Earlier this week, Fox News’ Tucker Carlson asked a guest on his show if it were true that the United States government has been “looting” Fannie Mae and Freddie Mac.

His guest, a mortgage industry analyst named Joshua Rosner, described the bailout that has kept alive the two mortgage finance giants since their collapse in 2008 and subsequent need for $187.5 billion of taxpayer funding, as “a simple theft.”

Not a theft from taxpayers–but from Fannie and Freddie’s shareholders.

While it was jarring to see Carlson and Fox not even attempt to challenge an advocate for the two government-sponsored mortgage companies–long the targets of conservative critics who argued they distorted mortgage markets, enjoyed a privileged status of being implicitly-backed by the U.S. government even before they were bailed out, and were primary causes of the financial crisis–Rosner’s basic argument is hardly new.

Hedge funds and other big investors, including Perry Capital LLC and the Fairholme Funds, have been making similar arguments in federal courts for years–to no avail. The cases have been met by dismissal in four federal district courts and last month a federal appeals court largely rejected the bid by investors to reverse one of those decisions.

On Fox, however, Rosner gave the shareholder cause a novel twist–one designed to appeal to conservatives and perhaps the Trump administration despite its lack of grounding in evidence or logic. According to Rosner, the U.S. Treasury is taking funds from Fannie and Freddie to pay for Obamacare–perhaps the one thing loathed more by conservatives than bailouts of putatively private companies.

“Essentially, in 2012, to avoid dealing with Republicans on the debt ceiling, on sequester, and to fund Obamacare, the Obama administration took Fannie and Freddie’s profits,” Rosner said.

The message: if you hate Obamacare, you should support the cause of the hedge funds seeking to profit by prying Fannie and Freddie out of government hands.

And please pay no attention to the fact that the two companies have always needed–and will always need, unless they are eliminated–the backing of the U.S. taxpayer.

Fannie and Freddie: The Walking Dead

Fannie and Freddie provide liquidity to the housing market by buying mortgages from lenders, packaging them into securities whose principal and interest payments they guarantee. Prior to their 2008 collapse, Fannie and Freddie were widely viewed as enjoying an “implicit guarantee” from the U.S. government, enabling them to earn enormous profits because investors viewed their bonds as being safe–or nearly so–as U.S. Treasury bonds

The companies were taken over by the U.S. government in 2008 when officials feared their collapse could further destabilize the housing and financial markets. Treasury provided hundreds of billions of funding while the Federal Housing Finance Agency became their conservator.  

Under their original agreement with the U.S. Treasury, both companies were supposed to pay a dividend equal to 10% of their taxpayer funding as well as a fee on the hundreds of billions more Treasury had pledged to support them. For years, however, neither company earned enough to pay the dividend, which forced them to draw even more from their bailout funds just to send the money back to Treasury as the dividend. This circular draw, as it came to be called, threatened to put the companies into a death spiral, slowly eating away at the remainder of the Treasury backstop.

In mid-2012, Treasury and the FHFA agreed to change the terms of the bailout so that Fannie and Freddie would no longer have a fixed dividend–ending the need for circular draws. Instead, each company would have a flexible dividend obligation that would rise and fall with their profits. Because the new dividend is equal to the positive net worth of each company, less a small capital cushion set to decline each year, it is known as the “net worth sweep.”

At the time the net worth sweep was implemented, Treasury Department officials noted that in addition to ending the circular draws and death spiral, the arrangement would facilitate the eventual wind down of the companies by preventing them from using profits to recapitalize as policy-makers designed a safe, more stable mortgage finance system.

Because every attempt at bipartisan mortgage finance reform legislation stalled out on Capitol Hill, neither company has been wound-down. Instead, they have remained in conservatorship and supported by taxpayer backing for more than eight years–a situation that nearly everyone involved in mortgage finance reform regards as undesirable.

“These companies are zombies. They died in 2008 but they’ve been kept alive by the contaminant of government backing ever since–all because every attempt to build a better system has gone nowhere,” said one former government housing official who spoke on the condition of anonymity.

Conservatives Balk At Net Worth Sweep For Keeping Companies Alive

The net worth sweep was designed by the Obama administration in part to placate conservative critics of the two companies. Obama housing officials believed that merely lowering the dividend obligation to a level the companies could afford would invite criticism from Republican lawmakers that Fannie and Freddie were getting a second bailout–a bailout from their bailout.

Since the net worth sweep would produce larger dividends if the companies were highly profitable and lower dividends when they were not, it balanced the risks to taxpayers with potential rewards, in the view of several Obama administration officials who spoke on background.

Nonetheless, the net worth sweep met with initial resistance from Republican lawmaker who feared it would delay the wind down of the companies.

“The reduction of the dividend payments for Fannie Mae and Freddie Mac will ensure the American taxpayers remain on the hook for the bailout of these two failed institutions,” Congressman Scott Garrett (R-NJ), the chairman of the House Financial Service Subcommittee on Capital Markets and Government Sponsored Entities, said in a statement.

“Instead of devoting time and energy to prolonging bailouts, Obama administration should work with Congress to wind these companies down and create a new and sustainable housing finance system where taxpayers are not at risk,” Rep. Garrett said.

This prompted an email, made public in one of the shareholder lawsuits, from an Obama administration official named Jim Parrott to complain that the net worth sweep had been misunderstood.  “We’re not reducing their dividend but including in it every dime these guys make going forward and ensuring that they can’t recapitalize,” Parrott wrote to one of Rep. Garrett’s staffers.

This didn’t fully satisfy the staffer. “In regards to them keeping additional profits, in my mind that is only an accounting issue, gov recoups now (per new method) or later when we liquidate them and then realize those gains for the taxpayer,” the staffer wrote back.

Summarizing the back-and-forth, Parrott wrote to the Treasury Department’s Timothy Bowler: “We’ve closed off possibility that they every [sic] go (pretend) private again and sped up the clock on the wind down of their portfolio, all while increasing the stability of the markets by removing concern that these guys run out of support before we have a place to which to transition.”

Despite this initial resistance, however, there was very little sustained opposition from conservatives to the net worth sweep–largely because it was presented as a step toward the wind down of Fannie and Freddie.

The Hedge Funds Strike Back

Resistance to the sweep arose from another, unanticipated quarter: hedge fund managers and other large investors who acquired large amounts of the preferred and common shares of Fannie and Freddie–betting that the government wouldn’t succeed in winding them down and that they would eventually be revived.

Several hedge funds made a fortune in the wake of the financial crisis by snapping up shares of bailed-out financial companies, such as failed insurance giant AIG and banking giants Citigroup Bank of America, when many investors still shunned the sector. Investors like Bruce Berkowitz of Fairholme and John Paulson of Paulson & Co, who had made a fortune shorting housing before the crisis, came to see themselves as heroic allies of the government’s attempt to rescue the financial companies.

Some former Obama administration officials encouraged them to see Fannie and Freddie as presenting similar opportunities. If the government couldn’t wind down the entities, these former officials said, it might wind up recapitalizing them and releasing them to the public–just as it had with AIG. With the common shares trading at pennies a share and the preferred at deep discounts to face value, the upside potential could be huge.

Perry Capital, Paulson & Co, and Fairholme Funds all acquired stakes in the companies. Later, activist investor William Ackman’s Pershing Square would become the largest holder of the common stock of Fannie and Freddie. Others followed the lead of these prominent investors.

The trouble was that the Obama administration did not go along with what the hedge fund managers believed to be the script to their next windfall play. It insisted that the companies remain in conservatorship–and subject to the net worth sweep–so long as no comprehensive housing finance reform was forthcoming. Which meant that instead of acting as allies of government policies, the funds were now fighting it.

Perry Capital, Fairholme and Pershing Square all sued the government in federal court. They argued that the ongoing conservatorship violated the law and that they net worth sweep illegally deprived them of the profits of the companies.

It quickly became conventional wisdom on Wall Street that the net worth sweep was “obviously illegal.” Shares of the companies rocketed upward as investors piled into the trade that the “smart money” had endorsed. Top flight legal scholars, such as New York University’s Richard Epstein and Yale University’s Jonathan Macey, added their support to the hedge fund cause–in Epstein’s case, at least, while receiving consulting fees from one of the investors.

Hopes for a court room victory were bolstered as Fannie and Freddie turned in record profits in 2013 and 2014, thanks in part to reversals of past losses, write-ups of once abandoned deferred tax assets, and legal settlements with large banks. Shareholders gleefully declared the government’s worry about a death spiral as a ruse and described the mortgage giants as “the most profitable companies in the world,” ignoring warnings that the artificially high profit levels would soon fall. In subsequent years, however, profits did fall by enough that both companies would once again have struggled or failed to pay the original 10 percent dividend.

The Influence Vultures Take Flight

Paulson & Co did not join the lawsuits, although his internal legal advisors believed the courts would side with the investors, according to people familiar with the matter. But that didn’t mean Paulson sat by passively. Instead, Paulson helped finance a behind the scenes lobbying campaign urging the government to relinquish its controls on the mortgage giants, according to a report in the Wall Street Journal.

Lobbying efforts included campaign donations to sympathetic politicians as well as giving cash to minority advocacy groups that voiced support for Fannie and Freddie, the Wall Street Journal reported.

Some advocacy groups in Washington, D.C. began offering donations to groups and individuals who agreed to write op-eds advocating for the release and recapitalization of Fannie and Freddie, according to multiple people familiar with the matter. The Wall Street Journal reported that the Raban Group, a Washington lobbying firm, offered a minority trade association $25,000 contingent on signing its name to an op-ed arguing for the recap-and-release of Fannie and Freddie, according to the Wall Street Journal.

In 2014, John Paulson’s private foundation donated $25,000 to the Leadership Conference Education Fund, an arm of a coalition of left-leaning civil rights advocacy groups, the Wall Street Journal revealed. The Leadership Conference has been an outspoken advocate for the release of Fannie and Freddie to private control.

The DCI Group, a Washington lobbyist outfit that works on behalf of Fannie and Freddie shareholder pressure group Investors Unite, gave the Leadership Conference a total of $325,000 in donations, according to the Wall Street Journal.

In June of 2016, a group of primarily Harlem-based New York Baptist ministers calling itself ‘Our Loans Matter’ held a rally near Wall Street. Video of the rally was posted on Twitter by none other than Tucker Carlson’s Obamacare funding critic Josh Rosner, who is manging director at Graham Fisher & Co., which bills itself as an independent research consultancy. The accompanying hashtag: #ourloansmatter.

“Wow.   rally in Wall Street w leading Pastors,” Rosner said in another tweet.

The Our Loans Matter group decried efforts to wind-down Fannie and Freddie, saying they would hurt homeownership opportunities for “our parishioners,” in an October 2016 letter to New York’s Senator Chuck S`chumer and the FHFA’s Mel Watt.

That same summer, Rosner appeared on Perspectives, a television show “geared to discussing contemporary topics affecting the African-American community.” His message there was very different than the one he delivered to Tucker Carlson about Fannie and Freddie’s profits allegedly being used to support Obamacare. Instead, he argued that the government is “now in the process of eliminating Fannie Mae and Freddie Mac, essentially to hand the business to the big banks, who already are the ones who are likely to overcharge borrowers for home loans.”

There’s no evidence that most big banks want to be in the business of being in the first-risk position on the types of loans Fannie and Freddie tend to back. In fact, the biggest banks have been losing market share to nonbank lenders and retreating from the riskier parts of the market.

Rosner went on to argue that eliminating Fannie and Freddie would reduce minority homeownership–and thereby increase crime, damage the quality of education and reduce people to being “wage slaves.”

Rosner has long been an advocate of homeownership while still criticizing loose credit the practices of banks as well as Fannie and Freddie. Indeed, he was one of the few who understood years before the financial crisis that Fannie and Freddie had taken on–and disguised–far more credit risk than they should. He famously criticized low to no downpayment mortgages by saying, “A home without equity is just a rental with debt.”

Currently, he argues that Fannie and Freddie should become housing-market utilities whose profits and practices are stringently regulated but whose shares are owned by investors. His views are not influenced by hedge funds or other investors in Fannie and Freddie, he said.

“I put my own views out there and I’ve been remarkably consistent. Anyone who looks at my record knows I’m not for sale,” Rosner said in an phone interview.

 

Crash and Burn

Despite the sums spent on lobbying and litigating against the government, the hedge funds and other investors did not gain much traction. The Obama administration stood firm in its position that Fannie and Freddie would not be released or recapitalized without congressional action. Capitol Hill lawmakers agreed, including in 2015’s omnibus budget “sense of Congress” provision that demanded the the administration make no changes to Fannie and Freddie’s status without congressional approval.

The passage of time did not improve the odds for the hedge funds. As recently as last week, a bipartisan group of Senators sent a letter to FHFA director Mel Watt, who oversees the conservatorships of Fannie and Freddie, that he should not allow the companies to recapitalize without congressional approval. The lawmakers warned against “any administrative action that would adversely impact” efforts underway to legislate housing finance reform.

If Capitol Hill and the White House have been cool to the hedge funds’ pleas, the reception in federal courts has been even frostier. In the fall of 2014, a federal court completely dismissed a group of shareholder lawsuits, finding that the government acted well within its rights when it implemented the net worth sweep. At first, the decision was derided by shareholders and their advocates but as court after court reached similar conclusions–including the influential D.C. Circuit–hopes for a hedge fund win in the courts withered.

Rosner points out that the Obama administration kept from the public over 10,000 documents investors have sought in connection with the litigation, a practice that the Trump administration has continued. He argues that the documents are likely to show that the motivations for putting in the net worth sweep were different from those stated by government officials. In any case, the public deserves to know what is in those documents, Rosner says.

“Let’s see what’s in them. I think it will be eye-opening. If I’m wrong about the motivations here, I’ll be the first to say so,” Rosner said in a phone interview.

Hope Revived, Briefly 

The election of Donald Trump as President briefly revived hopes that the administration would embrace a policy that would bring the long-sought windfall to Fannie and Freddie investors. Although Trump himself has not taken a position on housing finance reform, Fannie investor John Paulson had been a big fund raiser for Trump, hosting a $50,000 per plate dinner in NYC. Paulson was reportedly picked to be the Trump transition teams advisor on housing policy. What’s more, Trump had reportedly invested between $3 million and $15 million in Paulson’s hedge fund.

A day after he was tapped to be Trump’s Treasury Secretary nominee, Steve Mnuchin appeared to bolster the prospects that the hedge funds could finally wrest control of Fannie and Freddie from the government. 

“We got to get Fannie and Freddie out of government ownership,” Steven Mnuchin said on Fox Business Network in November. “It makes no sense that these are owned by the government and have been controlled by the government for as long as they have.”

“Trump Treasury May Mean Independence for Fannie and Freddie,” the New York Times declared in a headline. The accompanying article was written by columnist Gretchen Morgenson, who co-authored 2011’s Reckless Endangerment with Josh Rosner.

Shares of Fannie and Freddie soared. Morgenson described the euphoria among the well-connected Fannie and Freddie investors that followed these comments: 

So why did Mr. Mnuchin’s comments jazz the markets? Because they revealed a seismic shift in the way these companies are viewed by the new administration. In place of the strident, anti-G.S.E. ideology that has dominated the conversation on both the left and the right since the bailout, it looks as if a more pragmatic and positive approach to the companies and their role in the mortgage market is on the way.

What that means, in my view, is that the enterprises may be allowed to live a new day rather than continue to be diminished and drained of their profits.

The revival of this particular dream of avarice, however, was quickly quashed. At his confirmation hearing in January, Mnuchin told the Senators his comments had been misinterpreted.

“My comments were never that there should be a recap and release,” Mnuchin said.

Meanwhile, the Trump administration has continued to fight the hedge funds in court–and continued to stack up legal victories. There are no signs that the Justice Department, Treasury, or the FHFA is considering settling with the litigious hedge funds or backing away from the government’s strong hand in these lawsuits.

Sources inside the Treasury Department say the administration is still reviewing a wide variety of housing financing reforms options but is not planning on making any changes to the conservatorship or dividend of Fannie and Freddie without congressional authorization. On Capitol Hill, Senators and Representatives are already at work on a new version of housing finance reform legislation–one that is unlikely to leave any value left over for shareholders of Fannie and Freddie, according to people familiar with the matter.

“These guys overreached and they’ve accomplished something rare: bipartisan alienation. Both Republican and Democrat leaders can’t stand these Fannie hedge fund guys,” a person close to Capitol Hill housing reform efforts said.

Time Traveling Obama Officials and Other Villians

Despite this most recent setback, efforts continue to influence the right to adopt the hedge funds’ position on Fannie and Freddie, in hopes that the Trump administration can still be brought around to changing its views. Conservative-leaning legal scholars have been recruited and, in some cases, paid to write op-eds, and conservative outlets such as the Competitive Enterprise Institute and the Daily Caller have run pieces adopting the hedge fund line on Fannie, Freddie, and the net worth sweep.

The latest argument appears tailor-made to lure in conservatives with claims that the Obama administration illicitly diverted funds from Fannie and Freddie to bankroll portions of the Affordable Care Act. Specifically, the funds were allegedly used to provide a substitute funding source after a federal court ruled that some subsidies that had been provided to insurers were improper.

The trouble is that the changes to Fannie and Freddie’s bailout that net worth sweep in place were made in 2012, while the judge’s ruling on the Obamacare subsidies didn’t come until 2016. What’s more, the judge in the case has allowed the payments to continue pending appeal, which means there still isn’t a budget gap to fill.

Absent a trip in Dr. Who’s TARDIS, it is unlikely the Obama administration foresaw an adverse court ruling four years in advance then put in place a controversial change to Fannie and Freddie’s bailout to avoid it.

Another recent tactic has been to target those in the Trump administration viewed as both vulnerable and potential opponents of the hedge fund Fannie and Freddie agenda. Craig Phillips, a former BlackRock Inc. executive who was a big fundraiser for Hillary Clinton’s presidential bid, has recently come under fire. Phillips is leading Treasury’s review financial regulations–and many on Capitol Hill worry he is not a supporter of the administration’s agenda to rollback the regulations. Supporters of the hedge fund agenda for Fannie and Freddie have been playing on these concerns and Phillips’ connections to former Obama administration officials in hopes that if conservatives were to force Phillips out, he could be replaced by a more pliant Treasury official.

“They’ve flipped from seeking support from the civil rights types to seeking support from conservatives and libertarians,” said a staffer of a Republican Congressman who has been approached about his position on Fannie and Freddie.

This type of political flexibility is not altogether unheard of in the nation’s capital. Back in 2011, Josh Rosner, who advocated for preserving Fannie and Freddie to preserve minority homeowners in 2016 and decried the alleged use of their funds to support Obamacare in 2017, appeared before a House oversight panel alongside Dr. Anthony Sanders, a George Mason University finance professor.

“I really want to go with what the administration said earlier, which is to start paring them down if not dismantling them,” Sanders told the panel after arguing that Fannie and Freddie’s guarantees were keeping private capital out of the mortgage market.

“I totally agree with that,” Rosner said moments later.

 

Editorial Note: This article has been updated to include the comments of Josh Rosner following a phone interview with him after the initial publication.