May 15, 2014
Jonathan Macey and Logan Beirne have posted a short working paper, Stealing Fannie and Freddie, to SSRN. It advocates a position similar to that taken by the plaintiffs in the GSE shareholder litigation. They argue,
Politicians are running rough-shod over the rule of law as they seek to rob private citizens of their assets to achieve their own amorphous political objectives. If we were speaking of some banana republic, this would be par for the course – but this is unfolding in the United States today.
“The housing market accounts for nearly 20 percent of the American economy, so it is critical that we have a strong and stable housing finance system that is built to last,” declares the Senate Banking Committee Leaders’ Bipartisan Housing Finance Reform Draft. The proposed legislation’s first step towards this laudable goal, however, is to liquidate the government sponsored enterprises Fannie Mae and Freddie Mac – in defiance of the rule of law. This paper analyzes the current House and Senate housing finance reform proposals and faults their modes of liquidation for departing from legal norms, thereby harming investors and creditors, taxpayers, and the broader economy.
Under proposals before Congress, virtually everyone loses. First, the GSEs’ shareholders’ property rights are violated. Second, taxpayers face the potential burden of the GSEs’ trillions in liabilities without dispensing via the orderly and known processes of a traditional bankruptcy proceeding or keeping the debts segregated as the now-profitable GSEs seek to pay them down. Finally, the rule of law is subverted, thereby making lending and business in general a riskier proposition when the country and global economy are left to the political whims of the federal government. (1)
I found a number of unsupported assertions throughout the piece. For instance, they assert, without support, that Fannie and Freddie “never reached the point of insolvency.” (3) Badawi & Casey convincingly argue that without “government intervention, [Fannie and Freddie] would have defaulted on their guaranty obligations and more generally on obligations to all creditors.” (Badawi & Casey at 5) All in all, I don’t find this short working paper to be compelling reading — perhaps a more comprehensive one is in the works.