Senatorial stock tips

In a stunning conflict of interest, a sitting U.S. senator is dispensing investment advice designed to destroy value in two publicly traded companies. Having failed in his legislative efforts to wind down Fannie Mae and Freddie Mac, Sen. Bob Corker (R-Tenn.) has attempted a new tactic: he has taken aim at their stock prices. This alarming move is only the latest in a long line of Congressional blunders. 

Corker urged investors to short sell shares of mortgage giants Fannie and Freddie. Fannie and Freddie are privately owned, profitable mortgage finance organizations that remain two of the largest companies in the world, as measured by both revenue and asset value.  

{mosads}Like every major financial firm in the U.S., the two companies faced acute financial distress in the financial crisis of 2007-2008. A root cause of this crisis was the collapse of the real estate market, which caused people to default on their mortgages in record numbers. This, in turn, made investors unwilling to buy the toxic assets that Congress had encouraged Fannie and Freddie to buy up.  

Although Fannie and Freddie did not reach insolvency, the U.S. Treasury injected $187.5 billion into the companies and placed them into conservatorship. As Fannie and Freddie’s conservator, the federal government was meant to steward the companies back to a “sound and solvent condition.” Instead, it converted them into captive cash cows.  

As the market recovered and Fannie and Freddie returned to profitability during the summer of 2012, the federal government unilaterally altered their agreements to “sweep” all of the companies’ net worth to Treasury – effectively making the companies’ obligations to the federal government infinite and wiping out the private shareholders’ property.  

This setup not only robs citizens of their private property but also leaves the nation more vulnerable to the next mortgage crisis. The answer to this problem is less government intervention, not more.  

The federal government helped foster the subprime crisis in the first place by crafting perverse incentives for companies to issue subprime mortgages. Then, it made that mess even worse by putting Fannie and Freddie into a never-ending conservatorship, where Treasury siphons private funds into its coffers. But instead of being humbled, the federal government appears emboldened. This latest episode involving Corker is deeply problematic for two primary reasons.  

First, Corker and three other senators are pushing for a new bill called the “Jumpstart GSE Reform Act,” which would prevent the U.S. Treasury from selling any of its preferred equity in Fannie and Freddie without congressional approval. In other words, Congress is seeking to correct its failed oversight with additional oversight.

The proposed Jumpstart GSE Reform Act is evidence that Congress does not fully understand the problem: the federal government is bungling the conservatorship. Having congressional approval for the sale of stock does not address that underlying issue. It merely inserts Congressmen further into a situation that they have failed to effectively steward – and appear to not even understand.  

Second, Corker is dispensing investment advice about companies he is meant to oversee. As a member of the Senate Banking Committee, Corker has access to material, nonpublic information. But instead of solving the problems surrounding Fannie and Freddie’s captivity, he is giving stock tips designed to tank their shares. And he cannot even accomplish that – the market has largely shrugged off Corker’s Wednesday comments and the companies’ shares have risen since.  

To make the optics even worse, according to Senate disclosure forms, Corker has personally invested millions in an investment partnership that publicly adhered to the 2008 Fannie and Freddie CDS Protocol, which addresses settlement issues relating to their credit derivative transactions. While it is unclear whether Corker has benefitted from the government’s takeover of Fannie and Freddie in the past or would stand to benefit financially from their demise in the future, his recent stock tips are unbecoming of a sitting Senator.   

Fannie and Freddie have returned approximately $238 billion to taxpayers, which represents $50 billion more than the amounts injected into the two companies in 2008. But the federal government has nevertheless fought to keep funneling the companies’ profits towards offsetting deficit spending rather than permit Fannie and Freddie to build a reserve that would begin to help safeguard the housing market against the next downturn. 

Every investor – and every property owner – should be alarmed by this unprecedented abuse of governmental power.

Beirne is an ISP fellow & lecturer in Law at Yale Law School.

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