To compliment the @BillAckman accurate description of the Net Worth Sweep of 100% of Fannie and Freddie profits, one must also look at how the Obama Treasury forced F2 to cook their books. Then Treasury Secretary Tim Geithner continued the Hank Paulson large bailout plan that exacerbated the mortgage market crisis and extended credit losses beyond the sand States. Geithner hired both Blackrock and Blackstone to direct F2 to find as many write downs as they could to justify the $100B each bailout that protected F2 bondholders. When F2 internal models were stressed they each could not come close to $100B in losses. Paulson and Geithner wrongly compared street private label mortgage losses to the relatively safer book of GSE mortgages failing to recognize that GSEs had strong first loss cover in private mortgage insurance and in bank legal obligations to repurchase fraudulent and defectively underwritten mortgages. Obama Treasury forced F2 to cook their books and zero out all PMI ($43B of trapped liquid claims paying ability) and all lender recourse (another $61B of liquid bank assets - $20B alone with BofA) that provided F2 legally obligated claims paying ability. Treasury ignored that first loss liquidity forcing F2 to post large credit provisions in 2008-2010. The policy was extend and pretend for the banks and PMIs but to force F2 into conservatorship. Yet the PMI and recourse funds were being collected while bad loan repurchases mushroomed. F2 also tightened the credit box and doubled GFees during this period. It was a total double standard to target F2 investors. In hindsight F2 never needed the bailouts for cash flow because the credit loss provisions and other valuation allowances were non-cash. The bailouts were optics done for mostly foreign bondholders. American homeowners and F2 shareholders were the victims of that failure. Then with the high non cash credit losses F2 each wrote off $31B and and $21B of Deferred Tax Assets in 2008 respectively. In 2009-2011 another $29B Fannie and $8B Freddie DTA write downs for a total of $89B. Combining the $104B non-cash credit losses with the $89B DTA write downs coincidentally equalled the amount of Treasury F2 bailout in Senior Preferred. Yet in 2010 and 2011 F2 were collecting the PMI, lender recourse, the higher GFees and trends started to look good for home price recovery. Treasury knew ahead of the NWS taking that F2 would be rolling in profits. Nonetheless F2 kept loan loss allowances high and gave no model value to the liquid PMI first loss claim receipts. They all knew ahead of 2012 that the DTAs and loan loss provisions would appear anomalous. Facing obvious valuation allowance reversals, Treasury rushed to implement the 2012 NWS. Smart folks inside witnessed the accounting and loan loss committee gimmickry - with some still working at F2.
