Source: United States Senate
Mr. James Millstein [view testimony]
Mr. James E. Millstein
@1:20:50 ". . . The system that Senator's Corker and Warner designed is one that requires a good deal of first loss capital. We here can speculate on how much it is, when it will come, and how much appetite there is. But at the end of the day, your legislation is depending upon the investment decisions of tens of thousands of investment managers, and you can't command them to show up on queue. They are going to have to see the new system design, and see it operate a little-bit, before they are going to start coming in droves.
Today, with all due respect to my colleague Mr. Zandi, there is $8B of capital in the private mortgage insurance business. Yes, Mr. Burkowitz has shown up with an offer that says he will put $17B in, but there is a long way between that offer and a closing; a lot of other things have to happen. But the most important lesson, I think, in terms of this benchmark vs. timeline is: you are trying to design a system that will induce people to put capital into new mortgage insurers and into new first loss securities that don't exist today, in a system for a guarantor with a guarantee that doesn't exist today, for a market of new securities that doesn't exist today -- it's going to take time.
Mr. John Bovenzi: ". . . [U]ltimately the employees of the two government sponsored enterprises and the Federal Housing Finance Agency (FHFA) will determine whether the start-up is a success or a failure. They are the people who have the ability to effectively transfer critical functions to a new agency. Their experience and expertise should not be undervalued or lost if Congress decides to move in the direction of the proposed legislation."
Dr. Mark Zandi: "Dismantling the two institutions would risk disrupting the flow of mortgage credit, which, for all their faults, Fannie and Freddie have continued to provide efficiently through the Great Recession and subsequent recovery."
Read Mark Zandi's Full Testimony >>
Mr. David Min: "The guiding principle for legislators and regulators who are structuring our housing finance transition must first and foremost be, “Do no harm.” Avoiding the disruption of mortgage liquidity, either systemwide or in individual market segments, should be a paramount concern during this period. A failure to adhere to this principle would be catastrophic for the housing markets and the broader economy."
Read David Min's Full Testimony >>
The National Association of Realtors (Jamie Gregory and Joe Ventrone) and their California colleagues (the CAR [Joel Singer and Leslie Appleton Young]) invited me to attend a segment of their, multi-day, San Francisco conference, held at the Moscone Convention Center, and hear a discussion/debate between the American Enterprise Institute’s (AEI) Peter Wallison and the University of California’s, David Min. David Min is a nationally recognized expert on financial markets regulation, and his research interests focus on the law and policy of banking, real estate finance, and capital markets. Peter Wallison is a lawyer, Former White House Counsel Member, and Fellow in Financial Policy Studies at AEI.
I was fortunate enough to ask a question in regard to the Wallison (along with his colleague Ed Pinto at AEI) arguments that low income lending by Fannie Mae (and Freddie Mac) were the cause of the 2008 financial meltdown.
Specifically, I asked Mr. Wallison why the AEI never makes mention of the valueless $2 Trillion in near worthless private label mortgage backed securities (PLS) issued outside the Fannie and Freddie systems, by Wall Street banks and investment banks, and sold throughout the world, causing the US real estate softening to become an international crisis, costing hundreds of billions in losses. Those PLS securities fared 5 to 10 times worse (frequency and severity of default) than the Fannie/Freddie bonds, but AEI always singles out the former Government Sponsored Enterprises for scorn, never the banks and now their investment banking subs.
Wallison denied that Wall Street efforts were that large and before I could follow up, Professor Min, whose presentation had strong supporting facts, jumped in and said to Wallison (paraphrasing) "you denier, myth inventor, you…”
I had an opportunity to throw in a few statistics about big bank’s LIBOR manipulation, fraudulently rated AAA mortgages, and wrongly foreclosing on homeowners. But Mr. Wallison shrugged-off any bank wrongdoing, ignoring the Presidential Financial Inquiry Commission, headed by former California Insurance Commission, Phil Angeles, and the Federal Reserve Board staff study, which said Wallison and Pinto were wrong. There also are about four or five other strong AEI rejections by widely known financial types.
I also had a chance to question the validity of the Corker/Warner bill, which aims to replace Fannie and Freddie with a system owned by the big banks, increases costs for homebuyers, and replaces the 30-year fixed rate mortgage with ARM/jumbo loans. The bill would also cost taxpayers billions of dollars, introduce new risks, and likely produce little, if any, benefits to taxpayers; as others have noted more eloquently, Replacing Fannie Mae and Freddie Mac Is a Fix That Has Nothing To Do With the Problem.
Rep. Jeb Hensarling’s big bank supporters were out in full force at the conference, tweeting heavily about their proposal to eliminate Fannie and Freddie. I’ve already had an opportunity to provide statistics to the Financial Services Committee back in July when they tweeted to Restore Fannie Mae. Hensarling’s bill is also on hold status in Congress based on its low probability of ever passing full vote in Senate.
America has come a long way since the 2008 financial crisis, and I am more confident than ever that the National Association of Realtors and the California Association of Realtors are leading the way in innovation and sustainable, real estate market growth. Their openness to grass roots efforts such as Restore Fannie Mae, underscores their positive, broad-based support for industry discussions on housing finance.
The National Association of Realtors and the California Association of Realtors know how to put on an amazing event, and I was honored to attend. It was also a pleasure to get to see Hillary Clinton's keynote. The expo and panels were all very interesting; the people were friendly, and very well organized. I want to give a special thanks again to NAR's Joe Ventrone and Jamie Gregory, and CAR's Joel Singer and Leslie Appleton Young. I hope to see you again next year with a newly restored Fannie and Freddie!
Source: Bill Maloni's GSE Blog
In a conference call I did this week for a fledgling DC company, Capitol Forum, I explained to listeners why I was “more optimistic than I’ve been in months” about the possibilities that the future would include some form of Fannie and Freddie, working within the nation’s mortgage finance system as privately owned companies.
. . .
Here is a link to a presentation by Fairholme in the Wall Street Journal:
Fairholme Capital Management Announces Proposal for Purchase of Insurance Businesses from Fannie Mae and Freddie Mac
Source: BusinessWire via StreetAccount
- Fairholme Capital Management (“Fairholme”) announces that it has submitted a proposal to relevant federal government officials for the purchase by private investors of the mortgage-backed securities insurance businesses of the Federal National Mortgage Association (“Fannie”) and the Federal Home Loan Mortgage Corporation (“Freddie”).
- The proposal:
- Brings approximately $52B of private capital to support credit risk on more than $1T of new mortgages without market disruption;
- Allows for the liquidation of Fannie and Freddie, ending their Federal charters and special status, without losing the value of operating assets critical to the mortgage market;
- Reduces systemic risk by separating new underwriting from the legacy investment books of Fannie and Freddie; and
- Preserves Government options for affordable housing initiatives and counter-cyclical liquidity – but using tools other than Fannie and Freddie.
- The centerpiece of the proposal is the establishment of two new, State-regulated private insurance companies to purchase, recapitalize, and operate the insurance businesses of Fannie and Freddie. The new companies would have no Federal charter or special status, and the names “Fannie” and “Freddie” would be retired and never used again. The legacy book of investments and insurance in existence on a specified cut-off date would be wound down over time, with the proceeds used to fully repay the U.S. Treasury for its investments in the companies as well as provide a fair profit on that investment. The new companies and their private owners would earn profits only from the new business written by the State-chartered insurers after the cut-off date.
- The new companies would require no subsidy or support from the United States Government to begin profitable business immediately. However, the business model of the new companies would be compatible with a Federal reinsurance program or other Federal intervention in the market.
- The proposal contemplates a number of conditions, including the support of the Federal Housing Finance Agency, the U.S. Treasury, and other investors in Fannie and Freddie. Fairholme has conferred with many investors who support this proposal. A copy of the proposal will be made available online at www.fairholmefunds.com.
In a previous column, Grand Theft Treasury, I highlighted the recent lawsuits (now numbering seventeen) brought against the United States in connection with its controversial conservatorship of two government-sponsored enterprises, The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac).
The occasion for that story was the then-recent public announcement that about $59 billion had been paid to the United States Treasury as a “dividend” on the $188 billion in purchase money payments that Treasury had advanced to Fannie and Freddie pursuant to agreements that it had entered into with its conservator, the Federal Housing Finance Agency (FHFA). The two key agreements were the initial “Senior Preferred Stock Purchase Agreement” of September 26, 2008, and the Third Amendment to that agreement of August 17, 2012. (All the relevant documents can be found here).
This past week two events of note took place. First, the United States filed its much anticipated brief in Washington Federal v. United States, defending itself against charges that it had seized the wealth of the private shareholders of Fannie and Freddie. The second is that FHFA, on behalf of Fannie and Freddie, paid the Treasury another $39 billion in dividends on the original advances of about $188 billion. Combined with the earlier payments, the Treasury has now virtually recouped its huge original advance. The prospect of further and equally lucrative paydays promises to turn Treasury’s erstwhile “rescue operation” into an unparalleled bonanza for the government. The deal looks almost too good to be true. Indeed, a close examination of the government’s responsive brief reveals that it is.
The Original Deal
At root, the legal challenges to the government’s action rest on the one-sided terms of the original stock purchase agreement and especially the controversial Third Amendment. In September 2008, FHFA wrested control away from the Boards of Directors of Fannie and Freddie by installing itself as the conservator of both corporations, charged with managing all of their affairs. Armed with these extensive powers, FHFA promptly entered into a sweetheart deal with Treasury whereby Treasury purchased a new issue of senior preferred stock from Fannie and Freddie for about $188 billion, which carried with it a 10 percent dividend, and an option that allowed Treasury to acquire some 79.9 percent of the common stock for the nominal price of $0.00001 per share. That transaction drove down the prices of the common and (now junior) preferred. The 2012 Third Amendment replaced the previous 10 percent dividend with a “sweep” to Treasury of all the net profits of Fannie and Freddie, as of January 1, 2013.
The deal was made just as both companies were returning to profitability. As commonly expected, the revised agreement has proved wholly one-sided. Treasury has reaped over one hundred billion dollars and, through the profit sweep, has assured that Fannie and Freddie will never amass a single dime to enable the repurchase of the senior preferred stock. A conservatorship requires the conservator to act in the best interest of its beneficiaries—here the shareholders of Fannie and Freddie at the time the conservatorship was imposed. The original stock purchase agreement, and most emphatically the Third Amendment, which benefited only FHFA and Treasury, were signed in blatant violation of that basic duty. FHFA’s responsibility to the shareholders demands, at the very least, was that the Third Amendment be unraveled, and not exalted.
The Government’s Response
In speaking and writing about this issue (which I have done as a paid consultant for several hedge funds), I have often been asked how the government could defend itself in these dubious transactions that would be regarded as both intolerable and illegal if done by private parties. The government brief does not provide an acceptable answer to that question on either procedural or substantive grounds.
The Procedural Move.The government’s initial move is to refer to a key provision of the conservatorship law that it reads as making it impossible for the shareholders to have their day in court. Thus under 12 U.S.C. § 4617(b)(2)(A), FHFA shall “as conservator or receiver, and by operation of law, immediately succeed to—(i) all rights, titles, powers, and privileges of the regulated entity, and of any stockholder, officer, or director of such regulated entity with respect to the regulated entity and the assets of the regulated entity.” According to the government, this provision silences the shareholders because all their rights and powers have been transferred to FHFA.
That extravagant claim makes sense only so long as the interests of FHFA are aligned with those of its shareholders. The obvious distress of many financial institutions means that something has gone amiss. It is therefore a legitimate legislative judgment to grant the new government officials the power to pursue all claims that the corporations and their shareholders could bring against outsiders.
In support of its position, the government cites a 2012 Circuit Court decision, Kellmer v. Raines, which held that only FHFA was in a position to sue the former officers and directors of Fannie and Freddie for the breach of their duties to the corporation. That court insisted that, as a general proposition, its sole job was to “read the statute,” from which it concluded that “all rights, titles powers, and privileges” meant just that.
Therefore, on the basis of Washington Mutual, the government now insists that individual shareholders cannot sue FHFA and Treasury either as owners of shares or “derivatively” (that is, not in their own right but on behalf of the corporation). Thus the government concludes that persons who claim that billions of their dollars have made it into the treasury lack “standing” to challenge the FHFA and Treasury in court on, it appears, any and all legal grounds.
Two responses are appropriate. First, it is an absurd literalism to read the statute as though it contains no implied and necessary exception for those cases in which shareholders claim that FHFA has acted in violation of the duty of loyalty to them. The general legal maxim is that no person shall be a judge in his own cause, which is just what the government does with its wooden reading of the statute. The judicial injunction to read the statute means to read it as a whole, so as to make sense of all its moving parts, not just some.
Second, read as the government would have it, the statute is flatly unconstitutional because it denies individuals and their property the protections afforded against the government by the Fifth Amendment to the Constitution, which says “No person shall . . . be deprived of life, liberty, or property, without due process of law.” This, at a minimum, gives them the right to a hearing before a neutral and impartial judge in cases that involve major disputes over the nature and validity of substantial property claims.
The canon of constitutional avoidance holds that all statutes should be construed to avoid any serious clash with the Constitution “unless such construction is plainly contrary to the intent of Congress.” The government’s interpretation of the statute flouts that rule; if adopted, it should lead to the statute’s invalidation to the extent that it bars shareholders from the courtroom door.
The Substantive Move. The government’s second response is that even if they are allowed into Court, the shareholders of Fannie and Freddie really have nothing to complain about because their property has not been taken. At one point, the government makes the weird claim that this action should be barred because the plaintiffs do not allege that “the Government has the citizen’s money in its pocket.” The technical reason for that claim is that Washington Mutual did not allege that the government had taken the money, but only that it had suffered a reduction in its shares’ value as a result of the government’s action.
Yet that perceived defect in pleading is easily remedied. The explicit purchase agreement took stock from the corporations in exchange for the infusion of cash. The taking comes from the fact that the value given to Fannie and Freddie was less than the value taken from the corporations. Phrased in this way, there are 100 billion reasons why money that belonged to the two corporations ended up in the pockets of the United States after the last two major sweeps.
The argument that these transactions count as takings is no more complex than the simple claim that the government forcibly takes the house of A, worth $100,000, for a mere $25,000. The forced purchase on unequal terms is a taking of $75,000, which should be enjoined unless the government ponies up the remaining $75,000. The situation does not change if the government plunks down that $25,000 in cash in exchange for a mortgage upon the property for $75,000, which it then empowers itself to collect by renting out the premises, keeping all the rents net of expenses for itself.
The Third Amendment to the Stock Purchase Agreement represents just this kind of one-sided transaction. Yet the government seeks to avoid this obvious implication by three specious arguments. First, it claims that there really was a mutually beneficial bargain here. After all, the Third Amendment was needed “because of a concern that the Enterprises, although solvent with Treasury’s assistance, would fail to generate enough revenue to fund the 10 percent dividend obligation.” Fat chance. Indeed, the one way to magnify the miniscule risk of default is to strip Fannie and Freddie of liquidity by the unilateral “dividend” payment made to the government. As a conservator, FHFA is supposed to defend shareholders, not fork over their money to Treasury.
Next, the government offers two more threadbare arguments for its position. The first is that the time is not “ripe” for a complete accounting because the books have not closed on the transaction. But the goal in this case is to stop the bloodletting before the patient is dead, not to let the government go on with its rigged scheme until that future day when it will solemnly pronounce that it is just too late to unravel this complex transaction.
Finally, the government claims that the shareholders of Fannie and Freddie have assumed the risk that they will be looted. After all, an extensive body of law, much of which comes out of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), takes the highly contentious line that all banks know that they cannot challenge government regulations because they have willingly entered into a highly regulated area. Consequently, they do not have the requisite “investment-backed expectations” that they will be free of government regulation.
But this lawsuit is not a case where the government has acted pursuant to its general powers to regulate thrift institutions. Those cases are worlds apart from the present for two reasons. First, the source of the shareholders’ disaffection here is the purchase agreement of the senior preferred stock, and not any form of general government regulation of banks that have otherwise failed. Second, those cases do not contain the obvious element of self-dealing which pervades the Third Amendment.
Notwithstanding the government’s efforts to sugarcoat the obvious, this deal remains one of the most lopsided and unfair transactions in the annals of United States history—which says a lot about the sad state of public law and finance today.
Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2011, isDesign for Liberty: Private Property, Public Administration, and the Rule of Law. He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).
Source: Hoover Institution
Jim Millstein is the Chairman and Chief Executive Officer of Millstein & Co.
Until March 2011, Mr. Millstein was the Chief Restructuring Officer at the U.S. Department of the Treasury. In that role, he was responsible for oversight and management of the Department's largest investments in the financial sector. He was the architect of American International Group's (AIG) successful restructuring, described by the Wall Street Journal as the "Super Bowl of Corporate Turnarounds."
Prior to serving at the Treasury Department, Mr. Millstein spent more than two decades in the private sector, where he "worked on some of the biggest bankruptcies in history," per the New York Times.
From July 2000 to April 2009, Mr. Millstein served as Managing Director and Global Co-Head of Corporate Restructuring at Lazard. Mr. Millstein managed a leading restructuring practice in Europe, the United States and Asia. Selected engagements included representation of the United Auto Workers in connection with the restructuring of their contractual relationships with GM, Ford and Chrysler; representation of Charter Communications in connection with its pre-packaged plan of reorganization under Chapter 11; representation of the Republic of Argentina in connection with the exchange offer for its international bond indebtedness; representation of WorldCom in connection with its Chapter 11 reorganization; representation of United Pan-European Communications in connection with its pre-arranged plan of arrangement in the Netherlands and Delaware; and, representation of Marconi in connection with its scheme of arrangement in the United Kingdom.
Before joining Lazard, Mr. Millstein was Partner and Head of the Corporate Restructuring practice at Cleary, Gottlieb, Steen & Hamilton. From September 1982 to June 2000, Mr. Millstein managed a highly successful practice of a major international law firm. Significant engagements included representation of Daewoo Corporation in connection with its financial restructuring in Korea; representation of the Disney Corporation in connection with the financial restructuring of EuroDisney in France; representation of Pan-American Airlines in connection with its Chapter 11 reorganization; and, representation of the Zell-Chilmark Fund in its acquisition of various troubled companies in and out of Chapter 11.
Mr. Millstein is an adjunct professor of law at Georgetown University Law Center, where he teaches financial regulation. Mr. Millstein is a commissioner on the American Bankruptcy Institute Commission to study the Reform of Chapter 11, and the Trustee of Weantinoge Heritage Land Trust, the largest land trust in Northwest Connecticut.
Mr. Millstein received a J.D. from Columbia Law School, where he was a Harlan Fiske Stone Scholar. He holds an M.A. in Political Science summa cum laude from the University of California, Berkeley. Mr. Millstein graduated summa cum laude with a B.A. in Politics from Princeton University.
University of California's, David Min, presents at the National Association of Realtors Annual Conference and Expo in San Francisco
Source: National Association of Realtors (realtor.org)
UCI Law's, David Min, presented at the National Association of Realtors Annual Conference and Expo in San Francisco.
While AEI's Peter Wallison shared much of the same myths with the audience, David Min sorted through Wallison's myths and presented four options for GSE reform. The fourth option for GSE reform is a lead into the statistics on how Fannie has nearly repaid taxpayers and Freddie has fully repaid taxpayers. Journalist Ken Harney moderated the forum and had some very good things to say about Fannie and Freddie, and he appeared to like "option four" just as much as the audience. Questions from the audience members raised concerns about shareholder's rights, private equity's willingness to reenter the market, the big banks' major role in the financial crisis, and how Corker/Warner's FMIC provides little more protection to American taxpayers than the current system; albeit, at a higher cost than the GSEs with no assurance that a 30yr fixed-rate mortgage will still be available (the cornerstone of the American real estate market).
See the full presentation available here.
Restore Fannie Mae would like to extend a special thanks to the National Association of Realtors for allowing Restore Fannie Mae to attend the event. A big thanks also goes to Bill Maloni and David Fiderer for connecting us with #NARAnnual.
From Banking.Senate.gov November 7, 2013. US SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS met in OPEN SESSION to conduct a hearing on "Housing Finance Reform: Essential Elements to Provide Affordable Options for Housing." The witnesses were: Mr. Hilary O. Shelton, Washington Bureau Director and Senior Vice President for Policy and Advocacy, NAACP; Mr. Rick Judson, Chairman, National Association of Home Builders; Dr. Sheila Crowley, President and CEO, National Low Income Housing Coalition; Dr. Douglas Holtz-Eakin, President, American Action Forum; and Mr. Ethan Handelman, Vice President for Policy and Advocacy, National Housing Conference. Clip includes questions and comments from Senator Elizabeth Warren (D-MA).