Mega Triumph of Unanimously Agreeable and Constitutional Governance of Fannie and Freddie Mac

Dr. Sankarshan Acharya
Founder, Pro-Prosperity.Com and Citizens for Development

September 9, 2019

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Mega Triumph of Unanimously Agreeable and Constitutional Governance:  En Banc Verdict of US Court of Appeals and Trump Administration’s Plan for Fannie and Freddie Released on September 6, 2019

On September 6, 2019, the entire bench of judges of the U.S. 5th Circuit Court of Appeals decreed ILLEGALITY of Obama Administration’s surreptitious policy--designed and adopted in August 2012 at the behest of Robber Barons and their privileged associates in elite Academy, Media, Industry and Government -- to eliminate two giant privately-chartered mortgage finance companies (Fannie Mae and Freddie Mac) comprising $5 trillion (50%) of mortgage loans in USA.  The Trump Administration too announced its plan almost at the same time on September 6, 2019 to recapitalize and resurrect Fannie and Freddie   

The surreptitious policy adopted by Obama administration in 2012 has been draining all the profits of Fannie and Freddie to US Treasury.  This policy had two ulterior goals of (a) not allowing the giant mortgage financing companies rebuild their own capital for revival, and (b) eventually shutting them down with their mortgage business transferred to Too-Big-To-Fail (TBTF) banks operated by Robber Barons and supported by the privileged associates.

I had promptly written to President Obama soon after his 2012 policy was adopted that siphoning off Fannie-Freddie profits to Treasury amounted to a massive transfer of wealth from mortgage borrowers (American households) because profits of Fannie and Freddie constituted relatively higher mortgage interest rates paid by borrowers than the cost of funds and operation of the companies.   Obama Administration’s diktat of zeroing out equity capital for eventual elimination of Fannie and Freddie would not only perpetuate such high mortgage interest rates.  It would also concentrate mortgage business among TBTF banks to facilitate the latter to make the mortgage interest rates usurious.

The Robber Barons (owners of TBTF banks) and their privileged associates not only wanted higher interest rates on their wealth looted from the unprivileged vast majority.  They also wanted to perpetuate privatization of profits and socialization of losses using their privileged secret hedge funds by betting more aggressively with new mortgage assets (debt loaded on households) against the unprivileged investors (pension plans, mutual funds and individual investors). 

Fannie and Freddie are not chartered to operate privileged hedge funds to privatize profits and socialize losses to benefit privileged associates.  The privileged associates, therefore, created and disseminated fake news about Fannie Mae and Freddie Mac causing the 2008 financial catastrophe, which the Federal Reserve has rightly characterized as worse than the Great Depression.

Fannie and Freddie were actually well-capitalized and so were used (after their government takeover through a new law, HERA-2008, enacted at the behest of a representative of the TBTF banks serving as Treasury Secretary) with a surreptitiously ulterior goal of rescuing bankrupt TBTF banks by looting private capitals of Fannie and Freddie and additional taxpayer funds funneled as loans by Treasury to Fannie and Freddie. 

The Obama Administration’s surreptitious strategy went haywire soon after my research founded on Unanimously Agreeable and Constitutional Governance (written in a paper circulated in April 2013) showed that a government-regulated private mortgage lender is necessary for general equilibrium of the economy, i.e., for constitutionally mandated stability.  Within a month of circulation of this paper the stock price of Fannie and Freddie jumped 20-fold from their lows.  Around May 2013, private privileged hedge funds had acquired about 700 million common shares of Fannie and Freddie.  The unprivileged pension plans, mutual funds and individual investors had dumped their Fannie and Freddie stocks in 2008 for pennies due to government stand that Fannie and Freddie would cease to exist.  The TBTF banks’ market making subsidiaries had acquired most of the dumped shares, which they promptly transferred to privileged hedge funds after circulation of credible research on Unanimously Agreeable and Constitutional Governance of Fannie and Freddie in May 2013.  

Some of the TBTF banks that considered my research on UACG of Fannie and Freddie might have transferred Fannie and Freddie common stock by even aggressively short-selling from their market making subsidiaries to their privileged associates.  Other TBTF banks and their privileged associates that were confident of swaying the Obama Administration to jettison the policy outcome of my research that government-regulated mortgage lenders would necessarily remain for stability must have remained heavily short in Fannie and Freddie stocks.

The en banc ruling and consistent Trump Administration plan announced on September 6, 2019 to resurrect the two private mortgage lending companies by voiding the illegal Obama Administration policy of taking away all of their profits has completely busted the unconstitutional surreptitious strategy of the Robber Barons and their privileged associates of consummating the biggest heist of mankind with impunity and by propagation of fake news.

President Trump can now guarantee his victory in 2020 by taking the following policy steps which are within his purview:

  1. Have the Treasury return all the excess profits and pre-conservatorship networth (at least about $150 billion, equal to net worth before Fannie and Freddie were confiscated under conservatorship, plus profits swapped in excess of the "loan" given by Treasury and interest on these excess profits) transferred illegally (as per en banc ruling) from Fannie and Freddie and void the illegally usurped government ownership of the two private companies (the 79.9% Senior Preferred Stock and warrants) through Federal Home Financing Agency created in 2008.  The en banc ruling says that FHFA is unconstitutionally structured and the Treasury Department has admitted before the court that it would not defend constitutionality of FHFA.  [Government guarantee of MBS issued by Fannie and Freddie is equivalent to similar guarantees enjoyed by banks.  Fannie and Freddie as well as banks should be subjected to the same regulatory norms.]

This policy step will at once achieve the following needed by President Trump’s plan:

  • Recapitalize Fannie and Freddie to make their release from conservatorship (as per HERA) legally feasible.
  • Make Fannie and Freddie financially stable and strong to avoid the risk of loss to taxpayers.
  • Win the confidence of investors in the rules of law governing financial markets, which is necessary for long-run stability of the economy. 

Fannie and Freddie stocks should, of course, be relisted in NYSE for trade so that they are free from the lawless and rudderless OTC.  It is a shame that the two bluest of blue-chip private companies (which fund housing for 50% American Households) were taken under conservatorship to rescue mega banks in 2008 and, then were dumped in OTC after their profits were swept illegally by the Obama Administration.

2. Campaign during election with the following issues:

  • That the policy to recapitalize and release Fannie and Freddie will drastically lower the mortgage interest rates to make it easier for the vast majority of American households including low-income earners to own homes with commitment and creditworthiness to repay their mortgage loans.
  • That the 2012 policy action of Obama Administration to illegally sweep all the profits of Fannie and Freddie had made Fannie and Freddie financially unstable and the goal of home ownership harder for Americans.
  • That the huge financial settlements made by Obama Administration with large banks for "mortgage fraud" should have been used for recapitalization of Fannie and Freddie rather than wasting in other frivolous and inefficient liberal causes.

Dr. Sankarshan Acharya
Director, Academy of Rational Philosophy for Unanimously Agreeable and Constitutional Governance
http://pro-prosperity.com/About.html

PS:  The Trump Administration’s plan and en bank ruling of the U.S. 5th Circuit Court of Appeals are very consistent with my April 2013 academic theory on the necessity of a government-guaranteed-regulated mortgage lender.  The paper on this theory is available at http://pro-prosperity.com/Research/Coalition%20of%20Borrowers.pdf

It is very surprising that academic journals have declined to even review my seminal academic paper which is founded on unbiased axioms and on general equilibrium of the economy, and which is going to drive American policy now. 

My theory is, of course, antithetic to prevailing theories which are not founded on general equilibrium, which are based on unfair axioms (dogmas) published in the same academic journals (that have refused to review my paper) by anointed economic pundits, and which have unfortunately formed the basis of policy discourse in Congress so far.