Remarkable Vindication of Unanimously Agreeable and Constitutional Governance:
Order of U.S. President on Recapitalization and Release from Conservatorship of Fannie Mae and Freddie Mac
and Presidential Executive Order on Academic Freedom

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

March 27, 2019. Revised March 31, 2019

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The optimal bank foreclosure rule published in 1989 in the Journal of Finance was enacted as law (Federal Deposit Insurance Improvement Act of 1991).

Just before the above paper was published in 1989, US Congressional Budget Director consulted me (while I was an Assistant Professor of Finance at New Yourk University) to devise optimal policies for Fannie Mae and Freddie Mac. I had then no idea about the difference between banks and Fannie-Freddie.

I then came to the Federal Reserve Board (Washington, D.C.) as a financial economist on two year leave of absence from NYU. As a Fed economist, I discovered the most daunting problem facing the U.S. economy: moral hazard in banking and financial markets. This led to a paper on efficient resolution of moral hazard, which was mimeographed at the Fed in 1991. I found that unless this moral hazard problem was resolved through unanimously agreeable safe central banking policy, the U.S. economy would face a serious economic crisis and wrote to the US Congress and President in a series of memos starting in 2003.

The financial crisis of 2008 led the government to take over Fannie and Freddie under a new law (HERA) that forced Fannie and Freddie to purchase worthless mortgage backed securities from many mega banks. The worthless MBS was created through short-selling by some mega banks like Goldman Sachs and JPMorgan with a view to bringing down the U.S. housing market to profit from it. Toxic MBS had no real mortgage loan pools backing them. But Fannie and Freddie in conservatorship were forced to buy such toxic MBS almost at par to rescue mega banks that would have gone bankrupt due to negative capital. Most mega banks later paid more than $200 billion in fine to U.S. Treasurty for mortgage fraud (which was selling of toxic MBS) committed on Fannie and Freddie.

The resolution of mega banks, government regulators and Congress backed by top academic experts during the financial crisis of 2008 and earlier was to eliminate Fannie and Freddie through receivership for usurious lending. Rolling Stone has an excellent presentation of why the Obama Administration officials deliberately tried to hide 11000 documents relating to Fannie and Freddie.

Fannie and Freddie (while they were in conservatorship) generated, however, enormous profits starting September 2012. Fannie and Freddie have paid off the U.S. Treasury funds imposed on them as debt to purchase the toxic mortgage backed securities from mega banks.

Before reporting substantial profits, the Obama Administration decreed in August 2012 to take away (unconstitutionally) all the profits of Fannie and Freddie so that they would eventually perish in time by 2018. Fannie and Freddie stocks were removed from NYSE and listed in OTC, meant for stocks that eventually perish.

When Fannie and Freddie stocks were trading very low as of April 2013, I suddenly woke up in one morning, while subconsciously formulating (while asleep) a general equilibrium model in which government-guaranteed lenders of mortgage loans (not affected by the unfair and unconstitutional structure of mega banks and financial markets) are necessary for economic equilibrium (stability).

This paper was circulated widely starting early May 2013. It represents unanimously agreeable and constitutional rules of governance of regulated mortgage finance companies (not entangled by inefficient moral hazard in banking and financial markets) and interest rates in a general equilibrium comprising lenders and borrowers.

I sent this paper to President Obama and challenged the then prevailing academic/regulatory/congressional dogma of eliminating Fannie and Freddie. Fannie and Freddie stocks skyrocketed in the single month of May 2013.

The biggest heist of mankind is strategic takeover of $5-trillion Fannie and Freddie by mega banks (clearinghouse members who have formed the Federal Reserve as their club) for nothing.  The take-over strategy had active support (sans any research on general equilibrium of the real-world economy) of academic experts like Harvard Professor Larry Summers who was President Clinton’s Treasury Secretary, President Obama’s Economic Advisor and President of Harvard University and university professors at New York University including Viral Acharya who currently serves as the Deputy Governor of the Reserve Bank of India.  The Robber Barons' strategy to take over Fannie and Freddie - that are are bluest of blue-chip companies as they form the backbone of American home owners - has had active support of U.S. Congressmen and Senators who have arrogated the power to craft on a bipartisan basis unconstitutional rules for such takeover

The irony is that mega hedge funds have bought nearly 600 million shares during May 2013. It was very unusual for such a subdued price rise. It could be because some mega short-sellers still had faith that Fannie and Freddie would be eliminated by the Congress and played short-sellers' game to keep the price repressed while the hedge funds took the risk of buying the shares.

It is possible that many clearinghouse members have massive short interests in their market-making subsidiaries, while they have transferred, to thier private hedge funds, the Fannie and Freddie shares, which were collected by these subsidiaries for a few cents each share, as the unprivileged hedge funds, mutual funds and pension plans were forced to dump their holdings of Fannie and Freddie in 2008 after the U.S. government regulators cleared their intention to ultimately liquidate Fannie and Freddie. The U.S. government regulatory intention was formalized by a de jure, but unconstitutional, decree of the Obama Administration in August 2012 - the Net Worth Sweep decree - to take away to Treasury all the massive future profits of Fannie and Freddie that it knew then coming.

Now, President Trump of U.S. has issued a memo (see the postscript) directing concerned government departments and agencies to work out a plan on capitalizing and releasing Fannie and Freddie from conservatorship. This memo seems to be a direct vindication of unanimously agreeable and constitutional rules of governance which obtain in a model of general equilibrium of the real-world economy comprising coalitions of borrowers (demanders of capital) and lenders (suppliers of capital).

It is not surpising that an important academic/original paper based on general equilibrium of the real-world economy has not been considered for publication without even a review and by refunding the submission fee by prominent academic journals which are controlled by the elite academic pundits anointed by the Robber Barons. The same academic journals have actually published papers based on partial/restricted equilibrium involving only coalitions of lenders! The idea of including coalitions of borrowers for general equilibrium is original. Besides, how can there be equilibrium without both the demanders (borrowers) and suppliers (lenders) of capital who determine the price of capital (interest rate).

Why are such academic journals blocking publication of original research based on robust general equilibrium models of the real-world? It is obvious that they are prejudiced against unprejudiced authors due to the crumbs of systemic loot thrown at them. But why then are the administrations of universities -- which are supposed to be fountains of discovery and dissemination of truth, especially, about the stability of the economy that affects the very survival of the universities--rewarding faculty for blocking publication of research of enormous importance to the economy? It must be a failure of academic administration. President Trump has recently issued an executive order on academic freedom and I have responded to him about how to measure, rationally or scientifically, the stifling of academic freedom.

We are, thus, witnessing the end of modern liberal world order in which the power of the mighty based on systemic robbery is zeroed out. We have to still wait, though, for what the current regulatory team - engaged by President Trump - actually does, whether the President accepts its recommendation and whether his acceptance is enforced without any effective challenge by Robber-Barons' agents in Congress.

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


 

 

Memorandum on Federal Housing Finance Reform
 ECONOMY & JOBS

 https://www.whitehouse.gov/presidential-actions/memorandum-federal-housing-finance-reform/
Issued on: March 27, 2019



MEMORANDUM FOR THE SECRETARY OF THE TREASURY
THE SECRETARY OF AGRICULTURE
THE SECRETARY OF HOUSING AND URBAN DEVELOPMENT
THE SECRETARY OF VETERANS AFFAIRS
THE DIRECTOR OF THE OFFICE OF MANAGEMENT AND BUDGET
THE DIRECTOR OF THE BUREAU OF CONSUMER FINANCIAL PROTECTION
THE DIRECTOR OF THE FEDERAL HOUSING FINANCE AGENCY
THE ASSISTANT TO THE PRESIDENT FOR ECONOMIC POLICY
THE ASSISTANT TO THE PRESIDENT FOR DOMESTIC POLICY

SUBJECT:        Federal Housing Finance Reform

The housing finance system of the United States is in urgent need of reform.  During the financial crisis of 2008, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) — collectively known as the Government-sponsored enterprises (GSEs) — suffered significant losses due to their structural flaws and lack of sufficient regulatory oversight.  To prevent their failure, the GSEs received support from the Federal Government and were placed into conservatorship in September 2008.  The Housing and Economic Recovery Act of 2008 enacted important reforms to the supervision, oversight, risk management, and governance of the GSEs.  The GSEs remain in conservatorship, however, and the housing finance system continues to face significant and fundamental challenges.  To date, the GSEs are the dominant participants in the housing finance system and lack real competitors.  The lack of comprehensive housing finance reform since the financial crisis of 2008 has left taxpayers potentially exposed to future bailouts, and has left the Federal housing finance programs at the Department of Housing and Urban Development potentially overexposed to risk and with outdated operations.  Accordingly, it is time for the United States to reform its housing finance system to reduce taxpayer risks, expand the private sector’s role, modernize government housing programs, and make sustainable home ownership for American families our benchmark of success.  In order to resolve these ongoing challenges and by the authority vested in me as President by the Constitution and the laws of the United States of America, I hereby direct the following:

Section 1.  Framework to Reform the GSEs.  (a)  The Secretary of the Treasury is hereby directed to develop a plan for administrative and legislative reforms (Treasury Housing Reform Plan) to achieve the following housing reform goals:

(i)    Ending the conservatorships of the GSEs upon the completion of specified reforms;
(ii)   Facilitating competition in the housing finance market;
(iii)  Establishing regulation of the GSEs that safeguards their safety and soundness and minimizes the risks they pose to the financial stability of the United States; and
(iv)   Providing that the Federal Government is properly compensated for any explicit or implicit support it provides to the GSEs or the secondary housing finance market.
(b)  The Treasury Housing Reform Plan shall include reform proposals to achieve the following specific objectives:
(i)     Preserving access for qualified homebuyers to 30 year fixed-rate mortgages and other mortgage options that best serve the financial needs of potential homebuyers;
(ii)    Maintaining equal access to the Federal housing finance system for lenders of all sizes, charter types, and geographic locations, including the maintenance of a cash window for loan sales;
(iii)   Establishing appropriate capital and liquidity requirements for the GSEs;
(iv)    Increasing competition and participation of the private sector in the mortgage market, including by authorizing the Federal Housing Finance Agency (FHFA) to approve guarantors of conventional mortgage loans in the secondary market;
(v)     Mitigating the risks undertaken by the GSEs, including by altering, if necessary, their respective policies on loan limits, program and product offerings, credit underwriting parameters, and the use of private capital to transfer credit risk;
(vi)    Recommending appropriate size and risk profiles for the GSEs’ retained mortgage and investment portfolios;
(vii)   Defining the role of the GSEs in multifamily mortgage finance;
(viii)  Defining the mission of the Federal Home Loan Bank system and its role in supporting Federal housing finance;
(ix)    Evaluating, in consultation with the Secretary of Housing and Urban Development and the Director of the Bureau of Consumer Financial Protection, the “QM Patch,” whereby the GSEs are exempt from certain requirements of the Qualified Mortgage (QM) determination;
(x)     Defining the GSEs’ role in promoting affordable housing without duplicating support provided by the Federal Housing Administration (FHA) or other Federal programs; and
(xi)    Setting the conditions necessary for the termination of the conservatorships of the GSEs, which shall include the following conditions being satisfied:
(A)  The Federal Government is fully compensated for the explicit and implicit guarantees provided by it to the GSEs or any successor entities in the form of an ongoing payment to the United States;
(B)  The GSEs’ activities are restricted to their core statutory mission and the size of investment and retained mortgage portfolios are appropriately limited; and
(C)  The GSEs are subjected to heightened prudential requirements and safety and soundness standards, including increased capital requirements, designed to prevent a future taxpayer bailout and minimize risks to financial stability.
(c)  For each reform included in the Treasury Housing Reform Plan, the Secretary of the Treasury must specify whether the proposed reform is a “legislative” reform that would require congressional action or an “administrative” reform that could be implemented without congressional action.  For each “administrative” reform, the Treasury Housing Reform Plan shall include a timeline for implementation.
(d)  In developing the Treasury Housing Reform Plan, the Secretary of the Treasury shall consult with the Secretary of Agriculture, the Secretary of Housing and Urban Development, the Secretary of Veterans Affairs, the Director of the Office of Management and Budget, the Director of the Bureau of Consumer Financial Protection, the Director of the FHFA, the Assistant to the President for Economic Policy, and the FHFA’s Federal Housing Finance Oversight Board.
(e)  The Treasury Housing Reform Plan shall be submitted to the President for approval, through the Assistant to the President for Economic Policy, as soon as practicable.
Sec. 2.  Framework to Reform the Programs of the Department of Housing and Urban Development, the FHA, and the Government National Mortgage Association (GNMA).  (a)  The Secretary of Housing and Urban Development is hereby directed to develop a plan for administrative and legislative reforms (HUD Reform Plan) to achieve the following housing reform goals:
(i)    Attempting to ensure that the FHA and GNMA assume primary responsibility for providing housing finance support to low- and moderate-income families that cannot be fulfilled through traditional underwriting;
(ii)   Reducing taxpayer exposure through improved risk management and program and product design; and
(iii)  Modernizing the operations and technology of the FHA and GNMA.
(b)  The HUD Reform Plan shall include reform proposals to achieve the following specific objectives:
(i)    Addressing the financial viability of the Home Equity Conversion Mortgage program;
(ii)   Assessing the risks and benefits associated with providing assistance to first-time homebuyers, including down-payment assistance;
(iii)  Defining the appropriate role of the FHA in multifamily mortgage finance;
(iv)   Diversifying FHA lenders through increased participation by registered depository institutions;
(v)    Enhancing GNMA program participation requirements and standards to ensure its safety and soundness and to protect borrower and investor interests; and
(vi)   Reducing abusive and unsound loan origination or servicing practices for loans in the GNMA program, including, if appropriate, by providing for cooperation with other loan program sponsors and regulators.
(c)  For each reform included in the HUD Reform Plan, the Secretary of Housing and Urban Development shall specify whether the proposed reform is a “legislative” reform that would require congressional action or an “administrative” reform that could be implemented without congressional action.  For each “administrative” reform, the HUD Reform Plan shall include a timeline for implementation.
(d)  In developing the HUD Reform Plan, the Secretary of Housing and Urban Development shall consult with the Secretary of the Treasury, the Secretary of Agriculture, the Secretary of Veterans Affairs, the Director of the Office of Management and Budget, the Director of the Bureau of Consumer Financial Protection, the Assistant to the President for Economic Policy, and the Assistant to the President for Domestic Policy.
(e)  The HUD Reform Plan shall be submitted to the President for approval, through the Assistant to the President for Economic Policy, as soon as practicable.
Sec. 3.  General Provisions.  (a)  Nothing in this memorandum shall be construed to impair or otherwise affect:
(i)   the authority granted by law to an executive department or agency, or the head thereof; or
(ii)  the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.
(b)  This memorandum shall be implemented consistent with applicable law and subject to the availability of appropriations.
(c)  This memorandum is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.
(d)  The Secretary of the Treasury is authorized and directed to publish this memorandum in the Federal Register.
DONALD J. TRUMP