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Why The Government Gets The Profits Of Fannie Mae And Why That’s Just Fine

Here’s something I wrote about Fannie Mae in response to something Ira Stoll wrote over at his Future of Capitalism blog.

I do think you are missing something. We’re in agreement that property rights are property rights, and that the profitability of a certain piece of property doesn’t diminish the rights of the holders.

The question with respect to Fannie Mae, however, is about whether the net profit sweep was a one-sided deal in which Treasury got a right to future profits in exchange for nothing at all. The government’s argument all along has been that the company did, in fact, get something in exchange: namely, the right to pay a lower dividend on the government’s stake when profits are slim.

In the past, when profits were inadequate to pay a quarterly installment of the 10% of Fannie’s dividend, the company was obliged to draw additional funds from the Treasury’s commitment. This happened a number of times prior to the summer of 2012, when the deal was changed. Each draw made further dividends more difficult to pay, since they added to the aggregate draw and therefore the amount due under the 10%.

What’s more, each draw brought the company closer to hitting the limit on the Treasury’s commitment. That is, closer to the point where no new money was available to bail out the company. Sometime before they hit that limit, there certainly would have been a market crisis, as no one would purchase the securities issued by the companies if they believed they might lack the capital to support them. Since the company’s capital is almost exclusively the government backstop, keeping that at a healthy level is the key to its survival.

The 2012 deal preserved the backstop from being eaten away by the need to draw down to pay the 10% dividend. It means that rather than taxpayers always receiving 10% from the company, taxpayers can receive less when profits fall short. In exchange for accepting the risk of lower payments in tough times, the Treasury gets potentially higher payments in good times.

The enormous accounting driven profits of 2013 obscured this reality. Many believed the companies were now so profitable that there was no chance they would ever fall short of being able to pay the 10% dividend. If that were true, the deal would indeed seem one-sided.

The fourth-quarter results show that this was an illusion. We had a relatively healthy housing market, where prices remained steady and defaults remained low, yet both Fannie and Freddie’s profits fell short of 10% of their draws from the Treasury. So this quarter they are paying the government less than they would have owed under the original deal.

That proves both that there is a benefit to the company to the net worth sweep and that the short-fall of profits is more than a theoretical possibility. It is has happned and it is something that is very likely to happen again in the future.

There are huge differences between Fannie Mae and any other publicly held company. First, Fannie was chartered by the federal government. Second, the government was authorized by a Congressional statute to bailout the company and to put it into conservatorship or receivership. Third, Fannie still enjoys a multi-billion dollar line of credit from the U.S. Treasury. Fourth, no one would buy a dime’s worth of Fannie’s paper without that line of credit.

If any other company found itself in a similar situation, dependent on an explicit government backstop for its ongoing operations, then I would expect that shareholders would also receive nothing. All of the equity of Fannie was wiped out in the crisis. All that remains are the shares, which trade despite being fundamentally worhtless. None of the current holders of the pre-crisis shares contributed new captital to the company. That all came from Treasury. So the government’s equtiy and backstop is responsible for all of the profits of Fannie. No one else has a claim on those profits.

I hope that clarifies why the fourth quarter results severely undercuts the argument that this is expropriation.

The Lonely Crowd

If you’re anything like me, loneliness is one of the worst feelings imaginable.

It’s not being alone that ’s bad. I often love being alone. It’s the feeling that you have no choice, that you are isolated, alienated, unable to connect.

When I first moved back to New York City to be a summer associate at a big law firm I was incredibly lonely. I had a lot of friends from college and high school living in the city but they had been here for years so their lives were full, established. They had jobs, friends, lovers, hobbies. They were happy, set, and never lonely.

That’s how it felt, at least. It’s not really how it was, though. Most of them were far from “set.” They were often sad and lonely and sometimes they hated their jobs. A lot of them didn’t even like their friends all that much. These were people they’d fallen in with but we were all young enough that we hadn’t yet built up friendships of choice; mostly these were friends of chance or necessity.

But I didn’t know this at the time. So I not only felt lonely. I felt uniquely lonely. Lonely in my loneliness.

I walked a lot when I was lonely. It used up time. It also let me discover parts of the city that I didn’t know all that well. I learned how neighborhoods were connected in a way you don’t see when you’re on the subway or riding in cabs.

I went to every free thing I could. New York has lots of free events, especially during the summer. Free movies, free concerts, free lectures.

Mostly, though, these made me feel lonelier. Everyone else had a group. It seemed like I was the only one alone. I was sure I seemed weird, that I stood out, that I was a creepy loner in their eyes. Of course, in reality, that wasn’t true. Those strangers didn’t think I was a psycho; they didn’t really notice me at all.

For a little while it felt like my best friend was a girl who worked in beer tent at the Central Park summer stage. I’d flirt with her, try to make her laugh. Hope she didn’t notice I was always alone. I doubt she really paid much attention.

Sometimes I crashed parties. Just like the big events, parties were usually a disaster because I would feel like the only lonely person in a crowded room.

I’d make up fantastic lies about myself. I told people I was an artist with a revolutionary credo. We only painted on stolen materials with inappropriate paints that wouldn’t last. The quest for permanence and legacy had distorted art so we made art that could not be preserved.

I said We, because, of course, I was part of a movement. I wasn’t this lonely guy without any friends.

I’m still lonely sometimes. But not like I used to be. And now I know I’m not uniquely lonely. Everyone feels alone. We’re all in this together.

My friend James has some good advice on how not to be lonely. I’ve done a lot of these things, from inviting strangers for coffee or drinks to organizing dinner parties to calling old friends.

For me, ultimately, it was writing that helped. Blogging in particular. I read about other peoples lives and ideas; I wrote about mine; we’d shyly meet up for drinks to see if we were as cool as we sounded in our writing. I never was; very few of us were; only a couple of the girls were. But we liked each other, a lot.

Now it’s even easier. There’s Facebook, Twitter, Instagram. So many ways to introduce yourself to others and to meet new people. It still takes some courage, of course. But remember a lot of those smiling, happy people you see on the internet feel like their lives are still missing something. That something might be you.

UnBearable: The Unbelievable Awfulness Of The Berenstain Bears

(Note: This originally ran in the Fall 2012 issue of Scooter, the now-defunct parents magazine published by the New York Observer. Scooter’s website no longer works, so I’m putting this up here.)

Late last October, I found myself looking for a children’s book about Thanksgiving, something to introduce my two-and-half year old daughter to the approaching holiday. Owing to a surprising dearth of children’s literature about this cherished autumn feast, I wound up with The Berenstain Bears Give Thanks.

Here’s what happens in the book: Papa Bear has been doing work for a local farmer, who pays with a live turkey. Sister Bear adopts the turkey as a pet and refuses to eat turkey at Thanksgiving. The family relents and eats fish for Thanksgiving instead.

Give Thanks is part of the Berenstain’s “Living Light” series, a subdivision of Berenstain country in which lessons about God are imparted. I have no idea why the Berenstain God approves the eating of fish but not turkey on Thanksgiving. But I do know that the last thing a parent of a toddler needs is literary and faith-based encouragement for picky eating.

After just a few doses of that finicky Sister Bear’s behavior, my daughter arrived at her grandparents’ home for Thanksgiving with a driving passion against eating turkey. To her, the main point of the holiday appeared to be about avoiding the consumption of turkey, as it was for Sister Bear. For all I know, her two-year-old theology thought God hated turkey eaters. Thanks, Berenstains!

Berenstains will infiltrate your life in a number of ways. A well-meaning friend brings a Berenstain Bears book to a birthday party. Your mother in-law visits with a well-worn copy from your spouse’s childhood library. Perhaps you pick up one of the Berenstain books because of the relevance of its theme. This is one of the Berenstain Book Industrial Complex’s tricks: there are hundreds of titles, one for almost any occasion: a Valentine’s Day book, a first-day-at-school book, a budget-cuts-shutting-down-a-school-play-ground book, even a neighborhood-racial-integration book.

Since you are not an imbecile, you are initially put off by the hideous cover. It is sure to feature four or five members of the Berenstain family—all absurdly and insultingly ugly. Mama Bear is wearing a hat or, more commonly, a bonnet—a bonnet!—and a dress that looks like it was smuggled off the grounds of a breakaway post-Mormon polygamist cult. Brother Bear and Sister Bear are identical except for their clothes—blue slacks for Brother, some hideous pink romper for Sister. Papa Bear somehow wears overalls all of the time. Honey Bear, the baby of the family introduced in 2000, seems to be thrown in as an afterthought—which, in fact, she was.

Open the book and the situation is no better. The illustrations would be dull if the colors were not so garish. The bears typically stand around in wooden poses with not a suggestion of dynamism or movement. Their faces bear no indication of thought or emotional presence, unless a grin or grimace counts towards such a thing. Not a hint of charm or whimsy or technique redeems any of the art. The bears are devoid of wit. It’s a wonder anyone would inflict these pictures on a story that someone had actually taken the time to write.

At this point, if you are lucky or particularly wise, you will have set aside the Berenstain Bears. Preferably far from home, somewhere it will never be discovered by your offspring. If you are unlucky or unwise, the book will find its way into the proximity of your child. You will be asked to read the book. This is your last chance. You must refuse to read it. Do anything but read it. Suggest a different book. G oout to the park. Resort to declaring it ice cream time, if you must. But do not read the Berenstain Bears to a child.

Reading the book will reveal that the story is—unbelievably—worse than the art. The art merely betrayed lack of thoughtfulness. But the story is to thought as a black hole is to starlight. Where the art lacked action, the plot is grindingly dull. Where the drawings lacked whimsy, the text reads as if it were written under rigid orders to avoid creativity. There are no jokes that are funny. No surprises that are unexpected. It’s all wooden grins and grimaces.

As a parent, you know what is likely to follow: you will be required to read the book over and over. Your child will demand it at naptime, at bedtime, whenever his or her day becomes just slow enough to remember that some-where in the house there is a book about bears. Time and time again, you will spend precious minutes with your child—time you should rightfully be cherishing—resentfully reading the worst children’s books ever written.

The drudgery stems from the generic characters. As the official Berenstain Bears website puts it, the bears’ names were chosen to “emphasize their archetypical roles in the family.” But that fancy word “archetype” is wishful thinking. They are more like half-conceived types. The bear children are neither childlike or child-ish—they are likeish. Mama and Papa and Honey are likeish too. They are approximations of abstractions. To call the Berenstains anthropomorphized bears insults both humans and bears.

The incessant moral hectoring makes the dull-ness ever more excruciating. Each plot is organized around the relentless pursuit of a life lesson: Don’t be mean to your brother, mind your parents, weary our helmet and kneepads while skateboarding, don’t eat turkey on Thanksgiving. Fine enough advice, except for the weird turkey thing, but it is rendered tedious by the lack of imagination with which the themes are introduced, explored and resolved. It’s like watching a train wreck that you see coming a mile away—except there is no wreck. Just a train reliably pulling into station after station after station. The Berenstain books are the train spotting of children’s literature.

Most insidious is the Berenstain empire’s cleverness in coopting the otherwise unassailable canon of bear books for children, at whose pinnacle sits A.A. Milne’s Winnie-the-Pooh. The Berenstains are clearly derivative of the three bears encountered by Goldilocks. (Brother Bear was originally called Little Bear—and Sister Bear wasn’t introduced until later.) Don Freeman’s Corduroy tells the sweet tale of a stuffed bear looking for a home. Paddington Bear stows aboard a ship from Peru to London.

But the Berenstain series repudiates this proud tradition’s central tenet: that a book can be wonderful for parents and children. The franchise seems founded upon the almost anti-literary idea that children must be taught early reading through books whose art and narrative make them unbearable to read. Sure, kids may like them—but kids will drink detergent if you leave it in a cup placed on a low table. They aren’t the best judges.

Despite the dreadfulness of these novellas, they have been selling for 50 years, originally blessed by none other than Ted Geisel, aka Dr. Seuss. A few of the earliest installments, especially those rewritten in rhyme like the series-launching Big Honey Hunt, are admittedly pleasant reads. Not great, but good enough if you don’t have a Milne or Freeman around. But in short order, the books went terribly wrong. My research into the Berenstain oeuvre confirms that they have been awful for decades.

Perhaps we get the literature we deserve. But surely the delivery of just desserts has constitutional limits, I hope. Because even the most annoying parents among us should be spared these Bears.