A few more documents relevant to machinations about the Net Worth Sweep have been made public and they add to an already compelling case of a disconnect between private deliberations and public statements about the policy shift on the conservatorship of Fannie Mae and Freddie Mac five years ago this week.
On August 14, 2012, officials at the Federal Housing Finance Agency (FHFA) discuss via email the finances of Fannie and Freddie as preparations were being finalized for the public announcement of the Net Worth Sweep. It was noted that the subject of “…re-recording certain deferred tax assets that had been written off“ based on the view that [the Companies] were going to be profitable going forward.” There was a question about the logic of this given the fact that the Sweep was meant to “demonstrate wind down” but the assumption was that there would be additional discussion of this matter down the road.
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What is interesting about this exchange is that it directly contradicts the statement of Mario Ugoletti, a senior FHFA official who acted as liaison with Treasury, in a previously unsealed court document in which he said, “…[a]t the time of the negotiation and execution of the Third Amendment, the Conservator and the Enterprises had not yet begun to discuss whether or when the Enterprises would be able to recognize any value to their deferred tax assets.”
The question of how the deferred tax assets were booked has a direct bearing on the decision to implement the Sweep. When the Sweep was under consideration in the summer of 2012, it was clear that big profits were on the way for the enterprises, creating deferred tax assets worth tens of billions of dollars. Under the Housing and Economic Recovery Act (HERA), FHFA was to “preserve and conserve” the assets of Fannie and Freddie. But instead of applying the deferred tax assets to the GSEs’ balance sheets, the companies were required to make a cash payment to Treasury. This made them appear to be in weaker shape than they were, thus helping to create a rationale for the Sweep.
The latest email exchange to come to light further demonstrates government officials recognized there was an accounting feature to exploit. Recall that documents unsealed a few weeks ago revealed officials were aware that the treatment of the deferred tax assets was bound to raise questions because there was no policy rationale for not letting Fannie and Freddie retain them for accounting purposes.
The second of the three newly released documents is part of an email exchange from June 2012 that shows Fannie CFO Susan McFarland had let officials at FHFA know that Fannie was projecting $5 billion in earnings for the second quarter of 2012 and that “it is possible that [Fannie] may take a negative provision of $1 to $2 billion in the reserves (this would increase income) due to lower than expected credit losses.”
A third document is an April 2012 presentation Fannie Mae officials prepared for the FHFA. What is interesting about this one is that it is so uninteresting. It is a dry, factual presentation about finances. Yet somehow, the government wanted to keep it under lock and key. That level of secrecy seems odd, unless officials were trying to hide something from shareholders and citizens.
