Gary Hindes is continuing his battle with the boards of home lenders Fannie Mae and Freddie Mac.
Hindes is the managing partner of New York-based Delaware Bay Co. and has been active in Democratic Party circles in Delaware. Delaware Bay specializes in securities of distressed companies like Freddie Mac and Fannie Mae. The two companies package mortgages for sale. to investors.
Amid recent press reports that, because of the reduction of the corporate income tax rate which took effect on Jan, 1, Fannie Mae and Freddie Mac may require a one-time Treasury draw, Hindes says any such payments by Treasury should be characterized as “a return of stolen money”.
Hindes had previously filed suit in an effort to get a better deal for shareholders, reduce principal on debt and thereby boost the value of securities.
On September 6, 2008, the federal government seized Fannie and Freddie and placed them into conservatorship.
“The original takeover wasn’t the ‘bailout’ it purported to be; it was a stick-up,” Hindes says.
He notes that while both companies had been incurring losses due to the housing downturn, they still had the highest capital ratios in their histories, were flush with cash, and had successfully tapped the public securities markets just three days earlier. The debt was unsecured, and the offering was oversubscribed.
Shortly after taking control and ousting their CEOs, the Federal Housing Finance Agency (“FHFA ordered the companies to book several non-cash accounting charges, ultimately resulting in the U.S. Treasury purchasing $187 billion of preferred shares (bearing a 10 percent dividend rate) so they could maintain a positive net worth.
AIG and the banks which received federal assistance under the Troubled Asset Relief Program would be charged half that much.
By the summer of 2012, however, the housing market had turned around, the accounting entries had to be reversed, and Fannie and Freddie suddenly became massively profitable.
“It was a mafia-type ‘loan’ from the beginning,” Hindes says. “What responsible board of directors – or in this case, a ‘conservator’, no less – would borrow $187 billion and agree that no matter how much money they repay the lender, not a dime can be applied towards principal? I mean, who does that? And here’s a reality check for you: who borrows that kind of money and pays it all back in just four years? Answer: someone who never needed it in the first place. It was ‘cookie jar accounting’.”
Under the terms of the FHFA/Treasury deal, both companies were to have seen their capitaldrained downto zero by year-end 2017. However, on December 21, Treasury agreed to allow each company to maintain $3 billion in capital.
Everything above that will be swept to the government – in perpetuity, Hindes says.
“The idea all along was to saddle them with a concrete life preserver so that they could not ‘escape, as it were’,” Hindes said, quoting from an August 18, 2012 White House email to a Treasury official. “And so far, it’s worked.”