Documents DOJ Newly Released Under Court Order Reveal “Net Worth Sweep” Dividend Theft
WASHINGTON, D.C. – Shareholders of Fannie Mae and Freddie Mac, after years of discouraging litigation, finally have the proof positive they need to demonstrate at court exactly how the Obama administration stole from them billions of dollars of profits earned by the Government Sponsored Entities (GSEs).
Department of Justice documents newly released under a court order issued by U.S. Court of Federal Claims Judge Margaret in case involving Fairholme Funds [Fairholme v. United States, No. 13-465 (Fed. Cl.)], a company owning shares of the mortgage giants, leave no doubt the Obama administration created a false pretext that Fannie Mae and Freddie Mac were yet in financial turmoil, and lied to Congress, shareholders, and the American public, to implement the “Net Worth Sweep,” on Aug. 17, 2012.
A contrived justification based on a specious argument
As Infowars.com has previously reported, an analysis of Treasury Department financial statements for 2012 and 2013 proves the “Net Worth Sweep” was a complex scheme the Obama administration concocted for Sec. Timothy Geithner’s Treasury to steal without Congressional authorization all GSE earnings, in order to divert the funds unconstitutionally to keep Obamacare from going bankrupt by using Fannie and Freddie’s earnings to pay the low-income insurance subsidies the House of Representatives refused to fund.
Government briefs filed in the Fairholme case before the Eight Circuit Court of Appeals repeatedly argued the “Net Worth Sweep” was necessary to make sure the financially troubled GSEs did not burn through government bailout funds provided by the Preferred Stock Purchase Agreement (PSPA) of 2008, to pay dividends.
But a 17-page internal memo dated Dec. 12, 2011, written by to Treasury Secretary Timothy Geithner by Mary John Miller, the former Under Secretary for Domestic Finance for the Treasury, proves that as early as that date, fully 20 months before the “Net Worth Sweep” was implemented on Aug. 17, 2012, Treasury knew Fannie Mae and Freddie Mac were returning to profitability.
Miller’s first suggestion, termed “Policy Option 1,” read as follows: “Restructure the calculation of Treasury’s dividend payments from a fixed 10 percent annual rate to a variable rate based on available positive net worth (i.e. establish an income sweep). This will ensure that the remaining PSPA funding capacity is not reduced in the future by draws to pay dividends.”
The newly released documents proved the Obama administration based the “Net Worth Sweep” of all Fannie Mae and Freddie Mac earnings on the specious argument that Fannie Mae and Freddie Mac somehow would be compelled to pay dividends to shareholders from federal PSPA bailout funds if the GSEs lacked the financial strength to pay shareholder dividends from GSE earnings.
But the facts, as made abundantly clear from the newly released government documents, is that Treasury knew in 2012 that Fannie Mae and Freddie Mac were going to become profit machines and that by confiscating all of the earnings from both GSEs, Treasury would reap a windfall far in excess of the 10 percent dividend specified in the original PSPA agreement.
The Truth: Treasury Knew Fannie and Freddie generated strong, persistent earnings
The newly released government documents make clear the Obama administration understood by mid-2012 that Fannie and Freddie could no longer be considered to be in financial distress, but were already generating strong earnings.
On June 25, 2012, FHFA Acting Director Edward DeMarco met with Treasury Secretary Geithner and Treasury Under Secretary for Domestic Finance Mary Miller to discuss the financial status of Fannie and Freddie.
A memo prepared by Treasury staff on that day memorialized the discussion, noting that “[t]hrough weeks of negotiating terms of possible amendments to the PSPAs, [Mr. DeMarco] never questioned the need to adjust the dividend schedule this year. Since the Secretary raised the possibility of a [principal reduction] covenant, DeMarco no longer sees the urgency of amending the PSPAs this year.”
One of Mr. DeMarco’s stated reasons for being willing to delay the PSPA amendments was that “the GSEs will be generating large revenues over the coming years, thereby enabling them to pay the 10% annual dividend well into the future even with the caps.”
On July 20, 2012, Michael Stegman, a counselor to the Secretary of the Treasury (Geithner) for Housing Finance Policy, addressed a memo addressed to Beth Mlynarczyk, then a senior advisor to the counselor on Housing Finance Policy at the Treasury, suggested that in light of the improved profitability of the GSEs, restructuring the 10 percent dividend on the PSPA would lead to “a better outcome” for Treasury.
A comment appended in the margin by an unnamed Treasury official to a “PSPA Amendment Q & A” draft document marked “Sensitive and Pre-Decisional” indicated that in the period July-August 2012, Treasury officials realized the “death spiral” expectation that Fannie and Freddie would “wind down” unable to pay the 10 percent PSPA dividend “no longer holds water, because there no longer was any expectation that the business of Fannie or Freddie would reduce in the immediate future.
The newly released government documents convey a clear sense the Obama Treasury Department knew, well in advance of implementing the “Net Worth Sweep,” that Fannie Mae and Freddie Mac had sufficient earnings to both pay Treasury the 10 percent dividend specified in the original PSPA and pay shareholders healthy dividends without risking the financial solvency of either of the GSEs.
But instead of paying shareholders, Geithner and the Obama administration Treasury Department decided to revise the PSPA so as to begin on Aug. 17, 2012 confiscating all earnings from both Fannie Mae and Freddie Mac, while lying to Congress and the American public that the confiscation of earnings that rightfully should have gone to shareholders needed to be paid the Treasury?
Why? Because Treasury was happy to lie to Congress that the earnings of Fannie and Freddie were so fragile that Fannie and Freddie might have to tap into the PSPA to pay dividends – a eventuality the documents repeatedly prove Geithner and the Obama Treasury Department knew was never going to happen given by 2010 the return of both GSEs to healthy, sustainable, and consistent profits.
Obama’s plan to “wind down” Fannie and Freddie
Then, on Aug. 13, 2012, four days before the “Net Worth Sweep” was announced, Jim Parrott, then a senior advisor at the National Economic Council and the White House official perhaps working most closely with Treasury in crafting the “Net Worth Sweep” wrote a memo making it clear his intention was “making sure that each of these entities [Fannie and Freddie] pays the taxpayer back every dollar of profit they make, not just a 10 percent dividend.” [Underlining in original document.]
Parrott’s memo of Aug. 13, 2012, went on to note that under the “Net Worth Sweep,” Treasury “ultimately collect more money with the changes,” i.e. by abandoning the 10 percent dividend to make the Treasury “dividend” equal all Fannie and Freddie earnings. [Underlining in original document.]
Parrott concluded the memo of Aug. 13, 2012 by commenting, “With the overall set of changes we have removed any doubt about the long-term fate of these entities: they will NOT be allowed to return to profitable entities at the center of our housing finance system, but instead wound down and replaced with a system driven by private capital and lower risk to the taxpayer.” [Capital letters in original document.]
The Parrott email confirms previous Infowars.com reporting that the Obama administration had started planning as early as 2010 to eliminate home ownership as a central pillar of the American Dream.
That the Obama administration planned to “wind down” Fannie and Freddie helps explain why the Treasury Department was willing to strip them of the profits needed to rebuild the substantial capital base necessary for the two mortgage GSEs to continue playing their historical role of buying mortgages from mortgage originators as a plan to provide mortgage originators the liquidity need to keep the private middle-income mortgage market in the United States.
As Infowars.com noted in an article published March 7, previously unpublished Treasury documents make clear Secretary Geithner was spearheading an Obama administration plan to close Fannie and Freddie, knowing that doing so would mean the end of the 30-year, fixed-rate mortgage that has been essential getting first-time homebuyers into the market for generations.
The goal of the Obama administration was to turn the mortgage finance market over to Wall Street and the “Too Big to Fail” (TBTF) big banks, including Wells Fargo and Bank of America – a plan currently championed by Sen. Bob Corker, R-Tennessee, and by the Mortgage Banking Association, in a move that would transform the United States from a nation of homeowners to a European-style nation of renters.
On Aug. 16, 2012, the day before the “Net Worth Sweep” was announced, a memo authored by Timothy Bowler, then Deputy Assistant Secretary for Financial Stability at Treasury, and addressed to a large number of people at Treasury and the White House working to implement the “Net Worth Sweep,” left no doubt that the impact of the policy inevitably would mean the demise of Fannie and Freddie.
“By taking all of their profits going forward, we are making clear that the GSEs will not ever be allowed to return to profitable entities at the center of our housing finance system,” Bowler wrote. [Underlining in original document.]
The new Treasury documents released make clear the Obama administration was surprisingly devoid of any conscience that it was both morally wrong and a major violation of corporate law that the “Net Worth Sweep” was designed to confiscate 100 percent of all Fannie Mae and Freddie Mac’s earnings, to the point where both GSEs were closed, without ever paying the current shareholders as much as a penny of the dividends they were owed.
These documents read as a whole document how methodically the Obama administration calculated to confiscate what has amounted to $270 billion in Fannie and Freddie earnings in what amounts to the biggest theft of shareholder dividends to have ever occurred in U.S. corporate history.
Trump administration continues “Net Wort Sweep,” still robbing GSE shareholders
At the end of June, the Federal Housing Finance Administration (FHFA) continued the “Net Worth Sweep,” paying Treasury as “dividends accrued” an additional $7 billion in earnings, despite FHFA’s testimony under oath to the Senate Banking Committee on May 11 that under terms of the Housing and Economic Reform Act of 2008 (HERA), he has the responsibility to make sure Fannie and Freddie retain adequate operating capital, giving him the ability to end the “Net Worth Sweep” on his own authority.
If the “Net Worth Sweep” continues, Watt testified by the end of the year Fannie and Freddie’s capital buffer will be zero, with the result neither GSE “will have the ability to weather any loss it experiences in any quarter without drawing further on taxpayer support.”
Fannie and Freddie have paid back over $270 on the $188 billion the Treasury invested in the GSEs with the 2008 PSPA, repaying nearly in full the principal and the 10 percent dividend the Obama administration had negotiated under the 2008 Senior Preferred Stock Purchase Agreements (PSPAs).