Allegations that the US Treasury Department and the Federal Housing Finance Agency (FHFA) acted in bad faith when they began the full income sweeps of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) turned to fraud accusation when a memo surfaced showing that the government had no intention of ever sharing profits with shareholders. Now people are asking if the Federal Deposit Insurance Corporation (FDIC) knew about the policy when it sold off large blocks of its shares in the two government sponsored enterprises (GSE) in 2011.
Questions surround FDIC sales
“We have only recently come to understand ourselves that the FDIC in 2011 sold a very large stake of stock in the GSEs,” said Chuck Cooper, who is representing Fairholme Funds in this matter, reports Dan Freed for The Street.
If the FDIC knew that its shares were worthless and sold them anyways, then the agency would be guilty of insider trading. FDIC spokesperson David Barr has said that it’s the agency’s practice to get rid of inherited assets as quickly as possible while trying to maximize returns, but that doesn’t answer the basic question. The FDIC still owns 130,000 shares of the Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), so it wasn’t under any pressure to unload them onto the market, so why did it sell so many at a low cost? Was it reacting to the possibility that Fannie Mae and Freddie Mac would go bankrupt, or to a government policy that had not been made public?
Court will allow officials to be questioned
With two troubling revelations in the last few weeks, many investors have said that the Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) case is starting to look like a cover-up, and now that Judge Margaret M. Sweeney of the U.S. Court of Federal Claims has ruled that lawyers will be able to question current and past government officials, we could be in for even more bad news.
“Discovery will enable plaintiffs to confirm that such evidence exists with regard to profitability and additionally answer the question as to when, and how, the conservatorship will end,” Judge Sweeney ruled on Wednesday, reports Nick Timiraos for The Wall Street Journal.
Stock prices of both GSEs have been surging due to both positive earnings reports and the growing feeling that the government’s position that it doesn’t owe investors a dime is untenable. Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) preferred stocks are now trading above $10, compared to less than a $1 when the income sweeps were first announced in August 2012.