More On Golf, Settlement And The WSJ On Fannie Mae, Freddie Mac by Todd Sullivan, ValuePlays

I’ve refrained from commenting on the WSJ’s coverage of Fannie Mae and Freddie Mac saga for quite some time (since last December I believe) because, well, at this point they are simply trolling. But, since this piece is so disingenuous and patently false in some aspects, I feel obliged to chime in. I have reprinted the whole thing so as to not be accused of cherry picking snippets to make a point and will interject my thoughts as we go through it.

From the WSJ:

Rallies based on rumors all too often end in tears.

That is almost certain to be the outcome of a rapid rise in shares of Fannie Mae and Freddie Mac, which have gained 15% since last Wednesday. This has followed reportsfiled by investors in the two mortgage giants.

So far so good, nothing abjectly offensive there…..except they have a seemingly certain ability to predict the future.

The thin reed on which such speculation rests: a request by the government that three attorneys working in the Office of the White House Counsel be permitted to access information covered by a protective order issued by the U.S. Court of Claims.

That is one of the courts where under which both companies agreed to pay nearly all of their profits to the government. At least have .

The government’s motion didn’t explain why it was filed. In the absence of information, some investors and analysts have surmised the White House is moving toward a settlement.

Ok….some parsing. First it is nice for the WSJ to finally recognize the litigation before Judge Sweeney. Up until this point they have essentially ignored it and as I have speculated that decision comes from the top. Now the folks at the “opinion” part of the Journal will deny that but from top to bottom the paper has been anti-shareholder/plaintiff. Actions speak louder than words…..we are probably up to 30-40 articles in the WSJ from various authors about this and not one has even remotely come close to saying “shareholders have a point”.  I find it hard to believe that is some random occurence.

That makes little sense. If the Obama administration had decided to settle, negotiations of such a settlement would certainly be handled by Justice Department lawyers already involved in the case. No need to bring in the White House.

Again, this is factually inaccurate and not the first time they’ve been so.  Here is the thing, the heads of Treasury, FHFA and Justice all operate under the White House. The President appoints them and can ask that they step down at anytime. At the end of the day the administration sets the agenda for those entities.  The notion that Justice would make a unilateral decision and exclude lawyers for Treasury and FHFA which are also involved here and then do so without giving the White House an opinion is inconceivable.

So why has the White House Counsel become involved? Simple: It is standard practice for White House lawyers to review information in litigation that references the White House, a White House spokesperson told The Wall Street Journal. But because of the protective order in this case, the government was required to ask the court’s permission to share information with the White House, the spokesperson said.

That certainly is one possibility. Here is another, please read it.  What scenario you believe?

1- Perry’s lawyers (Gibson, Dunn) get access to protected information on 8/11, on 8/15 a senior partner in that firm (and Obama friend) play golf and have dinner in Martha’s Vineyard  and then on 8/21 the White House decides to finally check out what is going on in this now over 2-year-old case and requests the same access.  My theory is that Gibson, Dunn lawyers told Kirk that he may want his friend (the President) to have his staff look over the documents. Now this can be done 100% legally and without disclosing any protected information. A simple “I do not know what is in those docs but I’ve been told your people need to see them” would get the job done.

Fannie Mae and Freddie Mac

Now of course the WSJ will tell us “this is normal” for the White House to request access. Well, then, why didn’t the White house request this access when Fairholme released their 2014 annual report in January that disclosed White Staffers involved in emails about the Net worth Sweep? Why did they wait 8 months to request access and ONLY did so after Kirk’s firm obtained access and saw what was in the documents?  Anyone? Anyone? Bueller?

2- All this is a really, really, really, really odd coincidence?

The government has scored victories , giving it little motivation to seek a truce now. This recent rally appears to be based on nothing more than wishful thinking.

This is typically half true. Yes, they scored a victory before Judge Lamberth (that decision is now under appeal and has developed an interesting twist) and Pratt in Iowa. But, we must look at why they scored them. Judges are loath to conduct simultaneous litigations which is essentially what would have happened. Seeing Sweeney had granted discovery and said, “plaintiffs will have their day in court” Lamberth punted and dismissed his case (knowing full well it would be appealed) and then Pratt simply followed Lamberth. Now, rather than have similar litigation is three courts where precedents and ruling may conflict, it is happening in one court.  They’ve scored no victories before Sweeney.

So what about the Sweeney court? The one the WSJ seems to want to not talk about? How is Sweeney leaning? Should we have her tell us herself?

I know you’re going to say that the Court has no ability to have any — to, in any way, impact FHFA, and I disagree with that. I don’t believe that is a blanket insulation.

Now the rest

THE COURT: Yes, I don’t agree. I know you’re going to say that the Court has no ability to have any — to, in any way, impact FHFA, and I disagree with that. I don’t believe that is a blanket insulation. If FHFA enters into contracts and there’s a dispute and there’s a breach of contract — and the agency breaches the contract, I don’t think they can invoke that — the agency can invoke that provision to insulate itself. And, also, I think here — I’m not trying to control the conservatorship, I’m not trying to influence it in any way, I’m just trying to allow citizens to have every opportunity to meet the jurisdictional hurdle that the Plaintiff — excuse me, that the Government has asserted. The Government has said that the conservators are not part of the United States and, therefore, the Defendant is not implicated here. Now, on the other hand, by requesting these documents, the Government is saying, no, I’m sorry, you’re not entitled to any of these documents because the conservators are part of the United States. So, it’s a government entity and, therefore, you’re asking for deliberative process documents. So, it seems to me the Government is trying to have it both ways and, so, I don’t accept that argument. And as I said, you know, I understand and can appreciate the bar of –or the — not the bar, but the — that Congress intended that courts do not meddle in the business of the conservators.  That’s not my goal or desire. I have enough on my plate without trying to run the conservatorships. But I do want the Plaintiffs to have an opportunity to meet the jurisdictional challenge that’s been raised by the Government.

Then after Government Attorney Ms. Hosford explains their position in a long argument covering several pages of the transcript, Sweeney asks, “Anything else?” when he replies “No”, Sweeney says:

THE COURT: I just have a question for you. Could you please explain the litigation position or what I see as a conflict with — or an inconsistency with, on the one hand, the Government are saying Plaintiffs lack standing, this Court lacks jurisdiction because the conservatorship is not part of the Government, it’s not a Government entity. And, yet, when Plaintiffs seek discovery, it’s the position of the United States that any documents generated by the conservatorship are subject to the deliberative process privilege?

After plaintiff attorney Cooper states his case in an equally long argument before Sweeney, she says:

THE COURT: And so far, I haven’t gotten — I haven’t received a good answer from the Government. Counsel is very able. But counsel has expressed concern of what could happen if certain documents are released, which I do not want to see happen, but counsel didn’t answer to my satisfaction the discrepancy between sort of using the deliberative process as sword and shield. On one hand, FHFA is a government entity, you know, for purposes of booting the Plaintiffs out of court and not part of the Government, but for purposes of forwarding discovery, all of a sudden deliberative process is appropriate because they are part of the Government. So, it’s a schizophrenic approach and I’m just waiting to hear a reasonable explanation.

Sweeney then spends the next several transcript pages working through discovery request with Cooper.  Then following a very long exchange between both sides on dates, breadth etc, Sweeney ends with this:

I mean, there’s got to be — for purposes of the nature of this inquiry and this discovery request, it’s going to be more narrowly focused. We’re taking a surgical approach. But I want the Plaintiffs to have — I mean, their day in court may be that they’d prevail all the way to the Supreme Court. I’m not coming down one way or the other, but it’s important for the Plaintiffs to have access to information so that they have the ability, if possible, to establish this Court’s jurisdiction. And that’s all I’m dealing with at the moment. Merits from the Government — Plaintiffs’ perspective will come later; from the Government’s perspective, we won’t need to go there. So, we’ll just have to see who prevails. But the Plaintiffs will have the ability to make the best case they can to establish the Court’s jurisdiction. And with that, I’ll say good afternoon. Thank you.

Can someone explain to me how this is a “victory for the government”?  In fact before Sweeney they have suffered a string of setbacks and are in the middle of what is appearing to be a very damaging discovery process in which previous testimony is contradicted  and the stated basis for net worth sweep has been called into question through documents uncovered.

This leads us full circle back to why the White House is suddenly involved.  Two words… politics, elections.

Let me proposed two scenarios and you tell me which one makes sense. In order to do this you have to put away your ideologue cap.

Scenario 1:

Fannie Mae and Freddie Mac have been in conservatorship since 2008 (the entire duration of Obama’s presidency). Should Obama decide to direct FHFA to release them and direct Treasury to put aside the NWS (yes, he can do that) he can accomplish several things.

1- Proclaim “taxpayers paid back at a profit” (taxpayers win)

2- Pension funds and Unions and shareholders that have holdings in Fannie Mae and Freddie Mac will see their portfolios rise significantly (shareholders win)

3- Talk about reforms that have been taken at the entities to “ensure their soundness” (no more future risk)

4- Tell us that now low income lending will be expanded (low income folks win)

5- Tell us how the GOP plans to privatize them “would have left us in the same position we were in 2008? (GOP loses)

The bottom line is that by settling these lawsuits, Obama and the administration control the news flow and the outcome.

Scenario 2:

“We are going to trial”

1- At some point discovery material are released (some portions will be)

2- Those materials, based on the snippets that have been disclosed indicated the government was not being honest both before the conservatorship, during it and especially surrounding the net worth sweep. This is the reason for the full court press by the government to keep them hidden and the reason the NYT has filed to have them released…….I would point out here that oddly enough the WSJ has not requested they be released…….like I said before, actions speak louder.

3- That disclosure will lead to charges that the White House (whether true or not is irrelevant….we are in a political season):

  • has been lying to people and the court or;
  • has no idea what was going on
  • analogies will be instantly drawn to Benghazi and the IRS situations
  • finally there will be charges of them pilfering the Fannie Mae and Freddie Mac for their own uses

4- Any one of those scenarios means the administration is now on the defensive when it comes to Fannie Mae and Freddie Mac vs doing a victory lap.

But what about the WSJ’s claim that the government is winning so why would they settle? Here is the problem with that. These cases will not be “over” for many years if they are litigated to the end. Elections are next year. What matters to the White House is what happens between now and then. The White house cannot afford the release of these documents, should that happen, they lose control of the situation.

What makes the most political sense is to settle them and let everyone walk away happy and  keep the protected docs under seal…………

Allegedly the WSJ did reach out to Kirk who denied talking to the President about it and then allegedly and inexplicably claimed he has no idea his firm even represented Perry in its fight vs the government. This is apparently proof of something.  I have to ask what the WSJ expected him to say?

1- “Yup, I tipped him off, those docs are a real shit show for the government”

2- “No comment” (that equals “yes” for those who do not know)

3- “Someone is suing the government???”

Of course he denied it. There was nothing else he could have done….absolutely nothing else. Any settlement talks (*if* they ever happen)  would be done in secret anyway so there is no way he would say anything that might indicate anything else….no way at all.

Now we also  have to live in fairy tale land to assume a senior partner at a law firm is wholly unaware a client of his firm is embroiled in a lawsuit vs the government that could be potentially worth over $200B in damages……..yeah, that kind of thing is always kept on the DL at law firm partner lunches.

Do I have “proof” of any of this? Nope. Sometimes you have to look at a series of events and try to decide what is the most likely reason for them. In this case I’m skeptical “coincidence”  is one of them.