In a political season of arguably historic proportion, developments in the Fannie Mae / Freddie Mac world of finance that are equally stunning. Legal precedents are also being set regarding the ability of government to appropriate private wealth made with the US housing market resting in the balance.
Filings reviewed by ValueWalk show that key leaders driving current policy — US Treasury Secretary Jack Lew, US Senators Bob Corker (R-TN) and Mark Warner (R-VA) – had investments in Fannie Mae and Freddie Mac to various levels. The issue of their private ownership has now come to light with nearly $2 billion in quarterly revenue at stake
Senators shed their Fannie Mae exposure
Treasury Secretary Jack Lew came into office in 2013, after a strong if not historic stand was taken in 2012 claiming profits from Fannie Mae and Freddie Mack as US government property. He, along with Senators Bob Corker (R-TN) and Mark Warner (R-VA), are considered by Fannie and Freddie investors to be aggressive in their actions to wind down the government-dependent firms. Secretary Lew had bond exposure before he was US Treasury Secretary, but had no exposure upon taking office in 2013, according to a document available under cabinet official’s disclosure. Corker liquidated his Fannie Mae investments before 2008. A source with knowledge of Sen. Warner’s portfolio said the GSE exposures were liquidated when he came into office in 2009, but documentation of many LLC structured investments remains murky. As of 2010 Fannie Mae exposure was not listed in Senator Warner’s disclosures.
On January 11, 2009, public disclosure show that Lew owned interest bearing investments in Fannie Mae. Public documents on OpenSecrets.org show Senators Corker and Warner had ownership, but their exact exposure was not individually listed. Senator Corker listed exposure to “FHLMC,” an acronym for Fannie Mae. He was also exposed to FNMA notes, related bond investments. Senator Warner was exposed to the stock of Fannie Mae through a third party investment advisor in a Limited Partnership account structure and did not make direct stock investment decisions.
Sen. Corker’s office did not specifically address the management of the investments. Micha Johnson, a spokesperson for Senator Corker, noted that he decided to eliminate a wide range of stocks upon joining the Senate. Separate documentation shows that from 2007 to 2008 Corker reduced his portfolio to 38 constituents from 337 in 2007, when the Fannie Mae stock and bonds he held were among sevral in his overall portfolio.
As previously reported in ValueWalk, both Senators Corker and Warner had invested in Goldman Sachs “Abacus” derivatives investment, with Corker specifically investing in Abacus 2007-18 CDO, an investment product that profited from the sub-prime mortgage crisis. Fannie Mae was on the other side of the trade and fell into conservatorship as a result of the financial crisis.
Sen. Corker has recently come under fire for association with Wells Fargo Bank.
“While many senators on both sides of the aisle have pilloried Wells Fargo for its reprehensible treatment of consumers, Sen. Corker’s comments have been tepid. Perhaps this is because of his long financial relationship with the bank,” Anne Weismann, Executive Director for the Campaign for Accountability said in a statement. “The CFPB, which – unlike Congress – is not beholden to the financial industry, doesn’t shy away from holding the big banks accountable for their misdeeds. Confronted with clear evidence of massive fraud, if Sen. Corker continues to give Wells Fargo a pass, reasonable consumers should ask why.”
Sen. Corker was minority passive investor in a project in Alabama and had absolutely nothing to do with the financing for the project, nor is he a party to the Wells Fargo loan in question, his office said. In Senate hearings today, Sen. Corker said it would be “malpractice” if Wells Fargo bonus money was not clawed back.
“Senator Warner’s investments have been managed by an independent trustee since becoming Governor of Virginia in 2002,” Rachel Cohen, a spokesperson for Sen. Warner, told ValueWalk, noting he is continuing to push to reform the housing finance system “so that taxpayers are never again on the hook for a bailout.”
Fannie Mae – High stakes game being played out between investors and political leaders
Senators Corker and Warner are in the middle of a high-stakes battle involving the US government on one side and investors, including powerful hedge funds, on the other.
It started following the 2008 financial crisis. Fannie Mae and Freddie Mac, both government dependent organizations that insured home mortgages, required a bailout as toxic derivatives compounded the mortgage loan problem. Numerous bailouts were required for major banks as well as a handful of major corporations. (As reported in ValueWalk, Sen. Warner has sponsored derivatives legislation to address the issue.)
On the bailout list was General Motors and American Insurance Group as well as Fannie Mae and Freddie Mac. All three were corporations trading on the New York Stock Exchange, but Fannie Mae and Freddie Mac were considered government-sponsored entities.
During the crisis, the US Treasury Department orchestrated the government taking 79.9% control of the stock in exchange for the bailout with the initial understanding that once the bailout money was returned, the government would sell its stock ownership. The process of the government taking control of private organizations was widely criticized in the investment community. A ruling by US Court of Federal Claims Judge Thomas C. Wheeler stated the government overreached in taking equity in AIG in exchange for a government bailout, for instance.
As all the bailout companies returned to profitability, they repaid the government. Fannie Mae, for instance, received a $188 billion bailout allocation from the government. As of a March 2016 payment, Fannie Mae had repaid $147.6 billion, with The Hill reporting Fannie Mae only ended up receiving $116.1 billion, thus having paid back the bailout in full.
The government divested its holdings in GM and AIG after the bailout was repaid, but remains committed to maintaining control of Fannie Mae and Freddie Mac revenues. “These entities would not be generating one penny of income if the federal government wasn’t standing behind them,” Johnson told ValueWalk.
Critics say the government is significantly overreaching in the case of Fannie Mae and Freddie Mac because they won’t relinquish their stock ownership. Particularly sharp critique is leveled at the method under which a shareholder agreement was altered in 2012.
Fannie Mae – Altering revenue agreement was key point that left investors in cold
A key moment for all investors came in 2012 when an agreement beneficial to shareholders was altered. The new plan called for profitability from Fannie Mae and Freddie Mac to be returned to the US Treasury rather than going to investors.
Before this plan was executed, Senators Corker and Warner exited their Fannie Mae investment. Secretary Lew is documented to have exited the investment before he took office in 2013.
Senators Corker and Warner went on to sponsor the Housing Finance Reform and Taxpayer Protection Act, which is designed for the government to take full control of Fannie Mae and Freddie Mac, leaving investors with essentially worthless shares. On May 15, 2014, the Senate Banking Committee passed the legislation and it awaits full Congressional approval.
“Sen. Corker has made no effort to interfere with the rights of Fannie Mae and Freddie Mac shareholders,” Johnson told ValueWalk. “He believes they will have their day in court.”
Those attacking Sen. Corker are politically motivated, his office said:
This is yet another ridiculous narrative being peddled by a shadowy, politically-motivated special interest group that refuses to disclose its donors. This dark money entity has an abysmal track record for accuracy, and just like the other unfounded claims they have leveled against Sen. Corker, this too is completely baseless.
This article was researched by Travis Rothell, who previously held a position in Fannie Mae.
This article was updated 9/21/2016 to reflect information provided by the US Treasury Department relative to Secretary Lew’s holdings and his timeline in office. The article was also updated to reflect a source close to Sen. Warner’s office saying their GSE exposure was liquidated. The Treasury Department provided documentation to confirm the holdings, but Sen. Warner did not provide detailed documentation.