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Peter J. Wallison
Arthur F. Burns Fellow in Financial Policy Studies
American Enterprise Institute
From: Glen Bradford
Sent: Monday, December 28, 2015 11:47 AM
To: Peter J. Wallison
Cc: Ryan Nabil
Subject: Re: Fanniegate – a new book I wrote
Peter,
I am delighted you took the time to reply to me. It means a lot to me. I think it is safe to say that your narrative is very similar to the one put forward by US Treasury.
First, I wanted to extend your mortgage analogy. If an individual has a mortgage or any other debt on which he owes interest as well as principal, is it reasonable to assume that instead of paying 10% the burden can be increased to the individuals entire net worth the year before the individual has the most profitable year in the world’s history because the individual is forced to write up assets that the individual was previously forced to write down beyond what was reasonable causing the draws in the first place?
I think you are arguing that Fannie and Freddie were not insolvent when they were taken over. That’s a hard argument to make, since you have to explain why the government eventually had to invest $186 billion in them. I agree that they, along with the banks on which the financial crisis was blamed, recovered somewhat after the panic ended when it turned out that most people were not defaulting on their mortgages. However, the “huge profits” that Fannie earned came from the fact that once it began to produce earnings its $50 billion in tax loss carry-forwards became suddenly viable and were included in its earnings as profits, making Fannie look immensely profitable. Since then, they have not shown the earning power to pay back the principal that they owe, and without the government’s continued support they would not be viable entities—that is, they could not borrow in the market. And this would be true even if they had been allowed to keep their cash earnings. To borrow without the government’s support would require at least $250 billion in capital for the assets they hold and that would take years to accumulate after they’d paid back the Treasury. There is this strange alliance between the left and the hedge-fund speculators in GSE stock, and you should not become part of it.
Second, in any scenario where FHFA can come in and write down Fannie and Freddie’s assets to $0, yes, Treasury will have to bail out Fannie and Freddie in the future. I wasn’t aware if you had a chance to review any of the forensic accounting fraud audit papers that suggest that FHFA worked hand in hand with Treasury to illegally nationalize the twins by forcing them to take money they never needed in a conservatorship that was designed to nationalize. Did you see the Mulvaney exchange where Melvin Watt says the law was trumped?
No, I haven’t seen that, but would not be surprised to learn that someone tried to demonstrate a vast rightwing or leftwing conspiracy to nationalize Fannie and Freddie. Why the right would want to do that is beyond my imagination. Perhaps you can explain the left’s reasons.
Third, when Fannie and Freddie pay money to Treasury, you have two tax payers that are paying money to tax collectors. In fact, Fannie and Freddie are tax payers. Treasury is not a tax payer. Treasury is a tax collector. FHFA and Treasury have effectively made agreements that treat Fannie and Freddie like a tax collector instead of a tax payer where G-Fees are now a tax on home ownership. Also, you make a reference to our children and grand children. That’s very thoughtful of you. I don’t have any children at present. I do care deeply about children as they are our future. Your statements regarding the annual national deficit would be alarming to me if the US Government was a currency user instead of a currency issuer. It is impossible for the US Government to default except by choice on a currency that it prints itself. Modern Monetary Theory or Cullen Roche at Pragcap.com or Mike Norman atMikenormaneconomics.blogspot.com would be more capable of fielding those sorts of questions than I would be.
I can’t follow you monetary comments, but I think you are a bit confused about Fannie and Freddie—probably from reading Fiderer’s blog. Let’s assume they had no shareholders at all, but were simply owned—nationalized—by the government. What would be your objection then? The government would pay their bills and they would remit to the government whatever they received in profits. Your complaint is that they are charging too much for their services in the form of G-fees. OK, that’s a legitimate issue, but G-fees are supposed to compensate them (and, if nationalized, the government and the taxpayers) for the risks the GSEs are taking in acquiring mortgages. Right now, the nature of those risks, and how they should be compensated, are being set by Mel Watt. Is he your idea of a mean right-winger who would tax home ownership? If you don’t like it, don’t complain to me. I opposed his nomination.
Fourth, if payments were kept by Fannie and Freddie, who are taxpayers, the money would stay with taxpayers instead of being taken by tax collectors. Also, taxpayers did not save Fannie and Freddie from collapse with bailouts. My opinion as outlined in my book and the same opinion that is being pursued and will soon be a matter of fact is that when conservatorship began, Fannie and Freddie had their highest levels of capital in history. The conservatorship was forced by board consent under seige.
You have an odd sense of economic justice. The government keeps F&F in business—they cannot function without the government’s support—yet you want the benefits of the government’s support to go to the shareholders rather than the US taxpayers who are paying for their support. That’s doesn’t make much sense to me, unless you’re a hedge-fund operator.
The gift from taxpayers to their shareholders is simply business as usual. The weird part is when the government steps in and decides to unilaterally take everything.
Now, on your last point, whether or not Fannie and Freddie were or are a terrible idea, that’s an opinion. Historically, these two businesses have been consistently profitable and have done more good than harm and in the absence of FHFA led accounting fraud — you may change your tune.
You should stop thinking about this in terms of accounting fraud; it makes you sound like a Trump supporter.
This isn’t a me vs you. I just wanted to share my thoughts on something that you care about so deeply and express concern that it might seem that your idealogies are leading you to jump to conclusions that seem to be easily refuted by facts.
In order to make Fannie and Freddie look terrible, FHFA has had to take roughly $15B/annum away from them since conservatorship began. You agree with my ballpark numbers. That’s the conclusion that they have led me to. I am not the smartest of the bunch, but I’d love to introduce you to people who would be more capable of walking you through specific points of contention.
Thanks for the offer, but by expressing a lot of what these folks have said in the past without using the term “lying” or “liar” about people with different views, you have shown you are in fact the smartest of the bunch. Happy holidays to you, too.
You’re the best Mr. Wallison. Happy Holidays! 2016 is going to bring wisdom.
Do Not Lose,
- Richard Bradford, III
I’ve been looking forward to this moment my whole life. I like where you’re going. Don’t mind if I do how you do.
1504 Bay Road Suite 1910 Miami Beach FL 33139 (765) 543-4175
On Mon, Dec 28, 2015 at 10:39 AM, Peter J. Wallison wrote:
Glen: I don’t read the Fiderer’s blog, and wouldn’t trust anything he writes, but your numbers seem to be roughly in the ballpark. There are several errors that most people make when they discuss this issue.
First, it is necessary to understand that Fannie and Freddie are only paying “interest” (really dividends on the preferred stock the government purchased in 2008 to keep them afloat). They have not paid back principal, which is the amount that was actually been lent to them (in the form of the preferred stock purchases) by the Treasury. If an individual has a mortgage or any other debt on which he owes interest as well as principal, the debt is not canceled until he has paid back the principal; it is not canceled when the total interest payments exceed the amount of the loan. This becomes very obvious when you look at the information on your credit card statement, which usually shows a huge amount to pay over time if you don’t pay immediately the full amount of the outstanding principal that you owe.
Second, the Treasury is very likely going to have to bail out Fannie and Freddie in the future—Freddie has already had one loss quarter–in which case the amount Treasury is receiving will be used again to keep the firms operating.
Third, when Fannie and Freddie pay money to Treasury, they are returning money to the taxpayers, not taking money from them; all payments to the Treasury reduce the annual national deficit and in that sense reduce the future burden of the taxpayers and their children and grandchildren.
Fourth, if the payments were kept by Fannie and Freddie, they would not go to the taxpayers anyway; they would go to the shareholders, who continue to have an interest in Fannie and Freddie only because—in 2008–the taxpayers saved their companies from collapse with bailouts. In other words, if Fannie and Freddie were allowed to keep the profits they are earning now it would be a gift from the taxpayers to their shareholders.
Fannie and Freddie were and are a terrible idea, based on the notion that private managers and shareholders should be able to reap the profits from government-backed companies, but when those companies fail the taxpayers, and not their shareholders, should bear the losses.
Best regards, Peter
Peter J. Wallison
Arthur F. Burns Fellow in Financial Policy Studies
American Enterprise Institute
From: Glen Bradford
Sent: Monday, December 28, 2015 1:53 AM
To: Peter J. Wallison
Subject: Fanniegate – a new book I wrote
Hi Peter,
Saw an exchange between you and Bill Maloni on Fiderer’s new blog. I thought it was interesting and was curious if you would entertain my two thoughts for accuracy:
- Do you agree that Fannie and Freddie borrowed $132.2B?
- Do you agree that Fannie and Freddie paid back or will pay back $241B per the most recent pmt?
The corollary is that by some fluke FHFA has somehow managed to sweep the difference away from the private taxpayers to the tax collector US Treasury, a total of now over $100B rounding out to $15B/annum since conservatorship started.
If I’m wrong, please put me right. Thanks in advance.
Do Not Lose,
- Richard Bradford, III
I’ve been looking forward to this moment my whole life. I like where you’re going. Don’t mind if I do how you do.
1504 Bay Road Suite 1910 Miami Beach FL 33139 (765) 543-4175