Paulson’s Seizure

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

Imagine if the Bush administration, having decided that gasoline prices are too high, decided to nationalize ExxonMobil. The federal energy secretary held a Sunday press conference to announce that the Bush administration had replaced the company’s management, that the company would henceforth be run with the goal of reducing gasoline prices for drivers, and that any profits the company made would be the property of the federal government, which would now control 80% of the company. As for the company’s existing shareholders, they are out of luck — they won’t get any more dividends; they won’t even get a chance to vote on the deal.

Substitute mortgage prices for gasoline prices and you get a pretty good sense of what the Bush administration and its secretary of the Treasury, Henry Paulson, did over the weekend in respect of Fannie Mae and Freddie Mac. The administration decided that its interest in low mortgage rates as an artificial boost to housing prices was more important than the property rights of the shareholders of Fannie Mae and Freddie Mac. So without even so much as a shareholder vote, the companies were nationalized.

For what reason? Because they suffered sizeable losses? By that logic, Secretary Paulson ought to seize Merrill Lynch, whose $14 billion in after-tax losses dwarf the $9.44 billion that have been reported by Fannie Mae. Because they violated the statutory capital requirements? No, for all the verbiage offered yesterday by Mr. Paulson and the director of the Federal Housing Finance Agency, James Lockhart, no one accused Fannie of lacking the capital required by law.

Mr. Lockhart did get in a sneer at what he called “the antiquated capital requirements.” Those requirements were set by a law — the Federal Housing Enterprises Financial Safety and Soundness Act — that was passed in 1992 after a downturn in the housing market and that can hardly be accurately characterized as antiquated. In any event, if Mr. Lockhart considers the capital requirements antiquated, the right approach is to try to change the law, not to seize the company. At least that way the company’s shareholders would have a chance to participate in the legislative process.

What the federal regulators acknowledge they are objecting to in actuality was not the companies’ recklessness with capital but their care with it. “Freddie Mac and Fannie Mae, in order to try to build capital, have continued to raise prices and tighten credit standards,” Mr. Lockhart said. And what exactly is wrong with that? Had that been done a few years ago, there might be fewer foreclosures now. Mr. Paulson, the nation’s newly crowned chief mortgage lender, even announced plans to expand the companies’ portfolios of mortgage-backed securities through the end of 2009 — taking on even more risk.

Mr. Paulson yesterday praised Fannie and Freddie’s managements and board for their “productive cooperation” and absolved them of any responsibility for the problems. One can only wonder how harsh his criticism would have been had the company’s boards and managers stood up to defend the property rights of their shareholders. A quick look on Yahoo Finance discloses that as of June 30, 10.86% of Fannie Mae’s outstanding stock — or about $2.3 billion worth — was held by Capital Research Global Investors, which is the adviser to American Funds, a Los Angeles-based mutual fund giant.

The president of Capital Research and Management Co. is James Rothenberg, who, as treasurer of Harvard University and chairman of the board of Harvard Management Company, which manages the Harvard endowment, is quite an accomplished investment manager. Other big Fannie shareholders at last report included AllianceBernstein L.P. and Dodge & Cox, which represent plenty of individual investors and pension funds.

Here’s hoping that at least one major holder insists on a proxy vote before allowing the government to seize 80% of Fannie. If the shareholders vote the deal down, it will become clear that, Mr. Paulson’s protestations of “productive cooperation” notwithstanding, what this really amounts to is not a bailout or a rescue but an expropriation of private property by the government. If Fannie were really in such a dire capital predicament, its shareholders would be happy to be let off the hook. But it isn’t, so they aren’t.

The federal government already spends a huge amount of money subsidizing housing. The amount the department of Housing and Urban Development spends has soared 67% to $52 billion in 2008 from $31 billion in the last year of the Clinton administration. The cost of the home mortgage interest deduction is estimated by Congress’s Joint Committee on Taxation at $79.9 billion in 2008. The committee reckons the capital gains tax exclusion on the first $500,000 in gains on the sale of a house by a couple filing jointly costs another $29 billion, and the federal tax deduction for local property levies costs another $14.3 billion.

Seizing Fannie and Freddie from their stockholders as a way of propping up home prices by making mortgages cheaper and more readily available than they would be on a free-market basis is being touted as a good deal for taxpayers and for homeowners. But it is a bad deal for America, because the precedent that a company may be seized by the government without a shareholder vote on a regulator’s whim is one that will make property rights less secure in this country for generations to come.


The New York Sun

© 2024 The New York Sun Company, LLC. All rights reserved.

Use of this site constitutes acceptance of our Terms of Use and Privacy Policy. The material on this site is protected by copyright law and may not be reproduced, distributed, transmitted, cached or otherwise used.

The New York Sun

Sign in or  Create a free account

By continuing you agree to our Privacy Policy and Terms of Use