In a speech on the Senate floor on Thursday, Senator Bob Corker applauded inclusion of a Jumpstart GSE Reform Act provision in the fiscal year 2016 “omnibus” appropriations bill and encouraged his colleagues to prioritize housing finance reform in the new year.
“As we continue consideration of the ‘omnibus’, I rise today to applaud the inclusion of language I coauthored with Senator Mark Warner that will ensure the fate of mortgage giants Fannie Mae and Freddie Mac – entities Congress created – will be determined by Congress and make crystal clear that this body does not support efforts to return to the failed model of private gains and public losses,” said Corker.
“And as we wrap up our legislative business of 2015, I also am here to remind my colleagues that there is much work to be done in the new year to finally address the last unfinished business of the 2008 financial crisis.”
The provision, which would spur substantive and structural housing finance reform, would prohibit for at least two years the sale of Treasury-owned senior preferred shares in government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac without congressional approval. The appropriations bill also expresses the sense of Congress that it “should pass and the President should sign into law legislation determining the future of Fannie Mae and Freddie Mac, and that notwithstanding the expiration of subsection (b), the Secretary should not sell, transfer, relinquish, liquidate, divest, or otherwise dispose of any outstanding shares of senior preferred stock acquired pursuant to the Senior Preferred Stock Purchase Agreement until such legislation is enacted.”
In 2008, Fannie Mae and Freddie Mac were taken into government conservatorship and given a $188 billion capital injection from taxpayers to stay afloat. As a result of the bailout, the U.S. Department of Treasury purchased senior preferred stock in the GSEs and was given sole discretion to sell or otherwise dispose of those shares.
There is broad bipartisan, bicameral consensus that the status of the GSEs prior to conservatorship was a failure and that the best way to prevent another bailout and protect taxpayers is through comprehensive housing finance reform. Furthermore, the Obama administration has made clear that they continue to believe comprehensive housing finance reform is the only effective way forward and have publicly rebuked calls by some activist groups to recapitalize Fannie Mae and Freddie Mac and release them from conservatorship.
The Jumpstart GSE Reform Act was introduced in September by Corker, Warner and Senators David Vitter (R-La.) and Elizabeth Warren (D-Mass.) and does not indicate which housing finance reform proposal should be adopted.
Complete text of Senator Corker’s remarks as prepared for delivery is below.
Mr. President: As we continue consideration of the “omnibus”, I rise today to applaud the inclusion of language I coauthored with Senator Mark Warner that will ensure the fate of mortgage giants Fannie Mae and Freddie Mac – entities Congress created – will be determined by Congress and make crystal clear that this body does not support efforts to return to the failed model of private gains and public losses.
And as we wrap up our legislative business of 2015, I also am here to remind my colleagues that there is much work to be done in the new year to finally address the last unfinished business of the 2008 financial crisis.
Prior to the crisis, mortgage giants Fannie Mae and Freddie Mac were publicly traded.
They benefited from an implicit government guarantee – which meant any upside went to the company.
But as we saw at the height of the financial crisis, the downside of this structure fell on the taxpayers – and it fell hard.
In September 2008, because of their flawed model, losses mounted at Fannie and Freddie, causing taxpayers to write a $188 billion bailout check to keep them afloat.
The entities remain in government conservatorship today, backed by the taxpayers and owned by the U.S. Treasury Department.
A 2014 Federal Housing Finance Agency stress test projected that the GSEs could require a $190 billion taxpayer bailout to keep them afloat during a future crisis, something none of us want to see happen.
Because housing finance reform remained the last unaddressed piece of the financial crisis left, in 2013 Senator Mark Warner and I developed legislation that attempted to address the flaws in our housing finance system and protect taxpayers.
The bill has been called the blueprint for how our nation’s housing finance system should look in the future.
After working with a group of bipartisan members and then-Chairman Tim Johnson and Ranking Member Mike Crapo, a reform bill passed the Senate Banking Committee in May 2014 by a vote of 13 to 9.
The bill would protect taxpayers from future economic downturns by replacing Fannie and Freddie with a privately capitalized system.
Unfortunately, it did not come to the Senate floor, but that doesn’t change the fact that there continues to be broad, bipartisan, bicameral support to reform these entities.
That broad support at the committee level and throughout Congress came despite pushback from a number of large, self-interested Wall Street hedge funds.
Let me explain.
As a result of the 2008 bailout, Treasury purchased senior preferred stock in Fannie and Freddie and was given sole discretion – sole discretion – to sell or otherwise dispose of those shares.
Seeing an opportunity to make huge profits at the expense of taxpayers, a number of big Wall Street hedge funds and other entities rushed in when Fannie and Freddie crashed. They bought shares for pennies on the dollar – after the government had taken them into conservatorship and knowing full-well the government would have the authority to make decisions relative to their future. Now, the hedge funds appear to be spending big money and going to extreme lengths to stop housing finance reform in order to reap huge financial returns.
As they know how to do so well, these wealthy hedge funds made a highly speculative bet: that Congress would fail to do its job, structural reform efforts would fail, and Fannie and Freddie would be recapitalized and released out of conservatorship.
And under that bet, the taxpayers lose while some of the wealthiest hedge fund managers get even wealthier. That is why the Wall Street hedge funds want to stop efforts to protect the taxpayers in hopes Fannie and Freddie could be recapitalized and released from conservatorship.
Let's be clear: Under that scenario – recapitalizing and releasing Fannie and Freddie in their current form – we would fall back to a system of private gains and public losses, lining the pockets of multi-millionaires while leaving taxpayers on the hook for future bailouts.
Looking at what is at stake, one can see why these hedge funds are so engaged in stepping on the taxpayers and preventing reform from occurring.
Using a self-analysis from one prominent hedge fund, under a “recap and release” scenario, this fund – with an estimated current hold of $366 million – has a potential net profit of $8.1 billion and a total sale of $8.4 billion.
To give you another example, using those same projections, another prominent hedge fund – with an estimated current holding of $501 million – has a potential net profit of $2.3 billion and a sale of over $2.8 billion.
These hedge funds – and several others – would benefit greatly from a “recap and release” scenario, which is why they are so adamantly opposed to housing finance reform that would put taxpayers’ interest above their own.
Surely we will not conflate the clear interests of the hedge fund managers – which is billions of dollars in profits – with the critical need to protect taxpayers from a future bailout by enacting sound housing policy in our country.
Returning to the failed model of private gains and public losses would leave the taxpayers on the hook for the GSEs $5 trillion in outstanding liabilities.
This is why I believe we must act.
Inclusion of the Jumpstart provision in this bill is a good first step.
This legislation would prohibit the sale of Treasury-owned senior preferred shares in Fannie Mae and Freddie Mac without congressional approval and ensure Congress – not self-interested hedge funds – have the final say on how our housing finance system should look in the future.
And while I believe that “recap and release” is totally inappropriate, I do understand that the hedge funds still have claims to deal with in court, and this legislation does not prejudice those claims.
I believe the blueprint Senator Warner and I laid out in 2013 is a good start – and one that will protect taxpayers – but this legislation in the omnibus bill is silent on the future system.
It simply says that Congress should have the final say in what happens to these entities – again entities that Congress created in the first place.
With passage of this provision – in the face of extremely intense opposition – we are telling taxpayers that we are putting to bed the idea that returning to the status quo is an option.
We will not return to a system where big Fannie and big Freddie control the lion’s share of our housing system and taxpayers are exposed for future bailouts.
But there is much work to be done.
So the question I have is this.
Moving forward, who are we going to fight for?
Are we going to abdicate our responsibility and shy away due to efforts by large Wall Street hedge funds wanting to get wealthier off of taxpayers by placing taxpayers at greater risk?
Or are we going to fight for the people we represent?
Mr. President, as all of us who served in this body during the financial crisis know well: the American people do not want to write another bailout check.
Without housing finance reform, that is an all too real possibility.
To my colleagues: Trust me. I know a number of you have felt pressure from large Wall Street hedge funds and the interest groups they support. But I also know that there is not one of you who truly wants to put private investors’ interest ahead of the people we represent.
In the new year, it is time for Congress to finally do its job.
By finally addressing the last major piece of unfinished business from the financial crisis, we can once and for all end this failed model.
And fortunately, a lot of the heavy lifting already has taken place.
As we look toward 2016, protecting taxpayers by reforming our nation’s housing finance system should be near the top of the to-do list.
So this legislation takes us a step in the right direction toward that effort by saying the fate of mortgage giants Fannie Mae and Freddie Mac will be determined by Congress.
And I remain committed to doing everything I can to make sure we do not return to the same failed model that put taxpayers on the hook for billions of dollars, and instead we can create a dynamic housing finance system that works for Americans rather than against them.
Mr. President, I yield the floor.