Industry insiders say a new proposal for the future of the government-sponsored enterprises is deceitful and would line the pockets of hedge funds at taxpayer expense.
The proposal was outlined in Restoring Safety and Soundness to the GSEs. It is intended to be a Fannie Mae and Freddie Mac blueprint for policymakers.
Instead of scrapping existing infrastructure, the report says the secondary mortgage lenders should ensure market stability and not rely on untested systems.
This would include preserving the to-be-announced market.
The report calls for the GSEs to build safe and sound capital levels “to protect taxpayers” — up to a total of between $155 billion and $180 billion in core capital. In addition to retaining earnings — which are currently all swept by the Department of the Treasury — capital would be raised through existing shareholder participation and third-party primary equity raises.
The proposal has the Treasury Department retaining all $266 billion it has received since conservatorship. In addition, the Treasury
retains and exercises warrants for 79.9 percent of
common stock and sells its common shares through secondary offerings in 2019 and 2020.
The blueprint utilizes the existing framework of explicit government support. But the senior preferred stock purchase agreements would be transformed into catastrophic support. The Treasury would be paid a market-based commitment fee.
“This wind down would be effectuated first by reducing the size of the commitment line as permanent equity capital is built, and then by implementing a mechanism that transfers a portion of Treasury’s catastrophic risk to the insurance markets via reinsurance of the PSPA commitment line,” the report stated.
The paper additionally called for the continued wind down of the investment portfolios and
the use of capital markets and insurance risk-transfer structures.
“The approach outlined in this Blueprint brings a shareholder perspective to the ongoing policy discussion,” the report states. “Our goal is to facilitate an end to ongoing litigation on positive terms for all stakeholders, not the least of which is the government (and thereby the American taxpayer) which owns warrants that can be realized for value on the order of an additional estimated $75 to $100 billion.”
But the Mortgage Bankers Association expressed skepticism about the report’s motives. GSE investors that are clients of the report’s author, Moles & Co., reportedly include Paulson & Co. and Blackstone GSO Capital Partners.
“This proposal is clearly self-serving and designed to confuse unsuspecting, innocent taxpayers into supporting a plan that is intended to line the pockets of hedge funds who invested in Fannie and Freddie,” MBA President and Chief Executive Officer Dave Stevens said in a written statement. “MBA has been clear that the self-interests of stock speculators and profit seekers are not in the best interests of either the taxpayer or the housing system. The only solution to reforming Fannie and Freddie is through the legislative process.”
