Fannie Mae: Discovery Awarded; Now, Will Treasury Comply?

Fannie Mae: Discovery Awarded; Now, Will Treasury Comply?
By User:AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Rafferty Capital Markets analyst Richard X. Bove looks at the recent court decision ordering the Treasury to turn over documentation, noting that it’s not clear if the Treasury will actually comply with the ruling.

Judge Margaret Sweeney of the U.S. Court of Federal Claims has ruled that Fairholme’s request for discovery in its suit against the Treasury Department should be honored.

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This means that the U.S. Treasury will be required to provide the documentation surrounding the Treasury’s decision to put in place its Third Amendment. This is the amendment that requires Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) to: a) provide all of its profits to the Treasury; b) take its capital down to zero; and c) bring its owned portfolio down to $250 billion. It is the Amendment that in effect disenfranchises the private stock holders of the company.

Will Treasury obey the court?

The Treasury has asked that the Fairholme suit be dismissed without allowing Fairholme to see any of the documentation that supports the Treasury’s demand for dismissal. This now changes and, at least, the Court is requiring the Treasury to provide the appropriate documentation to Fairholme.

It is not clear to me that the Treasury will obey the Court. In recent years, the Treasury has acted as if it was not restrained by the laws of the land because: a) it is a sovereign power with sovereign rights; and b) it acted in the best interest of the nation at a time of great stress. Moreover in the WinTrust cases the Treasury ignored a Supreme Court ruling.

However, if discovery is provided, it is my view that it will demonstrate two critical factors. The first is that the Treasury knew that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA)’s earnings had turned around and th