When one takes this into consideration along with the Washington Federal response from last week, it is clear plaintiff lawyers are a step ahead of those at Justice.  This response resumes the theme of gov’t arguments both contradicting public statements by officials and then being used to directly refute the gov’t argument. As each filing goes by the plaintiff’s cases are gaining traction. That we are not on the cusp of discovery, a process that will lay public the actions and motive from FHFA and Treasury this soon into the process and from what seems just careless legal arguments from the gov’t is amazing.

Fannie Mae

The gov’t now has two options: drop their motion to dismiss to avoid discovery in which case everything goes forward OR argue this motion. The problem with arguing it is that they have effectively painted themselves into a corner. The ONLY way to prove the factuality of their argument is to disclose currently non-public information. Again, that brings up an issue of the plaintiffs then asking for additional discovery as a selective release of information will not be sufficient.

Here are a couple sections that demonstrate what I am talking about. The full annotated filing is at the end.

This is some classic stuff here…… The gov’t claims plaintiffs cannot sue for the lost dividends because the financial conditions of the enterprises:

The Government’s factual claims that the future profitability of the Companies is “speculative and conjectural,” and that it “is unknown” when or how the Companies will emerge from conservatorships, directly contradict the allegations of Plaintiffs’ complaint. Plaintiffs have alleged that Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) are expected to enjoy strong profitability for years to come, and that the Government knows as much. Compl. ¶ 12 (“[I]f the Net Worth Sweep is allowed to stand, it is anticipated that the Companies will be required to make similarly large dividend payments in subsequent quarters”); id. ¶ 60 (quoting the Acting Director of FHFA as stating in May 2013 that the Companies “[a]re each beginning to show regular, strong profitability”); id. ¶¶ 74-75. Plaintiffs have also alleged that the Government will wind down the Companies before it allows them to exit the conservatorship. Id. ¶ 64 (quoting a Treasury statement that the Government will “expedite the wind down of Fannie Mae and Freddie Mac” and “make sure that every dollar of earnings each firm generates is used to benefit taxpayers”).

Indeed, the Government’s factual claims flatly contradict not only the allegations in Plaintiffs’ complaint, but also the Government’s own prior public statements. Although the Government now represents to the Court that the future profitability of the Companies is “purely speculative and unknown,” it neglects to point out that, as alleged in the Complaint, earlier this year it represented the exact opposite state of affairs to the Securities and Exchange Commission and to the public. For example, in March 2013, Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA), under FHFA’s control as conservator, announced in a 10-Q form that “we expect our annual earnings to remain strong over the next few years” and that “[w]e expect to remain profitable for the foreseeable future.” Compl. ¶ 57 (emphasis added) (quoting Fannie Mae, First Quarter Report (Form 10-Q) at 1, 2 (March 31, 2013)). And in May 2013, the acting director of FHFA told the public that “it is clear [Fannie Mae and Freddie Mac] are each beginning to show regular, strong profitability.” Id. ¶ 60 (emphasis added) (quoting Edward J. DeMarco, Acting Director, FHFA, Remarks as Prepared for Delivery at Federal Reserve Bank of Chicago’s 49th Annual Conference on Bank Structure & Competition 2 (May 9, 2013))

Then comes this:

Moreover, the Government’s factual claim that the future profitability of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) was “speculative and conjectural” is directly contradicted by the accounting treatment of the value of Fannie Mae and Freddie Mac’s accrued losses for tax purposes. During the financial crisis, the Companies took a valuation allowance on deferred tax assets to account for their expectation that their future income would not be large enough to take advantage of their prior losses. As Plaintiffs explain in the complaint, in light of expectations for sustained profitability, the Companies changed this view. In the first quarter of 2013 alone, Fannie Mae released $50.6 billion of the Company’s deferred tax assets valuation allowance. Compl. ¶ 58 (“The release of this valuation allowance underscores Fannie Mae’s financial strength, as it demonstrates Fannie Mae’s expectation that it will generate sizable taxable income moving forward.”). Similarly, in the third quarter of 2013, Freddie released $23.9 billion in deferred tax assets. Freddie Mac, Third Quarter Report (Form 10-Q) at 50 (Nov. 7, 2013). The release of the valuation allowances contradicts the Government’s assertion that the financial health of the Companies is unknown and unknowable and suggests that discovery is likely to reveal the Government anticipated Fannie Mae and Freddie Mac would generate tens of billions in profits.

Discovery is likely to reveal information relevant to resolving the factual dispute between Plaintiffs and the Government about the Government’s assessment of the future profitability of the Companies. And it is likely to produce evidence establishing that the Government in fact believed at the time of the Net Worth Sweep, and continues to believe, that Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will experience sustained profitability. The fact that the Government has made statements in press releases discussing the future profitability of the Companies and has allowed the Companies to make similar statements to the SEC and to release some of their deferred tax allowances confirms that such evidence almost certainly does exist. The Government is almost certainly in possession of e-mails, strategy documents, internal analyses and projections, and other communications regarding the expected future profitability of Fannie Mae and Freddie Mac (both at the time of the Net Worth Sweep and at present) and also regarding when (if ever), and how, the conservatorship will end. Plaintiffs are entitled to discovery of those documents. This discovery should include the production of all nonprivileged documents, and appropriate depositions, relating to the Government’s decision to allow Fannie Mae to disclose in its 10-Q form that it expects “to remain profitable for the foreseeable future.” Plaintiffs should also be afforded discovery about the Government’s decision to allow the Companies to release billions of dollars of deferred tax asset valuation allowances. All of this information is held only in the hands of the Government and is not available to the public or Plaintiffs.

Get it? The gov’t on one hand is saying plaintiffs cannot sue because the future of the GSE’s financially is so tenuous while publicly touting the profitability of them and taking actions (the release of tax assets) that can only be done if the entities are on a path to substantial sustained profits.

Further the Gov’t motion says that FHFA entered into the Net Worth Sweep amendment voluntarily yet offers zero evidence to support their assertion. You just cannot do that.  Because

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