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Fannie Mae And Freddie Mac. Follow the money

Capital Distributions are restricted while in Conservatorship, according to 2008 HERA, where is set forth the regulation. The FHFA has repeated this several times, although referring to payments of claims, etc. But a dividend is also a Capital Distribution.

It doesn't matter what is written in the SPSPA signed between the FHFA/US Treasury, because a contract doesn't supersede a law in force.
Distributing dividend would go against Established Insolvency Principles and common sense. The companies need to increase capital and not decrease it, retaining earnings and not distributing it.
The FHFA has allowed to distribute Capital only to one holder of Equity interest, the holder of Senior Preferred Stocks. Why is that?
It turns out that distributing capital to the US Treasury both recapitalizes the enterprises (to be in a solvent condition) and pays off the obligations with the Treasury (to be in a sound condition), which is exactly the Conservator's Power:
If you have any doubt about the truthfulness of this concealed plan, the FHFA approved regulation in 2011 to formalize this plan, so that nobody can say now it's concealed. In the FHFA's own words, it aimed at being more transparent. Most of the regulation approved just copied/pasted what was already written in HERA, but there was this additional jewel:
The Capital Distribution is banned, but there are 4 exceptions where you can distribute dividends:
  1. It will recapitalize the enterprises.
  2. It will make them safe and sound for the long haul (both recapitalization and paying off the obligation with the Treasury).
  3. It's in the enterprises' interest.
  4. A FnF Adequately Capitalized and pay off the debt with the Treasury is in the public interest. The taxpayer's assistance won't be tapped again and it recoups the amount spent during the crisis.

And how can a dividend paid to a third party achieve all of the above?
Because the US Treasury acts as custodian of the enterprises' Retained Earnings account (capital), depositing all amounts received in a escrow account at the Department of the Treasury.

Can the FHFA/US Treasury lie to the shareholders and the public by carrying out a plan different than what was approved and said (wind-down rhetoric, etc)?
The public is not an interested party in this case. It's the Government, FHFA, FnF, their shareholders and the holders of Junior Preferred Stocks.

This is why HERA's shareholders/enterprises succession provision was approved. All our/FnF's rights, powers, privileges and titles have been transferred to the FHFA while in Conservatorship.
So, the FHFA is acting on our behalf. Which means they can do one thing and carry out the opposite without the shareholders/enterprises' knowledge.
We cannot sue the FHFA for lying. Only the FHFA can sue itself and it hasn't been economically harmed if it's recapitalizing FnF/paying off debt with the Treasury. So, there's no point in suing itself.

Was the 2011 FHFA regulation necessary?
No it wasn't. HERA already contemplated this scenario in the so called "Incidental Powers":
It allows the Conservator to "take any action" (use an escrow account at the US Treasury), "authorized by this section", which means it must be any action that abides by the rest of the section, and is no other part than the Conservator's Power mentioned before: "Put FnF in a sound and solvent condition".

It's worth mentioning that the Conservatorship was already regulated by the FHEFSSA of 1992, the current law in force. HERA just struck the entire section and added new provisions in this 1992 law. Maybe is because the FHEFSSA was more clear in the FHFA's mandate utilizing similar wording as the Incidental Power:
Note, it says again "any actions", so the FHFA could have used a escrow account at the Treasury as well, and "under sections 1365 and 1366" which are the sections where is laid out the supervisory actions applicable for Undercapitalized FnF and Significantly Undercapitalized FnF, which are two:

  1. Capital Restoration Plan
  2. Restriction on Capital Distribution: outlining 3 exceptions on the distribution of dividends, which are a replica of the 4 exceptions mentioned before (only the number 3,"it's in the interest of the regulated entity", is missing)

The bottom line is that HERA repealed the section of the Conservatorship and we have ended up with a replica of that but more concealed. It was more clear in the FHEFSSA just reading the words "Capital Restoration Plan". Which shows there was an intention to carry out this concealed plan from day one, so that only a few privileged people that knew it can take advantage of it and buy all things FnF like mad. Also, a main reason of this plan, the Community Banks (holders of 50% of all Junior Preferred Stocks outstanding) can switch to Common Stocks. And finally, the banks try to push the debate of a Housing Finance System overhaul tailored for them, where FnF are a simple Office of Securitization under a Utility Model, and the banks can issue MBSs with a Government Explicit Guarantee.
The politicians' "wind-down rhetoric" was meant to double down in this Machiavellian Plan.

This case eliminates the possibility of dilution on the common shares due to Capital Increase, because the Capital has already been built.
Taking into account that the Charter contemplated, before HERA, Treasury's purchases of FnF obligations (SPS) at an appropriate rate:
the excess of dividend to reach the 10% and Net Worth Sweep dividend is the amount deposited at the Treasury Department for our Recapitalization Plan, plus the TCCA fees due to the 2011 Temporary Payroll TCCA, because the Charter doesn't allow the Government to assess and collect a fee on mortgages.
It makes a grand total owed to FnF of $80 billion approximately. Enough capital to release the enterprises from Conservatorship and redeem the Junior Preferred Stocks outstanding because, if there is any amount left to achieve the minimum capital level, they can continue retaining earnings the next years to meet that threshold, as they are now deemed "safe", Mnuchin's condition to release them.
Furthermore, the JPS were needed to leverage the Balance Sheet increasing the Mortgage-Related Investment portfolio (the more than $1 trillion worth of toxic PLMBSs sold to FnF with fraudulent information that, ultimately, drove them into Conservatorship). But now, not only this portfolio is small (aproximately $200 billion each) but "it isn't for investment purposes", according to Fannie Mae. Also it's been renamed "Retained Mortgage Portfolio" (for workout activity with modified loans, holdings of their own MBSs or FHA's).

There's no risk of dilution due to the Government's warrant to purchase 79.9% of common stock almost for free.
The purchase of the warrant was authorized by HERA "to protect the taxpayer". That's called a collateral. The warrant did protect the taxpayer at the time, due to possible future unexpected losses but, exercising it, at this point in time, doesn't.
No risk of dilution, Adequately Capitalized and obligation with the Treasury paid off.

People rather follow the Hedge Funds' bets on the Junior Preferred Stocks simply arguing they are smart. You better read true in-depth analysis and wake up!


  1. The behaviour of the judiciary deserves a special article.

  2. The Government isn't confiscating money from private shareholders with the argument of applying the exception number 4, because:
    1- That's not in the public interest, unless you live in Venezuela or Cuba.
    2- The Conservator wouldn't be complying with the mandate "put FnF in a sound and solvent condition", which means recapitalization, because distributing capital depletes capital.
    3-The Department of the Treasury are not a gang of thieves.

    Go watch a movie of bank thieves to the cinema, not to #Fanniegate.

  3. UPDATE: Due to the recently published FHFA's proposed Capital requirements, FnF cannot be declared Adequately Capitalized, but Undercapitalized, which is the important thing because it translates into the release from Conservatorship and the FHEFSSA's Mandatory Actions kick off:
    -Capital Restoration Plan: Retained Earnings
    -Restriction on Capital Distribution: Dividend suspended.
    This post won't be updated more times.
    Follow me on Twitter.

    1. I think you're right about "Capital Restoration Plan" due to the proposal... but I think it needs to be accepted first.. They just paid Treasury which is anti-thetical to retaining earnings.

      I disagree with your theories that go against the plaintiff legal arguments. I encourage you to seek legal council.

    2. The only valid theory is that everything is a smoke screen. Upon a final resolution we will see everything put upside down and realize this is a simple cheap bailout, which is what the Charter is about.


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