An Open Letter to Our Readers

Dear Sir (or Madam),

I am writing this letter with all due respects. I have a few items that our Treasury and, subsequently, legislators may have failed to consider:

– If the GSEs borrow from either the Fed or from the Treasury lines without a requirement they first eliminate their dividends won’t taxpayers be forced to subsidize shareholder returns?

– Given the real possibility of future shareholder suits against the GSEs, for alleged misrepresentations and/or alleged fraud, would the Government be on the hook for any settlement or damages? Does a Government backstop preclude shareholder suits? Is this either a prudent or free-market approach? Is this a precedent our leaders want to set?

– If the GSEs have access to the Treasury and Fed then it is likely there could not be a scenario in which they could end up in “receivership” because their access to capital is theoretically unlimited. Although this scenario may well mean the U.S. and its taxpayers can become “critically undercapitalized” the GSEs would not be easily classified as such. Thus, this plan and the legislation will likely have the effect of tying the new regulator’s hands from using many of the most meaningful regulatory powers in the bill.

– It appears irrational to require homeowner’s with negative equity, who take advantage of the FHA refinancing provided for in the pending legislation, to give up to 50% of the future appreciation of their homes to the Government yet not require a similar profit sharing demand on the GSEs in return for the Federal assistance?

– Language in the legislation, which tithes the GSEs to provide funding for an affordable housing fund, seems either to be a direct transfer of taxpayer resources toward that end or already outdated and meaningless language that seems destined to pass in this legislation. This is a prime example of the reasons our citizenry has voted “no confidence” in legislative leadership on both sides of the aisle and in the executive branch.

– If the GSEs are being bailed out, by definition, will we either end up bailing out private mortgage insurers or, alternatively, providing a new business opportunity to reward the GSEs? They will have the US cost of funds advantage in developing new credit enhancement programs to circumvent their 80+ LTV risk limits.

I am somewhat amazed by the holes in this plan. Furthermore, I am beginning to question whether the GSEs, in their ongoing and masterful game of political check-mate, have orchestrated this ‘panic’ in an effort to garner assistance precisely during the short window before recess. Perhaps in doing so they would have understood that the Hill and the White House wouldn’t even have time to consider or understand what they are about to do or the dreadful and historic implications of their actions.

Given the April 14th S&P report about the risks posed by the GSEs to the US’ sovereign rating1 I am wondering why anyone would seek to rush and move this before August 3rd recess.

This poorly planned, ill considered and one-off approach is especially troubling given how early we almost certainly are in this crisis. Airlines, autos, regional banks, private mortgage insurers and bond insurers may also look to the Treasury for help. Should we accept the United States an economy where shareholders receive all of the gains from management’s good decisions while the public is forced to accept all of the losses of imprudent decisions?


  • Footnote:
  • (1) Standard & Poor’s, “For The U.S. ‘AAA’ Rating, Government-Sponsored Enterprises Pose Greater Fiscal Risks Than Brokers”, April 14 2008 (See: “We believe they (the GSEs) pose large contingent fiscal risks that recent policy decisions aimed at supporting the U.S. mortgage market have made even larger. If these risks were to translate into increased government debt, they could even hurt the U.S.’s credit standing).”

One Response to "An Open Letter to Our Readers"

  1. Acheson   July 23, 2008 at 1:01 am

    Bravo! Fax this to every Senator and member of Congress you possibly can.