By Alan Zibel
The inspectors general for the U.S. Treasury Department and the Federal Housing Finance Agency (FHFA) should investigate whether federal officials leaked information about plans for government-controlled mortgage finance companies Fannie Mae and Freddie Mac with the intent to manipulate markets for the benefit of investors in preferred and common shares, Public Citizen and the Revolving Door Project said in a letter (PDF) sent to the two inspectors general today.
The letter highlights a dramatic move in the shares of Fannie and Freddie before and after media leaks, suggesting that the Trump administration was considering privatizing the two government-controlled companies without the consent of Congress. Fannie and Freddie have been in federal conservatorship since September 2008. Sharing this confidential, market-moving information with the intent of private benefit would represent a breach of securities law.
“The possibility that some insiders and their allies will use advance knowledge of governmental action as a means of insider trading ought to frighten everyone who wants securities markets to be efficient and fair,” said Jeff Hauser, founder of the Revolving Door Project. “Inspectors general need to get to the bottom of this unusual trading pattern, and Congress and the U.S. Securities and Exchange Commission must consider what safeguards are needed to prevent this kind of insider trading in the future.”
Trump administration ties to investors in Fannie and Freddie predate Donald Trump’s 2016 presidential campaign. Trump and Treasury Secretary Steven Mnuchin both invested with John Paulson’s hedge fund, Paulson & Co., prior to assuming their current roles. Paulson & Co. was one of several high-profile hedge funds that took up a position in preferred shares of Fannie Mae and Freddie Mac.
Additionally, Paulson was one of the investors that Mnuchin brought together in 2008 to purchase failed lender Indymac and create OneWest Bank. Paulson, who took a 24.9 percent stake in OneWest, was essential to making Mnuchin’s venture possible. Although not an investor in the original venture, Acting FHFA Director Joseph Otting was OneWest’s CEO from 2010 to 2015.
On Dec. 21, 2018, the Trump administration announced that Otting would assume the role of acting director of the FHFA following the expiration of Mel Watt’s term on Jan. 6, 2019. On Dec. 31, 2018, Fannie Mae and Freddie Mac common stock was at $1.06 per share. By the market’s close on Jan. 17, 2019, Fannie Mae and Freddie Mac common stock had risen to $1.80 and $1.81 respectively, a nearly 70 percent appreciation in less than three weeks without any precedent for the stocks in 2018.
On Jan. 18, MarketWatch reported that, in his new role at FHFA, Otting had told employees in a private meeting that he soon would be announcing a plan to take Fannie and Freddie out of conservatorship. MarketWatch obtained this information from “an attendee of that gathering.” An FHFA spokesperson “confirmed there was discussion about ending Fannie and Freddie conservatorship but denied there was any talk of timing or details.”
“Momentous decisions about the future of these two massive firms, which were created by the U.S. government and play an important role in ensuring housing affordability, must not be made without our elected representatives in Congress,” said Lisa Gilbert, vice president of legislative affairs for Public Citizen. “The inspectors general and members of Congress should aggressively scrutinize whether hedge funds that would profit from any reform plan are driving policy – and whether they are gaining early access to insider information about government plans for Fannie and Freddie.”