A DC-based advocacy group has now set its sights on Fannie Mae and Freddie Mac’s private investors. The self-proclaimed guardians of “hardworking Americans,” this group called “Better Markets” has resorted to revisionist history as they seek to instead champion the federal government’s seizure of private property. If Better Markets was indeed seeking better markets, they would avidly condemn the government’s actions rather than abet them.
Last week, the advocacy group filed a motion to submit an amicus brief supporting the government’s stance in Perry Capital v. Jacob J. Lew. On appeal in the U.S. Court of Appeals for the District of Columbia, this case was brought by shareholders challenging the federal government’s sweep of Fannie and Freddie’s past, present, and future profits out of the private companies and into Treasury’s coffers.
Unfortunately, the Better Markets brief appears as politically driven as it is factually inaccurate.
Freddie and Fannie are two of the most profitable companies in the world. While they were privatized decades ago, they are commonly referred as “government sponsored entities” because they have federal charters that pledge to promote better access to mortgage credit. Although the mortgage giants have been largely successful in pursuing this laudable end, they have faced turbulent times over the past decade: first due to the financial crisis, and then at the hands of their government captors.
When the housing bubble burst starting in 2007, Fannie and Freddie faced acute financial distress – much like nearly every other American financial institution. However, despite Better Markets’ unsupported assertion of “insolvency,” at no point were the companies failing to meet their obligations as they came due. Nevertheless, Congress passed the Housing and Economic Recovery Act of 2008 (HERA), forcing Fannie and Freddie into a conservatorship whereby the companies would accept $187.5 billion in government funds, which was much more than they needed to weather the financial storm. In contrast to other financial institutions bailed out at the time, Fannie and Freddie’s directors were promptly dismissed and the federal government effectively began negotiating with itself.
What Better Markets hails as a government “rescue,” instead smacks of nationalization. Rather than “conserve” the companies’ assets for the benefit of all shareholders – as both HERA and state corporate law require – the government unilaterally amended HERA to sweep all profits into its own coffers right when the companies returned to profitability in 2012.
Better Markets applauds this as “repayments that taxpayers rightfully received.” However, Fannie and Freddie have since repaid the $187.5 billion the government pressed upon them during the crisis – plus many billions more each year on top of that. That is not repayment, but a government seizure of private funds.
Better Markets further claims shareholders are attempting to “put taxpayers on the hook for their losses.” But it is actually the federal government that is setting the taxpayers up for the next fall. Without a better alternative, the government has kept Fannie and Freddie operating in order to provide stability and assistance to the secondary mortgage market. However, rather than permit the companies to build capital reserve that would help insulate taxpayers from the next downturn, the government is seizing those funds for redistribution elsewhere.
What Better Markets describes as Fannie and Freddie’s “reckless behavior” prior to mortgage market collapse, was actually largely attributable to the government: federal legislation mandated that the two mortgage giants “facilitate the financing of affordable housing” while earning “a reasonable economic return.” In this way, government intervention pressed the companies towards riskier investments in the name of supporting affordable housing.
In fact, it was Fannie’s CEO who warned in 2005 about other lenders’ riskier lending habits, stating publicly, “One of the things we don’t feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk.” But other lenders and regulators ignored such cautionary statements and Better Markets is now attempting to turn the blame back on the companies that forewarned.
Better Markets misconstrues the facts of the case as much as it does the law. The organization’s noble mission of “to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system” would be far better served by holding the federal government accountable for subverting state and federal law. When the government is permitted to flout the rule of law in order to award itself massive payouts from two private companies, markets will suffer.
Logan Beirne is an ISP Fellow & Lecturer in Law at Yale Law School. He is the author of Blood of Tyrants (Encounter Books).