Let There Be Light

It seems fitting to begin with a quote from a class on Economics and the Fifth Amendment at Harvard:

"A judicial decision denying compensation in defiance of a popular perception that it should be forthcoming risks undermining people's faith that, by the large, the law comports with their sense of justice. Erosion of that faith, in turn, would reduce people's willingness to make decisions -- the rationality of which depends upon the content of the pertinent legal rules -- without taking the time to "look up" the rules. . . . Generally speaking, our willingness to act in this fashion is efficient; as long as the rules are in fact consistent with our senses of justice, it is desirable, from an economic standpoint, that we trust our intuitions. Any material diminution in that willingness would give rise to deadweight losses that merit the attention of a conscientious economist."

In other words, if investors are to have any faith in the markets as a whole, they must have confidence that the government will not overreach in their powers by taking private property to support its political agenda. These are the values at the core of our great nation, and a basis for the declaration of independence.

Some people question whether the investors today would share any concern for the GSEs if they were not profitable. It happens that this question itself raises a philosophical debate regarding the importance of material things with respect to distributive justice. Ironically, the majority of people that ask this question are involved in the markets; after all, the question remains, how should profits be allowed to flow equally to taxpayers and shareholders. At first glance, this question might seem to have an open ended answer. However, the original deal set by the government, provided terms by which a contractual agreement was made between investors and the government. The fact is, today, the companies are both profitable, and capable of returning to the market, repaying taxpayers, ramping up securitization (with government oversight), and providing the guarantee, as well as the necessary structure for a solid mortgage finance system. The problem remains to be a political one at this point, and not the typical variety of Washington politics, since these political issues tend to cross into the realm of business strategies, as they relate to the future of an already successful business. Indeed, rather than focusing on the original deal setup to conserve Fannie and Freddie, the government is behaving as an ominous political organization, with key stakeholders focused on the divide between those with a contractual agreement, and others in government focused on their own debt issues.

Another factor that should be considered was the reality at the time of the conservatorship, and the initial circumstances, which provided certain interested parties an advantage over others. For example, Hank Paulson notified his colleagues at Goldman Sachs about the oncoming conservatorship, while at the same time telling the American people, and investors in the GSEs, that there was almost no probability of any government intervention. To make matters worse, the people he lied to were taxpaying citizens, retirees, and small business owners. In other words, Hank Paulson's actions, releasing inside information, constitutes an unfair start, and is against the core principles of justice in our nation. Moreover, as the Perry Capital lawsuit outlines in its filing with the courts, the initial estimate on the GSE losses were exaggerated by over $100B. One might question the real motives of releasing such skewed numbers at a time when the government's budgetary needs are at an all time high.

Fast forward to 2012, and the government doubles down on injustice, when the Treasury and the FHFA declare a third amendment to the terms of the conservatorship, overreaching, and declaring that it has the right to sweep all profits from a private, shareholder owned business. Yet, a quick glance at the government's financial situation reveals another crisis looming; the debt ceiling just around the corner. When the American government begins taking private companies hostage for its own political agenda, it is very troubling indeed. In conclusion, then, as suggested earlier, defenders of the government's overreach can't have it both ways. Their assertion that the Treasury has the right to wind down the GSEs is contradicted by the their own lack of adherence to the law as defined by the conservatorship of Fannie and Freddie.


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