Comment

Absolute and reason-based criticism of the FHFA capital requirements

FNMA
FMCC

The FHFA's capital requirement presented to the FNMA lacks any reason-based foundation, is arbitrary, and at least $ 60 billion overestimated.

The latest results of the annual (FHFA) Dodd-Frank Act stress tests (DFAST) are overestimated by the (safety) factors 6.5 and 13.5 and this is at the expense of the shareholders. In addition, these far too high capital requirements discourage new investors from investing their money in the GSE and enabling recapitalisation.

In addition, there is (actually) no need for recapitalization, the government only has to return the stolen money to Fannie Mae and Freddy Mac, since a lot of help was never required.

And although the 12,000 secret documents up to 2016 prove that the companies never needed state aid in 2008, does the FHFA report claim that the legitimacy of the conservatorship still exists?

President Obama wanted to keep these 12,000 (secret / internal) documents under permanent presidential privilege, which clearly shows that fraud was ordered from above.

The theft by Tresury and FHFA is also proven to the extent that after the notification by Susan MacFarland (7/15/2012) to Tresury, a unilateral and unlawful "contract change" / confiscation of all profits (since 2012) was planned, deprive companies of any chance of getting out of the conservatorship and preventing recapitalization. The profit in 2012 amounted to $ 59.4 b!

This high and wrong capital requirement goes in the same direction, apparently director Calabria doesn't really want F&F to be released from the conservatorship and recapitalized.

In my opinion, director Calabria has a conflict of interest, on the one hand, as FHFA director, he must ensure that the GSE is released quickly and easily from the conservatorship (sound and solvent) and that the GSE does not suffer any financial damage from third parties (including the FHFA) ), on the other hand I see that he wants to transfer larger parts of the GSE business to the big private banks. This does not go together, he does not have the authority to transfer parts of the GSE business to private banks. This is fraud against the shareholders whose interests he must represent. Maybe you should ask him about whose interests he actually represents? The FHFA has acted illegally towards the GSE and has been proven beyond any doubt.

Director Calabria knows very well that the supposed "evidence" of the need for government aid is based solely on accounting tricks, as used by the mafia.

The capital rule is also wrong because Fannie Mae and Freddy Mac have an explicit state guarantee for financial defaults, so the "banking standard" according to Basel I to IV is not applicable here.

Mark Calabria said when he took office that he did not want to harm the shareholders any further, but with this proposed capital increase he is doing just that, and that is (also) contrary to the US Constitution.

The companies belong to the shareholders, not the preferred shareholders (the latter are only entitled to a dividend that has been taken from you by the state through the illegal takeover).

If these preference shares are now exchanged for ordinary shares in an unfavorable ratio for the ordinary shareholders, the ordinary shareholders lose a large part of what you are entitled to after 12 years of arbitrary determination and theft. This also violates Amendment 5 of the Constitution, protection of property, or compensation from the government!

The very fact that the FHFA is considering issuing new shares is fraud against the shareholders, as they are then “diluted“. If necessary, new preference shares could be issued to raise the capital, everything else is (again) deception of the shareholders.

According to current capital requirements, the GSE would never have needed state aid in 2008, this (hostile) takeover of control by the government corresponds to mafia methods, this is also the opinion of Judge Margret Sweeney in the Collins case. It has ordered the release of the 12,000 secret documents that the Obama administration wanted to keep as a secret so that the theft can be covered up.

The proposed capital rule, or the arbitrary capital requirements go back to the business model before 2008, but this was more than improved and reformed, so here again an arbitrary specification for a (intentionally) wrong calculation has been made and the resulting results and consequences (intentionally) misrepresented.

As an additional note, the FHFA is unconstitutional, so all decisions made by this authority are unlawful and must be reversed. The FHFA also does not act in accordance with the legal requirements arising from HERA for your work:

The Third Amendment implemented a “net worth sweep” that strips the
Companies of their entire net worth each quarter and prevents the accumulation of any funds to
repay pre-conservatorship shareholders, or build capital or any buffer against future losses. In
addition, it explicitly eliminates the Companies’ minimal reserve against losses to zero by 2018.
HERA requires FHFA to conduct the conservatorships in order to “preserve and conserve” the
Companies and to rehabilitate them so that they return to a “sound and solvent” condition.

Moreover, Congress consciously chose to vest with FHFA, not Treasury, the sole authority over
invoking and conducting a conservatoror receivership. The role of Treasury is exclusively that
of a creditor. Based on the past precedents, as demonstrated below, the requirement to return to a
“sound and solvent condition” requires at a minimum that the Companies must meet the
minimum capital and other regulatory standards required by the regulators and the market to
conduct their normal business. If the Companies cannot be returned to a “sound and solvent”
condition, then they must be placed into receivership. However, FHFA and Treasury have
ignored these specific requirements and, instead, have used the Companies as “cash cows” to
divert tens of billions of dollars to the Treasury.

See Page 6:

https://www.cato.org/sites/cato.org/files/pubs/pdf/working-paper-26_1.pdf


Here are the most relevant criticisms in my opinion in detail about the capital proposal:

Quotes from the following link by Don Layton:

https://www.jchs.harvard.edu/blog/the-new-proposed-capital-rule-for-freddie-mac-fannie-mae-ten-quick-reactions/

2. A strange mix of technical specificity and judgmental arbitrariness. 

"The proposal has very specific, complex, and lengthy calculations for a risk-based capital requirement calculation. It then applies no less than three different defined capital requirements (in addition to the statutory requirement, which is functionally obsolete but can’t be changed without legislation) to come up with a “highest of” number, and using 9/30/19 as a baseline, the highest figure for the two GSEs together is $135 billion (the lowest is $76 billion, the average $105 billion). It then adds buffers to that number which total another $99 billion, for an overall total of $234 billion. Yes, almost half of the total (42 percent) is rough judgment numbers that seem to overwhelm the massively complex formulae."

"This puts an aura of arbitrariness into it, which is not a good thing."

(4) "The incompatibility of the proposal with the DFAST results seems to add to the case that the proposal is just (much) too high, likely by a lot."

3. The proposed capital rule and the Federal Reserve stress tests seem incompatible. 
"On 8/15/19, FHFA published the latest results of the annual Dodd-Frank Act Stress Tests (DFAST), which are designed to show the loss assuming a “severely adverse scenario” set by the Federal Reserve, which uses the same scenario in setting capital requirements for large banks. The results actually showed two losses for the combined GSEs: $18 billion and $43 billion, depending upon a key issue related to taxes. That means the $243 billion proposed capital requirement is 13.5 times greater than the calculated loss in the severely adverse scenario using the $18 billion loss; it is also 5.6 times greater when using the $43 billion. And while a large financial institution is indeed supposed to have more capital than simply what is necessary to clear a severely adverse scenario loss (the extra amount is generally referred to as a “going-concern buffer”) 13.5 times and 5.6 times do seem rather high."
"So, can the proposed capital rule really be compatible with the published DFAST results? Even using the more conservative (i.e. higher) $43 billion DFAST loss, a total capital requirement of $243 billion, by simple subtraction, makes the going concern buffer equal to $200 billion. That’s over 80 percent of the total, which certainly appears excessive. This doesn’t add up somehow. The proposed rule does not address this major inconsistency with the DFAST results."
"FHFA’s proposed capital rule, by adding in its large buffers, comes up to $243 billion. The incompatibility of the proposal with the DFAST results seems to add to the case that the proposal is just too high, likely by a lot."

5. Real world implications on guarantee fees (g-fees) and market share.

"In 2019, a very good year for the GSEs in terms of their financial performance, the two companies together produced profit of $21.8 billion. This generates a return on the $243 billion of required capital of 9 percent, which is a reasonable return to shareholders. A first-cut conclusion would therefore be that this all works out, that the companies can carry the capital requirement without having to change much of what they do."

10. This is going to hurt the equity-raising needed to exit conservatorship. 
"Director Calabria has said many times that his top priority is to end the conservatorships, and have the two GSEs raise enough equity to be well-capitalized. This capital proposal, however, will make that harder."
"First, the companies will need to raise equity in amounts never before done, by an even larger margin than expected. Second, the projected return-on-equity (ROE) of the companies, which is the single most important measure of financial success for large financial institutions, will be under-market, and thus render the shares in any IPO unattractive, until enough years have gone by to show that increased g-fees and other impacts of the capital rule proposal are able to generate an ROE of at least 8 to 9 percent after tax. Third, the increased pricing required to deliver a return on the $243 billion level of capital will shrink the GSEs’ market share, leading to declining revenues and profits, which investors will not like."
"Buried in the proposal as well is the notion that the full $243 billion isn’t really officially required. It’s only required if the GSEs wish to escape restrictions on “capital distributions and discretionary bonus payments.” They can be considered adequately capitalized at a lower level of capital. That’s nice in a regulatory sense, but in the real world, especially when it comes to capital raising time, it’s a meaningless distinction. No investors will want to put money into a company that has such restrictions on it: the full $243 billion is what they will need. In fact, a large financial institution can’t run at exactly the level of capital required by its regulator but needs a working cushion. Research shows something like a 5 percent buffer is needed, raising the actual required capital for normal operations post-conservatorship to be $255 billion."
"To conclude, this proposal has a lot of good detail and depth to it. However, at key junctures it is strategically backward-looking or driven by ideology more than is appropriate. I hope it receives many comments from interested parties to generate significant reworking, with the result that it develops a reputation as professional rather than political, right down the middle of the fairway. Otherwise, it risks becoming a political football, like so much about the GSEs and housing finance, likely to be significantly revised every time a new FHFA director from the other party is appointed."

Other Remarks:

The NWS was a theft. When the (Obama) Government realized the companies became (too) profitable again, they somehow changed their mind and implemented the NWS, to take ALL profits, so that the companies will never become "sound and solvent" again and cannot leave conservatorship.
This was 2012, as the Company FNMA realized a profit from $ 59.4 b in this year 2012!
The only motivation for this behavior is GREED. A cash cow. Why give it back to the rightful owners (the shareholders) when they can milk this cow forever? This is in my opinion THEFT! 
Ultimately, the securitized rights are also disregarded, protection against confiscation of property:

Amendment V [1791]
No person shall be held to answer for a capital, or otherwise
infamous crime, unless on a pres
entment or indictment of a
Grand Jury, except in cases arising in the land or naval forces, or
in the Militia, when actual serv
ice in time of War or public
danger; nor shall any person be subject for the same offence to
be twice put in jeopardy of life or
limb; nor shall be compelled in
any criminal case to be a witne
ss against himself, nor be deprived
of life, liberty, or property, without due process of law; nor shall
private property be taken for public use, without just
compensation.

The confiscation of company profits is a violation of Amendment V and awards the shareholders compensation!

The FHFA is therefore obliged to release the companies from the conservatorship as soon as possible, which can be a fair market valuation of the shares (min. $ 60). FNMA's liquidation assets are approximately $ 100 per share and these assets belong solely to the shareholders! And the company belongs to the shareholders, not the government or the preferred shareholders.

Sincerely

Wolfgang Drogis