Early Briefing: A New Bloomie's and Safeway

Bloomingdale's plans to open a trendy concept store in Georgetown modeled after its above-pictured store in New York's SoHo neighborhood. (By Gregory Bull -- Associated Press)

*Bloomingdale's announced plans to open a store in the Shops at Georgetown Park in the next three years, providing a boost to a shopping center that had become overshadowed by its trendier neighbors. The high-end retail chain, which is owned by Macy's, said the three-level, 82,000-square-foot store is expected to be completed in August 2011. It will be modeled after Bloomie's concept store in New York's SoHo neighborhood.

"Georgetown Park really needs a shot in the arm of having a great anchor," said Herbert S. Miller of Western Development, which owns the property and negotiated the deal. "We have a chance ... to turn it into the highest fashion and trend center in the whole Washington area."

*Safeway is planning to open a 58,000-square-foot grocery store in downtown Washington tomorrow, the only full-service supermarket in that neighborhood and the first store that the company has built in the District in 11 years. The store is on the ground floor of the new CityVista complex at 5th Street and New York Avenue NW, a roughly $250 million project with 685 condominium and apartment units and 120,000 square feet of retail. Nearly 150 condos have been sold, and leasing of the apartments will begin within the next two months, said Amy Adams, vice president of developer Lowe Enterprises.

*As part of an effort to pare $1.1 billion in transportation spending, Maryland officials announced cuts to several Washington area projects intended to curb congestion and accommodate military growth, as well as to planning funds for possible light rail lines.

Cuts included about one-third of the $45.3 million in funding for intersection improvements around the Bethesda National Naval Medical Center; a similar share of $47.9 million for improvements around Fort Meade in Anne Arundel County; about $25 million for engineering work for the Purple Line, a proposed light rail or rapid-bus link between Bethesda and New Carrollton; $42.5 million in engineering work for the Corridor Cities Transitway, a proposed light rail or rapid-bus link in Montgomery County's Interstate 270 corridor; and almost $60 million for a second round of road improvements aimed at reducing congestion around the Branch Avenue Metro station in Prince George's County.

As Fannie and Freddie's regulator, James Lockhart said he was "obviously wrong" months ago when he called fears of a government bailout "nonsense." (Dennis Brack - Bloomberg News)

*With the government's seizure of Fannie Mae and Freddie Mac on Sunday, the federal regulator who oversaw the mortgage giants during their long descent is now in charge of restoring them to financial health. In the months before the takeover, James B. Lockhart III repeatedly assured investors that the mortgage giants were financially sound.

He eventually came to a different conclusion, deciding the companies were in perilous shape and would pose a major risk to financial markets if the government did not intervene. In an interview, Lockhart said he was "obviously wrong" about his assessment in March. As the director of the newly created Federal Housing Finance Agency, he now finds himself in full control of the companies and facing many of the same challenges that brought Fannie Mae and Freddie Mac down -- along with a few new ones.

By Terri Rupar  |  September 11, 2008; 5:00 AM ET  | Category:  Morning Brief
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The media seems to be missing part of the story of the Fannie Mae seizure. The seizure -- or taking without compensation, from a shareholder perspective -- was a two step process:

First, Lockhart declared a conservatorship.

Second, Paulson agreed to provide new capital, as may be necessary.

In reviewing the Housing and Economic Recovery Act, it's clear that FHFA could declare a conservatorship only for a "critically undercapitalized" entity. Fannie Mae did not meet the conditions for a mandatory conservatorship, so FHFA had to proceed with a discretionary conservatorship. The only condition it appears that Fannie Mae met for a discretionary conservatorship was the consent of its board.

Supporting this analysis is the fact that Fannie Mae's Board of Directors did, indeed, consent to the conservatorship. What we don't know is, why did Fannie Mae's Board consent to the conservatorship?

In addition, why was Fannie Mae suddenly found to be "critically undercapitalized," another condition precedent to the declaration of conservatorship? We've read that a portion of Fannie Mae's capital was attributable to tax credits, and so not real capital. However, the fact remains that (1) according to its second quarter financials, Fannie Mae was adequately capitalized; (2) OFHEO found Fannie Mae to be adequately capitalized in the first quarter; and (3) no allegations that Fannie Mae did not meet the statutory definition of "adequately capitalized" have been made -- merely that the definition is "antiquated," according to Paulson.

The timing of the declaration of conservatorship is also suspicious. Not because of the national political conventions, but because last week FHFA was due to issue its report on Fannie Mae's and Freddie Mac's capital for the second quarter. Perhaps FHFA needed the conservatorship declared before it was required to report that the GSEs were, in fact, adequately capitalized?

Close reading of Lockhart and Paulson's statements indicate that the conservatorship was declared for reasons not provided in the statute: the conflict between the GSEs' need to preserve and grow capital (and thereby reduce loan purchases), and the public mission need to increase liquidity in the mortgage market. It's a fine public purpose to encourage -- it is not, however, grounds for a conservatorship.

All the more puzzling about the conservatorship is the fact that Treasury and Paulson could have made the Preferred Stock Purchase without FHFA's declaring a conservatorship. It's not apparent why a conservatorship was necessary to avoid bailing out shareholders -- the onerous terms of the Preferred Stock Purchase effectively wiped out both preferred and common shareholders.

Of course, we may never know why Fannie Mae, an otherwise apparently adequately capitalized entity, consented to the conservatorship. Under the HERA statute, the regulated entity may seek judicial review of the conservatorship, but having consented already this seems unlikely to occur. Perhaps avoiding judicial review was only certain if the Board's consent was obtained, but that begs the question as to the nature of the negotiations among Fannie, Treasury, and FHFA.

Did Paulson threaten not to make an investment, unless Fannie consented to conservatorship? But if Fannie were adequately capitalized, why would it need the investment? Because once the Treasury made an investment in Freddie (which it appears was in fact insolvent), Fannie would find its access to debt markets cut off without a Treasury investment? Without doubt, Treasury investing in Freddie and not Fannie would have created an immediate liquidity crisis for Fannie Mae -- but would it have been worth it for Fannie to call Paulson's bluff?

Could FHFA have threatened to find Fannie "critically undercapitalized?" If FHFA so found, then it had full grounds for declaring a conservatorship (though as we've established, it would have been difficult for FHFA to do so). The declaration would have been subject to judicial review, however.

Again, we may never know the full story, unless a shareholder seeks judicial review of the conservatorship. It's unclear whether they'd have standing to do so, but it's certainly in their interest: conservatorship may be a prelude to receivership, to merger with Freddie Mac, or other reworking of the GSEs which a post-election Bush/Paulson/Lockhart team may pursue, without Congressional involvement. Anyone who thinks that this crew would pursue a reshaping of the American finance system without legislative involvement must have missed the Chase takeover of Bear, the Lehman bankruptcy, or Bank of America's takeover of Merrill Lynch.

At the end of the day, the important piece to take away from this is that conservatorship was not necessary to accomplish the public purpose of the Preferred Stock Purchase -- it was merely part of the price. If that sounds like the way Putin dealt with the industries previously privatized in Russia -- well, we already know that Bush and Putin are soulmates!

Posted by: Tom Paine | September 15, 2008 12:01 AM

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