Noted consumer activist Ralph Nader, who has lately taken up the cudgels on behalf of non-government shareholders of Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) (he is one himself), wrote yesterday to Secretary of Treasury Jacob Lew seeking clarification on a 2010 US Treasury memo.
A contradiction in terms
The offending memo, which can be read in full here, contains a phrase as follows:
“Makes clear the Administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.”
Ralph Nader interprets the phrase as a clear indication that the Treasury had every intention of denying the GSE shareholders any benefits from the companies’ future profits. He asserts in his letter to Lew that this was in clear contradiction of the terms stipulated in the GSEs’ preferred stock purchase agreements that their assets be “preserved and conserved.”
“What legal authority does the Administration have …to completely wipe out shareholders?” asks Nader, considering that taxpayers’ bailout dues would soon be repaid in full by Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)
Gretchen Morgenson on “The Untouchable Profits of Fannie Mae and Freddie Mac”
Ralph Nader attached in his letter a copy of the above article published in the New York Times, and repeats the point raised in it that shareholders could be treated fairly even after repaying taxpayers. “The federal government has similarly recouped taxpayer money used to bailout other corporations (A.I.G., Citigroup, etc) involved in the financial collapse, but has allowed the shareholders of those companies to share in their recovery,” asserts Nader. “The same should be the case with the GSEs.”
Ralph Nader is silent, however, on another issue raised by Morgenson in her article – right or wrong, the decision by the authorities to deny shareholders rights in future profits was material information that was never communicated to the Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s shareholders, based on the opinion of securities law expert Lewis D Lowenfels.
Misrepresentation by officials
Though this non-disclosure of material information is probably bad enough, there was worse before the GSEs landed into conservatorship.
Ralph Nader has long been pointing out that various officials are guilty of painting a rosy picture of the GSEs’ affairs before the housing crisis, leading shareholders to believe that all was well. The reality, once the storm broke, was quite different.
“Shareholders who might otherwise have been apprehensive about keeping their Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) stock, even as the financial crisis was mushrooming, were led to believe these two prominent GSEs were financially sound,” says Nader in his letter dated May 23, 2013 to Jacob Lew, Secretary of the Treasury. “Even the most risk-adverse, prudent investor was comfortable relying on statements from knowledgeable high- ranking government officials who publicly claimed Fannie Mae and Freddie Mac were rock-solid companies.”
“Let me just say a word about GSE’s, because you raised that. The GSEs are adequately capitalized. They are in no danger of failing.” – Ben S Bernanke, Fed Chairman, to the House Financial Services Committee, July 16, 2008.
In effect, a GSE shareholder was misled before, and kept in the dark later.
Reconciling Ralph Nader
It is interesting that Ralph Nader has a previous history of crusading against Freddie and Fannie.
In her article “How Ralph Nader learned to love Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA),” Bethany McLean digs up his earlier testimony and statements against the GSEs and is surprised that “despite his prescient warnings and his dislike of the GSE business model, somewhere along the way Nader bought stock in Fannie and Freddie.”
She also points to another “irony,” – the alignment of Nader’s interests as a shareholder with “the interest of powerful financial firms – not Nader’s usual pals! – including hedge fund Perry Capital and mutual fund Fairholme Capital.”
“Is it just a story of pure hypocrisy, the way we can all change our minds when our own money is at stake?” asks McLean.
Come to think of it, there really is no hypocrisy here. When Nader demanded better governance and oversight of Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) in his 2000 testimony, he was clearly carrying a bat for taxpayers, hoping to shield them from a recurrence of the savings and loan debacle.
It is to his credit that his warnings were so prescient, yet Nader’s priorities have not changed. Pay the taxpayers by all means, but play even-handed with shareholders too, is all he asks.
In all fairness, Ralph Nader has the right to criticize the Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) and Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s risky models and executive compensation, yet is fully entitled to demand equity for both taxpayers and shareholders in the same breath.
Where is the hypocrisy in that?