Dear Chairman Bernanke:
On July 17, 2008, David Rogers, the respected Congressional reporter for Politico wrote an article titled “Pelosi-Paulson tension Rises,” in which he had the following paragraph:
“Earlier in the day, Federal Reserve Chairman Ben Bernanke assured lawmakers that Fannie and Freddie, the two government-supported enterprises, are adequately capitalized’ and in no danger of failing.'”
Given what you knew at that time, when Freddie Mac common shares were selling for about $9.25, down from about $60 a year earlier, what was the basis for your assurance to the many trusting shareholders of Fannie Mac and Freddie Mac who were likely to interpret your statement as reason to hold on for a recovery?
At that time, there were students of these GSEs such as Peter Wallison of the American Enterprise Institute and Thomas Stanton, who in early critiques of these GSEs concluded that they were seriously undercapitalized.
How could you have been so mistaken? Do you have any explanation that you would like to share with the public? What do you wish you had said in the light of what happened in the following months?
Finally, what role do you envision for the present common shareholders if Fannie and Freddie wish to raise capital in the private markets as part of their recovery?
There is often an inclination by Fed Chairmen to let their statements stand and not have to explain them either when they are made or in retrospect. However, the enormous losses incurred by common shareholders of these GSEs in the past three years due to their trust and reliance on the statements of responsible federal officials, including one might add, the statements in the spring of 2008 by Mr. James Lockhart, director of OFEO, invite a different brand of candor if investor confidence means anything anymore to these companies and their conservator.
I look forward to your response.