Richard Epstein cries “Fraud.”
The initial bailout terms were contained in a Senior Preferred Stock Purchase Agreement (SPSPA). Under its terms, each corporation had to issue a new class of senior preferred stock to the United States, which bore interest at 10 percent per annum. That sum increased to 12 percent if Fannie and Freddie chose to conserve cash instead of paying dividends. For the next two or so years, as conditions in the housing market improved, the arrangement proceeded more or less as planned. The entire legal landscape, however, was radically changed in August 2012, when the Third Amendment to the 2008 SPSPA was passed. It called for a “net worth sweep” under which FHFA and Treasury entered into a deal that magically converted all the net receipts of Fannie and Freddie as “dividends” to be paid to the government.
Peter Wallison says it’s not so sad.
The original shareholders of Fannie and Freddie, as noted above, should have been wiped out by a receivership. The Treasury’s mistake in keeping shareholders’ rights “alive” was a windfall for this group. The shareholders that bought in after Fannie and Freddie were placed in the conservatorship were largely hedge funds, speculating on later developments. Speculation is certainly good, and is vital to price discovery, but in this case the hedge funds probably realized not only that Fannie and Freddie—because they continued to dominate the housing market—would eventually become profitable but also that they could probably push Congress to do what Entine recommends: allow these profitable companies to exit the conservatorship and resume their role as profit-making enterprises. That would have made a fortune for the hedge funds. Indeed, the Treasury’s move to extract all the profits from Fannie and Freddie was probably developed to prevent the success of this strategy. The Treasury was worried that it might succeed.
I’m with Wallison. If you bought Freddie or Fannie stock any time after 2008, you were not investing in fundamentally sound private businesses. You were buying a political lottery ticket. If the politicians had decided to perform financial CPR on Freddie and Fannie and then re-privatize them, you would have made a fortune. Given that they decided otherwise, you lost a pittance. Don’t sue because your lottery ticket lost. Don’t pay Richard Epstein to plead your case in public. Just tear up your worthless lottery ticket and shut up.
“Don’t pay Richard Epstein to plead your case in public.”
Is this statement suggesting something about Epstein’s possible motivation for taking the position he does?
Epstein discloses that he has been a paid consultant for the hedge funds litigating these cases.
Thanks.
Arnold’s analysis seems a bit off. The hedge funds were buying a ticket to play a game in which they made their political and legal case as compellingly as they could, in hopes of winning a big prize–and that is what they are doing now, not without skill (or good lawyers). That’s got to, at the very least, be more fun than a lottery ticket where you just passively wait to see if you win. That the result they want to see realized fails to conform to anyone’s notion of fairness is not giving these folks any sleepless nights.
It is a good long-term result if private capital decides wisely – from being repeatedly burned – to completely stay away from investing in any financial enterprise with such strong entanglements with politics.
Seems kind of conveniently pseudo-legal at first blush.
A judge can transubstantiate pseudo-legal to legal-legal pretty quick.
I wouldn’t be quick to tear up that ticket. In the long run it will probably end up valuable.
I disagree with you on this. What the government did in the Third Amdt was a base form of theft. it is like something we have seen in Russia, Venezuela and other thug-ocracies. No one is disputing the federal right to the 79.9% they got in 08. But that was in exchange for new money it infused. The Third Amendment is just a blatant taking of the other 20% for no compensation, like Putin walking off with Bob Kraft’s Super Bowl ring. I don’t think it is thoughful to say someone who bought the 20% should get screwed just because the purchase had political risk. That kind of political risk is inimical to a viable republic.