John Carney And His Tortured Logic
Time and time again the editors at the WSJ allow John Carney to suspend reality in the GSE debate, and cleverly present cherry picked facts that appear to support our government’s claims.
To do this requires them to leave out key facts that would render their arguments pointless. John’s near-constant refrain has been that that absent the 3rd amendment sweep in 2012 the GSEs would have been unable to pay the original ten percent dividend in perpetuity.This leaves the casual observer to believe wrongfully that our government did no wrong and will win the court cases challenging the third amendment. John closes his articles with that exact conclusion. This simplified defense does not even begin to assess the true situation honestly.To believe these claims one must ignore what the third amendment is and the effect it has had.
If the GSEs original terms were honored, they would have paid the ten percent dividend to Treasury and kept anything over in their accounts. By now they would have many billions on account while easily paying the 18.7 billion per year dividend payment.This would have provided a big enough cushion to ensure the GSEs would not require any government draw for years to come.In light of this basic fact one quickly sees the absurdity of both John and the Wall Street Journals arguments.

Of course, this is a very simplified version of the truth to understand truly the absurdity of the WSJs line of thinking let’s look a little deeper. Remember in August of 2012 the government claimed they were re-working the original deal because of the death spiral they believed the GSEs were in. They claim that because the GSEs were being forced to borrow money from Treasury every quarter to pay the original ten percent dividend they would one day exhaust the remaining 200 billion dollar lines of credit. Yes, that is 200 billion dollars each for both Fannie and Freddie. As we all know, since the third amendment went into effect neither has needed one penny. We also know now that our government was keenly aware that the non-cash losses forced on the GSEs from 2008-2011 were about to reverse allowing the GSEs to reclaim the billions they were forced to borrow.The sweep ensured that the massive reversals did not end up with the GSEs but rather swept into Treasuries coffers. So this coupled with the fact that the third amendment also requires the GSEs to reduce their capital levels to zero by 2018 are the true reasons why the GSEs have little capital in their accounts to pay the ten percent dividend. I am not going to bore our readers with all of the details that prove just how corrupt our government has been in their treatment of Fannie and Freddie; it’s not necessary. Nor should it be necessary to explain this to the wall street journal. Both John and his editors know exactly what they are doing, but I want to remind them that anyone who even knows the cliff notes on this charade see’s right through their nonsense. Again when one overlays the facts with the Journals reporting it grows even more obvious that they have no interest in the truth but rather blindly supporting our government’s lawless seizure of Fannie and Freddie.

George Will Courageously Lays A Path For True Conservatives To Follow

Last week we saw a very powerful piece by legendary conservative commentator George Will entitled “Treasury’s Fannie and Freddie rip-off” in the Washington Post. Of course being a true conservative George despises even the thought of Fannie and Freddie’s existence but in a very powerful way he has reconciled his hatred of the GSEs with his love for the rule of law. George says:

“The government’s original rescue terms were for Fannie and Freddie to pay a stiff dividend on the bailout funds — 10 percent, amounting to $4.7 billion per quarter. Then, however, the Treasury Department was told of the GSEs’ strong recoveries. According to documents recently unsealed, on Aug. 9, 2012, Treasury was told that the GSEs’ prospects were for strong profitability, requiring no further government assistance. Eight days later, Treasury negotiated with the GSEs’ conservator, the Federal Housing Finance Agency (FHFA), for an astounding revision (called “the third amendment”) of policy: Instead of the agreed-upon dividend, and already enjoying a right to 80 percent of the GSEs’ profits, the government would get 100 percent forever, far exceeding the size of the original bailout.
So, the government (Treasury) negotiated with itself (FHFA) to achieve a windfall for itself. And the conservator abandoned its duty to safeguard the assets of the entities in conservatorship.”

George makes it abundantly clear that he knows exactly what our government is up to.

My favorite passage though is this:

“Many individuals and community banks invested in Fannie and Freddie in good faith and have been injured by the government’s profit confiscation. Granted, a few wealthy people would become more so from judicial invalidation of the “third amendment.” This, however, is at most an argument against creating the moral hazard inherent in GSEs. It is not an argument for allowing the anomalous nature of these institutions to justify lawless discretion by a government as self-interested as those who would profit from restraining the government with law.”

This passage is critically important as he lays out a very simple moral road map for other conservatives to follow as they struggle with this issue. George points out that even if you hate Fannie and Freddie, you must not allow that hatred to allow our government to trample the rule of law. I truly applaud Mr. Will for having the courage to step forward and honor the most cherished conservative ideals.

Carney Fails Big In Attempt To Discredit George Will
Unsurprisingly our old friend John Carney immediately weighed in on George Wills piece.
Johns article in its entirety is here:

“The Myth of the Fannie and Freddie Third Amendment The controversial net worth sweep did not “crater” Fannie or Freddie’s shares.
Conservative columnist George Will recently weighed in on the legal battle over Fannie Mae and Freddie Mac. Unfortunately, Mr. Will repeats a claim about the effect of 2012′s third amendment to their bailout agreements that is almost as pervasive as it is false. “After the government ‘negotiated’ with itself for the GSEs’ profits, the value of their shares cratered,” Mr. Will writes. That’s just not true.
Let’s look at the tape. The government announced the third amendment, which put in place the controversial net worth sweep, on August 17, 2012. One month earlier, on July 19, shares traded at $0.24. The day after the amendment, shares fell to $0.23. One month later, shares traded at $0.28.
Here’s the chart:
Screen Shot 2016-05-08 at 11.01.24 PM
What the chart shows is that traders pushed up the shares of Fannie and Freddie in the weeks before the announcement to around $0.30. After the announcement, shares initially fell back down to where they were trading before that surge. Then they climbed back to the $0.30 level.
Reading this chart, its clearly wrong to say that the value of Fannie and Freddie’s shares “cratered” after the third amendment.
Now take a look at how shares have performed since 2012.
Screen Shot 2016-05-08 at 11.01.32 PM
Looking at that chart, it is hard to see how the 2012 amendment hurt shareholders at all. On the longer timeline, you can’t even see the 2012 change. And, in any case, shares have never traded as low as they traded before the 2012 change. Indeed, shares are up 775% since early 2012 levels. Of course, the stock has risen over the past few years because people believe the profit sweep will be tossed out by the courts. That looks increasingly unlikely.”

Carney’s Epic fail:

Remember that in the years leading up to 8/12 Hedge Funds and other sharp investors who identified a potential turn around by the GSEs had begun heavily investing in the Preferred shares of the GSEs. Here is a chart of FNMAS the most liquid of Fannie Maes preferred shares:
Screen Shot 2016-05-08 at 9.01.23 PM

Here is a chart of FNMAT Fannies T series preferred’s:
Screen Shot 2016-05-08 at 11.24.40 PM

John, staying true to form John tried to cherry pick one fact in an attempt to discredit George’s entire brilliant piece.One problem though this time even his one “fact” was dead wrong. He cited the common stock prices for Fannie and Freddie. As you see above the preffered shares which are what people were heavily investing in at that time did crater just as George Will correctly pointed out.
This is just one more example of how Carney and the WSJ will go to any lengths to spin the narrative in our government’s favor.
Keep the Faith!