
Secondly, Bloomberg called in and the only thing that they cared about was if Tim, Richard, or Ralph were doing anything differently now that the stock has dropped roughly 50%. Tim could not legally disclose what he’s been doing, Richard has no financial interest and Ralph still has his shares going way back. I, on the other hand, can openly say that I have bought more shares at a fraction of the price that I used to have to pay to own them. You might call what I’ve been doing “doubling up.” So be it. Now, what I would like to do is talk extensively about what was covered briefly on the call, that is to say that I want to illustrate the temporarily troubling nature of understanding this situation in its entirety. I say temporarily because this will be resolved.
The troubling aspect meanwhile has nothing to do with actually understanding what is happening, but in understanding why people are not seeing what is happening and are reporting things where they start with foregone conclusions and work backwards into their perspectives and do their best to support their foregone conclusions with arguments that when you look closely are as flawed as the foregone conclusions.
I’ll point out a few examples of publicized non-sequitur that for the most part are part of the prevailing popular consensus in regards to Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).
The Post’s View
The Post is obviously confused. That’s how I explain that they thought it was a good idea to write an article titled “A win for Fannie Mae, Freddie Mac … ” and acknowledge in the middle of it, “… as a plunge in Fannie Mae and Freddie Mac stock price suggests …”. How exactly does a win for FnF tie to a plunge in stock price for FnF? It does not. That, my friends, is the definition of a loss. The title should be, “A loss for Fannie Mae, Freddie Mac … “. No further analysis is warranted investigating what is obviously a flawed opinion.
The Wall Street Journal
Included in this article is the view:
These shareholders point out that dividends paid to the Treasury for the rescue have totaled more than $218 billion-apparently exceeding the rescue funds.
What do you mean apparently? You just said in the preceding paragraph:
The two mortgage giants would have failed without a 2008 federal bailout that eventually poured $188 billion into the firms.
Further, it is not very nice that the Journal engages in ad hominem attacks by using phrases like, “old Fannie Mae scam,” “dubious legal reasoning with junk economics,” and “mortgage monsters.”
Now that I’ve got your attention, it’s time to break it down. None of these even come close to the biggest of them all. I’ll quote it from the Wall Street Journal.
One Distortion To Rule Them All
Every nickel the mortgage monsters earn comes courtesy of the taxpayers.
The best thing about this is that it is simple. Better yet, it sounds like a reasonable perspective. That makes it easy for people to believe it. The truth is that the taxpayers have nothing to do with this. The truth is that not all payments to the government are tax revenues. The US government prints its own money. The US government is a currency issuer. As such, its balance sheet and income statement don’t matter that much. What matters is the prosperity of its people. In that regards, interest rates are low, inflation is low and for the most part business is booming.
Are payments from Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) to the US Treasury somehow enabling you and me to pay less taxes? No. Have you received a check in the mail paying back any bailout money or have you been asked for money to fund the bailout? No.
What matters as far as the government is concerned is on any given year if they are taking in more taxes than they are spending or if they are doing the opposite.
Since You Expect The Truth
Further, Richard Bove and David Fiderer are great resources who have a solid handle on what is going on. As David most eloquently puts it,
There never would have been any kind of mortgage crisis if all lenders issued FRMs and followed Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) credit standards.
The truth is that Fannie Mae and Freddie Mac bailed out America. The truth is that they did not actually borrow $187.5B from the government because $161B was non-cash accrual accounting gimmicks. The truth is that I am not sure about the legality of paying interest on money that was not actually borrowed but was theoretically drawn due to temporary fluctuations in perception during a time when people went from believing that things would work out to believing that things would not work out and back again to things will work out.
The truth is that Fannie Mae and Freddie Mac will be restored and released from conservatorship. The truth is that people will figure this out and that it takes time. The truth is that you cannot wind down profitable companies. The truth is that the status quo is temporary. The truth is that I will, unlike Richard Epstein, get rich in the process whereby the public distortion field is destroyed by the whole truth and nothing but the truth. There you have it. Take it how you want to take it.
Disclosure: The author is long FNMA, FMCC.