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The Obamacare of Real Estate

3:01 PM, Mar 18, 2014 • By JAMES K. GLASSMAN
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At a forum on Feb. 5, lawyer Ted Olson, the former U.S. solicitor general, revealed that in December 2010, then-Treasury Secretary Timothy Geithner initialed a memo declaring that the government would not let shareholders touch the Fannie’s and Freddie’s profits. Ever.

The memo, which until last month was secret, referred to the administration’s “commitment to ensure existing common equity holders will not have access to positive earnings from the GSEs in the future.” Shareholders were not told what the government had in store for them—a severe breach, if not of securities law then certainly of the conventions of honesty and transparency that make markets work.

The breach was only one of many. Ralph Nader, a shareholder in the GSEs himself, complains that a long list of government officials, including Fed chairman Ben Bernanke, told investors that Fannie and Freddie were sound, and community banks were pressured by regulators to invest in these government-sponsored enterprises, or GSEs.

Encouraged by such statements, many investors held onto their pre-2008 Fannie and Freddie shares, and others bought after prices collapsed. Olson, the former U.S. Solicitor General, represents Perry Capital, a hedge fund that’s among several investors suing to demand that the government follow its original 2008 agreement and stop taking shareholders’ money beyond the original payback deal for the bailout.

Nader, by the way, has been admirably consistent. Asked at the forum if he thought that hedge funds and small investors should be treated differently, as some in Congress believe, he said definitively, “No. That's political preferences. Basically, the decision as to how to treat investors is based on the status of their investment—common, preferred, bondholder—not on the status of who holds the investment, whether it's a hedge fund, brokerage firm, bank, or individual or a mutual fund.”

The feds laid the groundwork with their treatment of General Motors and Chrysler bondholders, who in 2009 were given short shrift at the expense of politically favored unions. But the GSE grab is far worse, and the obvious question is why so few policy makers, especially conservatives, aren’t outraged.

One notable exception is Sen. Pat Toomey (R-PA), who stood up for shareholder rights in a set of pointed questions to Treasury Secretary Jack Lew. For example: “What comfort can you give to private sector investors considering investing in the future of the housing finance system when they believe that the government arbitrarily changed the rules of the game mid-stream?”

But most conservatives seem blinded by animosity toward Fannie and Freddie and are only too happy to see them vaporized. In recent decades, the GSEs were tightly connected to the Democratic political establishment and reveled in throwing their weight around. Now, conservatives want to see Fan and Fred get their comeuppance. A Wall Street Journal editorial even claimed that the GSEs should keep paying in penance for creating the financial crisis and for “the election of Barack Obama.”

In addition to this over-the-top “Fannie-mosity,” many conservatives simply are not convinced that Fannie and Freddie, which have been effectively reformed, will stay that way. Rather, they worry, the GSEs will be exploited to promote liberal social policy or return to funding loans to low-income borrowers who might not afford them – and we’re back where we started.

It’s a legitimate concern, but it can be handled with capital requirements and regulatory oversight as too-big-to-fail financial institutions. Have the president state clearly that the GSEs no longer have their guarantee, explicit or otherwise, from the U.S. government.

What is unacceptable is for the federal government to thumb its nose at the rule of law and treat shareholders with contempt – which is precisely the approach that the new Senate legislation will enshrine in law.

James K. Glassman, former U.S. under secretary of state for public diplomacy and public affairs, is a visiting fellow at the American Enterprise Institute and a member of the Securities and Exchange Commission’s investor advisory board. These views are his own.

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