February 18, 2014
The Honorable Jacob J. Lew
Secretary of the Treasury
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220
Dear Secretary Lew,
I am writing regarding an article published in the New York Times by the formidable Gretchen Morgenson this past weekend. The article, titled “The Untouchable Profits of Fannie Mae and Freddie Mac,” discussed an internal memo at the U.S. Treasury from 2010 which indicated that the Treasury Department was striving to ensure that no future profits would benefit the shareholders of the government sponsored enterprises (GSEs). The precise phrase in the memo reads as follows:
“Makes clear the Administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.”
What legal authority does the Administration have, as this section of the memo intimates, to completely wipe out shareholders – even after taxpayers have been repaid (as is likely to happen soon)?
This would seem to be contrary to the stated goal, in the preferred stock purchase agreements (PSPAs), of the conservatorship that the GSEs’ assets and property be “preserved and conserved.” How do you reconcile this contradiction?
Gretchen Morgenson later updated the article with a response to her request for comment from Treasury, which read: “The relevant language in the memo was about the importance of repaying taxpayers for the enormous investment that they made in the G.S.E.’s if the G.S.E.’s ever generated positive returns, which, at the time, was uncertain to ever occur.”
Contrary to this statement, neither the memo – nor Treasury’s actions by unilaterally amending the PSPAs – leaves one with the impression that this point in the memo is meant to highlight the importance of repaying the taxpayers. It seems to be setting a precedent for using and abusing the GSEs’ shareholders.
Further, Treasury’s comment only addresses the issue of the repayment of the taxpayers, and ignores the issue raised at the heart of Ms. Morgenson’s article: Does the administration aim to wipe out shareholders? Shareholders are not arguing that taxpayers should not be repaid. This is not at issue. Taxpayers should recoup their investment in the GSEs; but the Administration does not have to wipe out shareholders in order for this to happen.
This need not be an issue of choosing taxpayers over shareholders. The federal government has similarly recouped taxpayer money used to bailout other corporations (A.I.G., Citigroup, etc.) involved in the financial collapse, but has allowed the shareholders of those companies to share in their recovery. The same should be the case with the GSEs.
I have enclosed a number of items with this letter: A copy of my last letter to you, dated May 23, 2013; a copy of Ms. Morgenson’s article; and a copy of the Treasury memo referenced in her article and in this letter. I look forward to the courtesy of a timely clarifying response.