Amid Delays In Fannie Mae, Freddie Mac Reform, Frustration And Litigation Flourish by: Amanda Maher

Fannie Mae and Freddie Mac were the focus of much debate again over this past week. Writing for Fortune, Roger Parloff got the conversation started with his provocative article “How Uncle Sam Nationalized Two Fortune 50 Companies”. Shortly thereafter, a number of advocates criticized the White House for its lack of housing finance reform.

Parloff’s article is particularly instructive for those who are new to GSE reform. He lays out years of policy changes for readers, and provides a clear timeline from 2008 through today, albeit with his own tone and opinion injected.

Referencing the profit sweep, Parloff writes:

Instead of a 10% annual dividend on all the bailout funds drawn – a dividend that came to $4.7 billion per quarter – the dividend was now to be set at 100% of each GSE’s net worth. One hundred percent. That is to say, any and all profits they posted. And this would be so in perpetuity. For all practical purposes, the GSEs’ shareholders were wiped out. The two firms, on their way back to health, were effectively nationalized.

The profit sweep is nothing short of un-American, he says, before getting into the lawsuits companies have filed against Fannie Mae and Freddie Mac since the policy took effect.

While others have expressed similar frustration with the profit sweep policy, few have laid out the constitutionality of the policy as clearly as Parloff does here—comparing the “nationalization” of the corporations to Truman’s attempt to nationalize steel mills during the Korean War.

Then Parloff describes how “nationalization” is not only filling Uncle Sam’s pocketbook, but how wealthy fund managers are using this as an opportunity to invest in GSE securities at deeply discounted rates. These same fund managers are among the most vocal advocates for the “recap and release” of the GSEs, which would send shares to sky-high levels.

“Their conflicts are breathtaking,” Parloff writes. “What a strange way we’ve hit upon to make policy in our county. Fund managers identify an investment opportunity, then retroactively construct self-serving arguments for why the nation will be a better place if their bets are allowed to hit the jackpot.”

An unintended impact is the wedge the Fannie Mae and Freddie Mac debate has created amongst conservatives. Bipartisan bills aimed at initiating meaningful GSE reform has all but stalled as a result.

Wade Henderson, President and CEO of the Leadership Conference on Civil and Human Rights, acknowledged his dismay with Congress’s inaction on GSE reform this past week. “[The House] hasn’t shown it can handle any other complex policy issue – especially one that ought to be bipartisan,” said Henderson. “Putting the future of our nation’s housing finance system in the hands of this House, while refusing to do what can be done under existing law, shows a level of naiveté and seeming indifference to the consequences of the status quo that is truly disturbing,” Henderson stated in his scathing attack on the Obama Administration.

In the meantime, litigation continues.

On Nov. 17th, Investors Unite held a conference call in which it brought members up to speed on the latest legal development affecting Fannie Mae and Freddie Mac shareholders. One point of discussion was the lawsuit recently filed by Chief Justice Myron T. Steele in Delaware on behalf of Fannie Mae shareholders. The lawsuit argues that the profit sweep is illegal under Delaware law, where Fannie Mae is incorporated.

There remains no clear pathway forward for Fannie Mae and Freddie Mac reform. In the meantime, with sides waging war against each other regarding the legality of the pay sweep and need to (or not to) release Fannie Mae and Freddie Mac, the only uniting factor is the level of frustration everyone is feeling—which only continues to grow.

Fannie Mae Bethany McLean
Fannie Mae