When Bruce Berkowitz’s Fairholme Funds brought in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) former CFO Tim Howard to help them with discovery, the government got defensive pretty quickly. But yesterday Judge Margaret Sweeney ruled (h/t David Sims) that he wouldn’t be allowed to view any of the documents “because disclosure of the protected information could place this nation’s financial markets in jeopardy, a risk that the court is not willing to take.”

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Howard’s “need for vindication” disqualified him

Howard certainly isn’t disinterested. Aside from the fact that he is a Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) shareholder, he was pushed out as Fannie Mae CFO in 2004 amid allegations that he and two other executives had cooked the books to increase the bonuses by more than $100 million. All three were eventually cleared in a summary judgment and Howard wrote The Mortgage Wars in which he claims that his removal was politically motivated and that the US Treasury took advantage of the financial crisis to take over Fannie Mae when the GSE could have survived on its own.

“Even as the court agrees with plaintiffs that Mr. Howard has the right to opine about such matters and recognizes plaintiffs’ litigation needs, his desire for vindication in the public arena and his stock ownership give the court pause with respect to his admission to the protective order,” Sweeney wrote in her ruling.

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She was also skeptical that Howard was uniquely suited to review the privileged information considering he had been dismissed four years before the financial crisis struck.

The privileged files could harm US financial markets, says Sweeney

None of that is really surprising, even if it’s a little disappointing. The real surprise is that Judge Sweeney was persuaded by US government argument that “clearly defined a serious injury that could occur if protected information is disclosed—not merely to one discrete business, which would, in itself, justify denial of the motion, but rather, to United States financial markets.”

At this point, your speculation is as good as ours. Somewhere in the Fairholme Funds v US discovery process are documents that, according to the government and Judge Sweeney, could plausibly threaten US financial markets if released. Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) bulls have been promising that sparks will fly once court documents start coming out, and it’s starting to sound like they’re right.

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