Josh Rosner is managing director of Graham Fisher & Co, and co-author of Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Created the Worst Financial Crisis of Our Time. This is his most recent commentary.
Last week, 53 documents pertaining to the government’s 2012 decision to impose a Net Worth Sweep on Fannie Mae and Freddie Mac were unsealed. These documents reveal a brazen attempt, by a group of former White House, United States Treasury (“Treasury”), and Federal Housing Finance Agency (“FHFA”) officials, to apparently violate the spirit and perhaps letter of the law, exceed their statutory authorities and advance a bank-centric housing finance reform scheme[i] nearly identical to an industry group’s 2009 proposal.[ii]The newly de-designated documents also suggest a concerted attempt to cover-up these actions by misleading Congress and the public in 2012 and the United States District Court for the District of Columbia in 2013. Given that these are the first documents that have been seen by the public which directly implicate former high-ranking White House officials, the behaviors exposed in these documents is deeply troubling and raise serious questions about the content of the approximately 12,000 documents on which presidential privilege, deliberative process privilege and attorney-client privilege have been asserted, as well as the propriety of those privilege assertions.
During the financial crisis, Congress passed and the President signed into law the Housing and Economic Recovery Act of 2008 (“HERA”). The goal of HERA was to rectify shortcomings in the oversight of Fannie Mae and Freddie Mac, to create a new and appropriately empowered regulator, and address the potential rehabilitation of each company. The law gave the new regulator, FHFA, the authority to “establish criteria governing the portfolio holdings of the enterprises, to ensure that the holdings are backed by sufficient capital and consistent with the mission and the safe and sound operations of the enterprises” and to “establish risk-based capital requirements for the enterprises to ensure that the enterprises operate in a safe and sound manner, maintaining sufficient capital and reserves to support the risks that arise in the operations and management of the enterprises.”
Between 1999 and 2008 there had been several legislative reform attempts to bolster oversight of the GSEs while adding both conservatorship and receivership authority to their regulator’s enumerated powers. Conservatorship authority was intended to authorize the FHFA to appoint a conservator who could “take such action as may be (i) necessary to put the regulated entity in a sound and solvent condition; and ‘(ii) appropriate to carry on the business of the regulated entity and preserve and conserve the assets and property of the regulated entity.” In contrast, receivership authority was intended to manage the potential failure of a GSE that could not be rehabilitated to a sound and solvent condition and to “place the regulated entity in liquidation and proceed to realize upon the assets of the regulated entity in such manner as the Agency deems appropriate, including through the sale of assets, the transfer of assets to a limited-life regulated entity … or the exercise of any other rights or privileges granted to the Agency under this paragraph.” There is no middle ground: distressed enterprises may be placed in either conservatorship or receivership, with each respectively having its own distinct goals and specific powers assigned to the party administering it. (more…)