Bud Fox News has learned that Mel Watt, the director of the Federal Housing Finance Authority (FHFA), invoking Judge Royce C. Lamberth’s recent high-five to big government in his decision in a DC District Court case (Perry Capital LLC v. Jacob Lew, Secretary of Treasury), has done a cash sweep of his own, swiping all of Fannie Mae’s (ticker FNMA) excess cash and heading to the Cayman Islands. Said a FHFA employee who asked to remain nameless: “Right after the decision was announced [Monday, September 29], Mel called me into his office. He had an open bottle of champagne on his desk, and he handed me a glass as soon as I walked in. He said a celebration was in order because of the Lamberth decision. At the time, I didn’t quite realize what he meant.”
Said Fannie/Freddie follower and co-author of Reckless Endangerment Josh Rosner of Graham Fisher when interviewed last Friday by Bloomberg Advantage and asked about the decision’s implications: “…if the conservator decided he wanted to take all of the assets of Fannie Mae and Freddie Mac and transfer them to himself as salary, there’s no ability to go to court and say, ‘You can’t do that.’”
Bud Fox News managed to reach Watt by cell phone. Here’s how he explained his behavior:
“Mr. Rosner is exactly right, and I’m the conservator. Look, let’s be honest, this is what every government hack who runs an agency dreams of- a court-approved license to steal. Right after that decision came out, I decided to take a big payday. I cleaned out Fannie’s cash balance and hit the road. I’ll let the next guy gut Freddie. The way the justice system works these days, there’s probably no rush. Gotta go, I have to flip these conch burgers.”
As reported by the Wall Street Journal, Judge Lamberth threw out claims brought against the federal government for sending nearly all profits generated by Fannie Mae and Freddie Mac (ticker FMCC) to the US Treasury, a sweep which began last year. The sweep was made possible by a 2012 amendment to a 2008 agreement, the Senior Preferred Stock Purchase Agreement (SPSPA), between the FHFA, which is the conservator of Fannie and Freddie, and the US Treasury. The plaintiffs, a number of high profile hedge funds, claim that the 2012 amendment was illegal for several reasons. The judge basically concluded that the Housing and Economic Recovery Act of 2008 (HERA), which created the FHFA and put Fannie and Freddie into conservatorship, does not give parties harmed by the legislation recourse to the court system.
When asked for a comment, Professor Verbal Funderbunk, Director of the CountryWide Institute for Real Estate Studies at Slater Industrial and State Normal School, said, “This is the government, with judicial OK, saying, ‘If you like your profits, you can’t keep your profits.’ As the estimable Richard Epstein wrote in his Forbes column, ‘A conservator is supposed to nurse a business back to prosperity.’ He’s not supposed to let the federal government milk it dry.”
In 2008, Fannie and Freddie were in serious financial straits because of the housing crises. As a result, legislation was passed that called for a newly-created regulator, the FHFA, to appoint a conservator who was supposed to be independent of the federal government. In a move typical of power-grabbing federal agencies everywhere, it appointed itself. At the time of the initial legislation, the government gave itself warrants to acquire 80% of Fannie and Freddie’s common stock as well as senior preferred shares that paid a 10% dividend. But in August 2012, the government amended the agreement governing the preferred shares by waiving its right to receive senior preferred dividends in exchange for a full dividend sweep. According to the Wall Street Journal, the companies received nearly $188 billion in government aid during the crisis but as of September had paid $218.7 billion to the U.S. Treasury in dividends. Said Professor Funderbunk, “During the negotiation over the 2012 amendment, clearly the conservator, whose interests really should not have been aligned with those of the government, was no Scott Boras.”
When asked about the ruling last week at a press conference, President Obama gave the matter short shrift and asserted: “I applaud Director Watt for using the full powers of the federal government to his benefit. I wish him well in the Caymans. And let me clear, shareholder rights, and property rights more broadly, can’t be trivialized enough.”