All sides should agree on property protection

By DAVID MOON, Moon Capital Management, LLC
September 29, 2013

Eminent domain laws typically allow a government to acquire private property for “public use.” Roads, utility systems… things like that.

It is debatable whether or not taking and demolishing an 1896 Victorian home for a new science building at the University of Tennessee is public use. What is less debatable, however, is the morality of taking private property and giving it to a second private entity—even one that promises to create jobs or new tax revenue.

That’s what happened in the infamous Kelo case in New London, Connecticut, where an entire neighborhood was condemned and destroyed so Pfizer could build an office park.

Not-so-ironically, Pfizer abandoned the office park just two years before its tax incentives expired, taking with it 1,400 jobs.

Using economic development as rationale for public use or public benefit gives the state the ability, in the words of Justice Sandra Day O’Conner, to “replace any Motel 6 with a Ritz Carlton, any home with a shopping mall, or any farm with a factory.”

The mayor of Richmond, California, Gayle McLaughlin, is taking eminent domain to an entirely new level. She has threatened to use eminent domain to seize underwater mortgages from lenders on houses in the town. As owner of the mortgages, the city would then refinance the loans based on the now much lower property values, eliminating significant portions of the borrowers’ original mortgage debt—by simply forcing the lenders to sell assets for a fraction of their original cost.

If assets are taken from evil, predatory banks, perhaps you don’t object. But what if the lenders are, instead, hundreds of thousands of 401k participants who own mutual funds invested in mortgage-backed securities?

When the federal government placed Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) into receivership in September 2008, the legal rights of the common and preferred shareholders were not eliminated. They were merely superseded by the federal government’s investment. A full bankruptcy would have eliminated the shareholders’ rights, but the Federal Housing Finance Authority (FHFA) didn’t want to force the government sponsored entities into bankruptcy.

Now that Fannie Mae and Freddie Mac are profitable, the federal government has almost been repaid its $180 billion. And because the FHFA chose a conservatorship rather than a bankruptcy, the once presumably worthless stock in these companies actually has some value.

But the federal government has decided to seize that value, violating the terms of the bailout, arguing that the value is only the result of taxpayer support. Otherwise, savvy investors who bought the shares for pennies on the dollar stand to make millions—or billions—of dollars.

It is a massive battle that members of Congress are positioning as the American taxpayer versus evil hedge fund managers.

This is an issue on which conservatives and liberals should concur. Both the ACLU and the staunchest libertarians should agree that the protection of one’s property is a matter of liberty.

Regardless of your opinion of the victim, it is intellectually inconsistent to support the property rights of a homeowner and usurp the property rights of a hedge fund or bank.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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