Receivership Does NOT End GSEs

Since their failure in 2008, I’ve been advocating that Fannie Mae and Freddie Mac be placed in receivership, which is essentially an administrative bankruptcy.  In what is an otherwise wonderful read, James Hagerty repeats in his new book (see pages 182-3) the myth that placing Fannie and Freddie into receivership would end those companies.  As he writes:

Under receivership, the main providers of funding for home mortgages would be going out of business at a time when private money for mortgages had dried up.” He continues, “The Bush administration would have to explain how it was going to make sure mortgage lending would continue without Fannie and Freddie.

Few journalists have as deep an understanding of Fannie and Freddie as Hagerty.  But I worked on the receivership language (Section 1145) in the Housing and Economic Recovery Act of 2008 (HERA) while staff on Senate Banking Committee, and I think his read of its powers are incorrect.

First, under a receivership, the GSEs can continue to be run – that is, the regulator, FHFA, can still issue debt, buy mortgages and do everything else the GSEs currently do. Skeptical?  Well, here’s the law:

Section 1367(b)(B) Operate the regulated entity.–The Agency may, as conservator or receiver– “(i) take over the assets of and operate the regulated entity with all the powers of the shareholders, the directors, and the officers of the regulated entity and conduct all business of the regulated entity; “(ii) collect all obligations and money due the regulated entity; “(iii) perform all functions of the regulated entity in the name of the regulated entity which are consistent with the appointment as conservator or receiver; “(iv) preserve and conserve the assets and property of the regulated entity; and “(v) provide by contract for assistance in fulfilling any function, activity, action, or duty of the Agency as conservator or receiver.”

Also the law prohibits FHFA from ending the charters:

HERA 1145 (Section 1367(k) of 1992 Act) “Prohibition of Charter Revocation.–In no case may the receiver appointed pursuant to this section revoke, annul, or terminate the charter of an enterprise.”.

The law is quite clear.  FHFA would continue to run the GSEs, with the option of a good/bad bank model to resolve bad assets, and the only way FHFA can terminate the receivership is to sell the charters back into the marketplace (see Section 1367(i)(6)(C) “Termination of status as limited-life regulated entity”).

So let’s get the facts straight.  Receivership would not end the GSEs.  The fundamental difference between receivership and the current conservatorship is the ability to impose losses on creditors.  The sole reason that Paulson and crew chose conservatorship was to protect the debt-holders and stick the taxpayer with the tab.  There were options to do otherwise.  Which is of course the primary reason I am skeptical of Dodd-Frank:  we had the “tools” to protect the taxpayer from GSE losses, yet chose not to use them.  Why should we believe we’d use them for Citibank if we didn’t for Fannie Mae?