On April 9th, shareholders of Fannie Mae and Freddie Mac from across the country converged upon Washington, D.C. to make their voices heard in the halls of Congress. And Tim Pagliara, an investment advisor who also owns shares of stock in Fannie and Freddie, launched the Investors Unite coalition. As the housing finance reform debate heats up on Capitol Hill it is vital that the voices of shareholders – which have, until now, been ignored – are heard so that a bad precedent not be set for disenfranchised investors.
Fannie Mae and Freddie Mac are government sponsored enterprises (GSEs), which buy mortgages on the secondary market, pool them, and resell them as mortgage backed securities. Their business helps support and finance the secondary mortgage market. In principle, this is supposed to help keep mortgage rates down and make products like the 30-year mortgage available to borrowers.
Since the 2008 bailout of Fannie Mae and Freddie Mac, and the beginning of their conservatorship, the stockholders of these two companies, of which I am one, have been stripped of their basic rights as shareholders.
Prior to the financial crisis, shareholders of these companies had legal rights to challenge management decisions through the courts and through proxy battles, or by offering shareholder resolutions. Many prudent investors purchased Fannie Mae and Freddie Mac common stock because these stocks were considered safe investments. In the spring and summer of 2008, knowledgeable, high-ranking government officials like the Federal Reserve Chairman Ben Bernanke, Treasury Secretary Hank Paulson, and the GSEs’ regulator James B. Lockhart, publically and explicitly claimed Fannie Mae and Freddie Mac were rock-solid companies to reassure their owners.
On September 7, 2008, when the U.S. Treasury and the Federal Housing Finance Agency (FHFA) established a conservatorship for Fannie Mae and Freddie Mac, common shareholders lost their voting rights, dividends on preferred and common stock were suspended, and annual shareholder meetings were canceled. Share values plunged to pennies, and countless small and institutional investors who viewed their investments in Fannie and Freddie as secure were financially devastated. Obviously they were deceived by top government officials.
At the time, the administration, the FHFA, the Treasury, and Congress all left shareholders with the impression that the conservatorship was a necessary, but temporary, measure to address the GSEs’ immediate liquidity concerns. The legal mandate of the conservatorship was – and is – to “conserve and preserve the assets” of the companies taken into conservatorship and “restore them to safe and sound condition.” But, at this point, neither goal is being advanced by the FHFA or the Treasury.
In 2012, as Fannie Mae and Freddie Mac were returning to profitability despite financial and operating restrictions on their activities, the U.S. Treasury unilaterally changed the terms of its investment in the GSEs to its own benefit. The Treasury replaced the already well-above-market 10 percent dividends that the GSEs were paying to a “sweep” taking all of the profits of the companies. The GSEs are now sending nearly all of their earnings to Treasury, cannot rebuild their capital, and their shareholders remain in a limbo where they are neither eliminated nor given an opportunity to recover.
The federal government helped stabilize AIG and Citigroup, both of which had investors who were allowed to benefit from the recovery of these companies. It should be no different when it comes to the GSEs’ shareholders, who, in addition, are very useful to the U.S. Treasury in keeping the GSEs’ liabilities off the government’s deficit.
Fannie Mae and Freddie Mac shareholders are not asking for a subsidy. Taxpayers should be paid back in full for their support of the GSEs during the financial crisis. And in fact, taxpayers have already recouped their investment. In March of this year, the two GSEs had finally paid more back to the federal government in dividends – $192 billion – than the $187.5 billion bailout they received.
But the abuse of Fannie and Freddie shareholders isn’t yet over. A number of proposals for housing finance reform have recently been advanced in Congress. Most notable is Senators Johnson’s and Crapo’s bill.
Taxpayers, consumers and shareholders should have serious reservations about this proposal for housing finance reform. It does not sufficiently protect taxpayers from being saddled with another bailout. It does not advance adequate support for affordable and low-income housing for underserved communities. It sets an objectionable precedent for shareholder rights and treatment in this country. Specific concerns about this bill can be found in a letter I wrote to Senators on the U.S. Senate Committee on Banking, Housing, and Urban Affairs. To see the letter, visit shareholderrespect.org.
Unfortunately, the legislative proposals in the Senate and the House do not adequately anticipate the greed and power embedded on Wall Street in its incentive structure. And without laying out a strict regulatory structure, they seem to wrongfully assume that private capital will regulate itself. Do we really want to give even more power to the ‘Too Big to Fail’ banks that were principally responsible for this crisis to begin with?
The GSEs were certainly not blameless for transgressions similar to those larger ones committed by the Wall Street crowd prior to the financial crisis in 2008. But to eliminate the GSEs and unravel this intricate market further, Congress could be opening the door wide for runaway corporate exploitation. We aren’t arguing that the GSEs should be maintained as is; but instead urge they be regulated strongly to prevent their previous missteps and abuses.
Shareholders have begun to fight back by bringing lawsuits challenging Treasury’s “Third Amendment” dividend sweep. This is a good step – but this isn’t enough; shareholder voices need to be heard in Congress.
I urge other Fannie Mae and Freddie Mac shareholders, individual and institutional, who have yet to come forward to join us and make their voices heard in the coming weeks and months.
Visit shareholderrespect.org to learn more about what you can do to protect shareholder rights.