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Obama Administration's Lawlessness Finally Hits Home With Investors

This article is more than 10 years old.

Virtually from its beginning the Obama administration has been marked by a disregard for the law. Yet the administration’s supporters have been mostly unmoved by this aspect of the government’s action. This seeming indifference to the continual flouting of laws, constitutional principles, and precedent has also extended to Wall Street. Yet now, thanks to a revelation about the fraud being perpetrated by the Obama administration upon investors in Fannie Mae and Freddie Mac , investors have finally seen the cost of this lawlessness.

A list of all the actions taken by the Obama administration that break or stretch the law is long. There are so many they can be grouped into categories: Obamacare actions, recess appointments, non-enforcement of existing laws, and participation in actions that break laws.

Most famously President Obama has now made over twenty executive changes to Obamacare that are not allowed under a plain reading the law. In the majority of these changes the administration simply announced that it will not enforce a law duly passed by Congress and signed by the President. Legalization of the “Dreamers” and letting states legalize marijuana are two more major examples of selective non-enforcement of various laws. Such acts likely break the law and certainly stretch it greatly. Under our system of government, the legislative branch (Congress) is supposed to make laws and the executive branch is supposed to enforce them, not ignore them.

Photo credit: Mr.TinDC

Added to this list are recess appointments (such as to the National Labor Relations Board) made when the Senate was not in recess, and actions by the EPA, the National Labor Relations Board, and other federal agencies that go beyond the authority they have been given by Congress.

Much closer to home for investors, the Obama administration signaled its attitude toward the laws that govern investments almost immediately upon assuming office. Investors should have paid attention when President Obama arranged for the bankruptcies of GM and Chrysler to occur in such a manner that the UAW healthcare trust funds received preferred treatment to legally superior creditors such as bondholders. This subversion of centuries of bankruptcy law precedent on the order in which creditors are paid should have warned investors that this was not an administration to be trusted. Yet, other than a few affected bondholders, most investors looked past this theft of bondholder money.

Instead, Wall Street’s top dogs have mostly given the administration a pass on its many legal violations, placated by their bailout and the fiscal and monetary policies that were boosting the stock market and making the rich even richer. While their campaign donations in the 2012 election did favor Mitt Romney over President Obama by about a 3:1 margin, the finance/insurance/real estate sector still donated over $20 million to President Obama’s reelection campaign.

Now, we have discovered that investors have been fraudulently mistreated by the Obama administration. This case deals with the two government sponsored enterprises lubricating our mortgage markets: Fannie Mae and Freddie Mac. During the depths of the recession the Obama administration did not nationalize Fannie Mae and Freddie Mac, instead placing them under conservatorship and taking an ownership stake in the companies. Since that time, the government has sold large blocks of stock in Fannie and Freddie three times through the FDIC. While doing so, the government neglected to inform investors that it planned to keep all of Fannie and Freddie’s profits forever, even after it has been paid back in full with interest.

When normal companies sell stock they must provide investors and the Securities and Exchange Commission with considerable details about their plan as well as enough financial and risk disclosure for investors to make informed decisions. The details disclosed must be truthful and complete or the company risks civil and criminal prosecution.

The federal government sold stock in a company with no future earning potential and handily kept that fact to itself. While prospective investors may not have expected much in the way of future earnings in 2010 or 2011, they knew there was at least a chance that Fannie and Freddie would be able to pay back the government one day and those investors could begin to collect a share of earnings from that point forward. This probability, slight though it may have been, caused investors to bid the price of Fannie Mae shares up from $0.34 to $3 per share.

In 2012 the federal government revealed an amendment to its 2008 document explaining its relationship with Fannie and Freddie. This 2012 plan, known as the Third Amendment, makes clear that the government plans to keep all of Fannie and Freddie’s earnings forever, long after the two GSEs have fully paid back the government from the housing bust’s fallout. Yet a memo, dated in 2010, details that the government plans were in place well before they were disclosed to the public.

This fraud allowed the government to find buyers for some of the shares in Freddie and Fannie that it acquired as part of its bailout, helping it to recoup the taxpayer’s money. However, this recovery of taxpayer money was accomplished at the expense of investors who trusted in the disclosures that they received from Fannie and Freddie, disclosures that the government knew to be untrue.

People can debate the wisdom and benefits of the government essentially nationalizing Fannie and Freddie. However, there is no debate about the ethics of fraud. The best way out of this dilemma is for the government to reverse the Third Amendment and begin allowing Freddie and Fannie’s shareholders to receive some or all of the future earnings. If the government did this, the fraud’s economic damages would disappear since the government just recently reached the point where it was fully paid back.

Our government is supposed to be policing securities fraud, not committing it. There is no excuse for defrauding investors just to enrich the Treasury. The government needs to admit its wrongdoing, make reparations if needed, and take steps to make sure it does not repeat this type of behavior. As for investors, they should learn that at least for the rest of the Obama administration you cannot trust the government.