GSE Recap/Release: Bloomberg "Intelligence" Is Dumb As Driftwood

Bloomberg is out with a shoddy and inept hit piece regarding GSE recap/release. It is an example of financial journalism at its worst.

Financial journalists labor under severe impediments:

• the subject matter of corporate finance is difficult,

• they have no experience actually working in the field of finance,

• they have little to no aptitude for the subject, and

• they are largely immune to criticism, since most readers are unwilling or ill-equipped to call financial journalists out on their lack of diligence and accuracy.

  • I am not one of those readers. I am more than happy to call out sloppy financial journalists.

Take in point the recent article (paywall protected) in Bloomberg by reporters Scott Carpenter and Katy O’Donnell.

Carpenter and O’Donnell seek to insulate themselves from criticism insofar as their article (itself paywalled) summarizes a Bloomberg “Intelligence” report by another Bloomberg reporter, Ben Elliot, which itself is available only to Bloomberg Professional Service subscribers (also paywalled at an even higher subscription price).

Since the issues surrounding GSE recap/release are complex and require at lest a modicum of financial experience and understanding, I have been publishing this newsletter as a counterbalance to the dearth of reliable financial journalism on the subject.

Therefore, I am quite willing to subject financial journalists, like Bloomberg’s Elliot, Carpenter and O’Donnell to the criticism they deserve.

Let’s have a look at their reporting, which I examine below (quotes are from the Carpenter and O’Donnell Bloomberg article):

• “The challenge for the administration in releasing the GSEs is that they have nowhere near enough capital, at least relative to their mountains of debt, to offer any new shares to the public.”

  • One might think that the mountains of debt must refer to their MBS guarantee liabilities, no? If so, then Bloomberg should have gone on to consider GSE equity capital requirements in light of the results of the 2025 Dodd-Frank Act Stress Test Disclosure Results of the FHFA Supervisory Severely Adverse Scenario, right?

    • No Bloomberg mention of the 2025 Dodd Frank severe adverse scenario test results, which show that the GSEs can weather a 10 quarter severe recession, on the order of magnitude equal to the Great Financial Recession, without any equity capital required (and make a profit rather than incur credit losses over the test period).

• But it seems, incredibly, that Bloomberg isn’t referring to the MBS guarantees when it refers to “their massive mountains of debt”.

• Bloomberg goes on to state that the problem involves the “$355 billion that the US Treasury still demands to be paid by the GSEs as compensation for its 2008 bailout of Fannie and Freddie. No public offering could succeed as long as that massive debt overhang remains.”

  • It is hard to know where to begin with this statement.

  • Let’s start with the obvious:

    • Treasury cannot “demand” that the GSEs repay this “massive debt overhang” because the GSEs owe zero debt to Treasury.

    • There is outstanding on the GSEs balance sheets an investment by Treasury in senior preferred stock.

    • Newsflash to Bloomberg financial journalists: preferred stock is not debt.

• As for the GSEs’ capital requirements, Bloomberg goes on with Mr. Magoo perspicacity to state

  • “Changes to the ERCF require a lengthy public comment process and navigating bureaucratic obstacles, and it likely would take until 2027 to get done, the [Bloomberg Intelligence] report says, calling it perhaps the single biggest hurdle to exiting conservatorship.”

  • This is false.

  • A new FHFA proposed rule would have to go through notice and comment in order to become a final rule. But this need not halt conservatorship release. An existing FHFA rule can be waived by a snap of FHFA Director Pulte’s fingers.

    • For further background on the FHFA Director’s waiver authority under its organic federal statute (HERA…which Bloomberg financial journalists likely believe to be a Greek god as opposed to the acronym for the federal statute that created FHFA), see FHFA Director Pulte Uses a Little Known Regulatory Waiver Rule, and the ERCF Shudders

• Moreover, the Trump 47 Treasury and FHFA can agree to release the GSEs from conservatorship pursuant to an amendment to their Senior Preferred Stock Agreement, setting forth any level of GSE equity capital they choose on a prudential basis.

  • Just like the Trump 45 Treasury and FHFA provided that release from conservatorship would be conditioned on satisfying a 3% CET1 capital standard.

• As for credit spreads between MBS and Treasuries, Bloomberg notes that ““If the Trump administration tries to privatize the GSEs, investors will likely require stronger credit enhancements or wider spreads”. But consider that

  • The GSEs’ guaranteed MBS post-conservatorship release will have more creditworthiness than they have had during conservatorship.

    • While in conservatorship, institutional MBS buyers looked to the GSEs reliable cash flow, Treasury’s backstop senior preferred stock purchase commitment and an implicit federal guaranty (like all trillion dollar US financial institutions) to assess creditworthiness, but without adequate GSE equity capital to factor into the creditworthiness analysis.

    • After conservatorship release, institutional MBS buyers will look to the GSEs reliable cash flow, Treasury’s continued backstop senior preferred stock purchase commitment and an implicit federal guaranty to assess creditworthiness, but also with adequate GSE equity capital to factor into the creditworthiness analysis.

      • Bloomberg doesn’t consider any of this.

Bias is the enemy of diligence.

Bloomberg’s bias against GSE recap/release is evident. It is also evident that this bias keeps Bloomberg from doing responsible financial journalism.

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As always, this substack provides investment analysis, not investment advice. Do your own due diligence.