Fannie Mae, Freddie Mac: Olson’s Shot Across the Bow

Fannie Mae, Freddie Mac: Olson’s Shot Across the Bow

Fannie Mae

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Fannie Mae, Freddie Mac: Ted Olson’s Shot Across the Bow by Todd Sullivan, ValuePlays

Perry Capital has asked to join Fairholme’s request for supplementation of the record.  Ted Olson has done so in a way that all but makes the claim Treasury and FHFA are duplicitous in hiding/omitting documents in this case. Nothing pisses off a judge more that the specter of one side mocking their decision (by ignoring it) or playing games with the process. Nothing…..

As for the lawyers, it is a quick and easy way to be held in contempt or sanctioned for this type of activity so one might expect  Lamberth, who until this point has abdicated his duty as a judge to Sweeney in the DC Court of Claims (in so far as making any rulings on this case) to come out rather harshly towards defendants lawyers or run the risk of being looked as though he has no control over his courtroom (many suggest this may already be the case).

There are additional ramifications to this also. So much of what is being decided here goes to credibility. When Fairholme/Perry/Ackman etc claim Treasury/FHFA are not being forthcoming with discovery and seek additional orders from the judge to require more and defendant’s lawyers claim they are, do actions like what is described below give them more or less credibility with the judge?

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Fannie Mae, Freddie Mac: Olson says Treasury/FHFA claims were untruthful

One has to really step back here and read what Olson is saying.  In no uncertain terms he is saying Treasury/FHFA were not being truthful when they claimed:

1- Tax attributes of >$100B were “never” discussed prior to the 3rd amendment (this is either an egregious lie or a signal of abject incompetence on a unfathomable scale)

2- Contrary to the “downward spiral” they claim the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s were in, the memo clearly depicts rapidly improving finances

3- There were in fact several other options available instead of the Net Worth Sweep (contrary to claims)

4-  Both Treasury/FHFA claim FHFA did NOT act at behest of the Treasury yet FHFA was NOT present at the Blackstone meeting indicating Treasury in fact had a VERY active role in what was happening with Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s (this was the sole role of FHFA)

Now, it is important to note that this meeting took place over year before the 3rd amendment was enacted so even if Treasury had financial projections for Fannie Mae and Freddie Mac’s that were far less optimistic than The Blackstone Group L.P. (NYSE:BX)’s at this meeting, there was a year for things to play out to determine if they or Blackstone’s were more accurate (Spoiler Alert: Blackstone’s were).

DTA coming to fruition at Fannie Mae, Freddie Mac

Let’s take it further. Defendants briefs and statements by officials in these cases all claim they never discussed or considered the DTA’s that were obviously coming to fruition at Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s. Now, this memo casts very real doubt on that claim and one has to wonder if people at FHFA/Treasury are getting nervous. The claims were made in court filings, you don’t get to go back and ask for a “do over” when documents come to light that counter your statement. Should more documents come out trashing that claim, someone has a real serious problem on their hands.

Finally, what Olson is really doing here is ingenious. He is trying this case publicly via his request.  He lays out evidence and then links it to each of Treasury/FHFA’s claims and then illustrates how the evidence refutes each of them.  Now, this isn’t for the general public (they aren’t reading this) but it sure as hell is for other plaintiffs, media members, members of Congress, the judge, and Treasury/FHFA officials.

Wanna see members of Congress scramble away from this faster than high school sophomores from a party the cops show up at? Just give them a hint something nefarious went on. They will switch sides on this in a heartbeat and support shareholders (think unions/pension funds).

Fannie Mae, Freddie Mac: Deposition list during discovery

Most importantly this is for those on the deposition list during discovery.  He is telling them where plaintiffs stand and it letting them know they might not want to stick to the company line  (as it pertains to the above issues) or perhaps they are committing perjury. All plaintiffs need is one person to spill it…just one and this whole thing explodes.

Applicable sections, emphasis mine (pdf of full filing).

C. Disclosure Of The Blackstone Presentation

On July 29, 2014, the website TheStreet, a financial news and services website, published a PowerPoint presentation that Blackstone, a global investment and advisory firm, and the law firm Skadden, Arps, Slate, Meagher & Flom LLP presented to Treasury on June 13, 2011. See Dan Freed, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) Investor Blackstone Also Sought Advisory Role, TheStreet (July 29, 2014), also-sought-advisory-role.html (follow link in second paragraph to “pitch documents provided to TheStreet”). Neither Record filed with this Court includes the Blackstone Presentation, even though on its face it constitutes a document that was before the administrative decisionmaker at the relevant time.

Among other things, the Presentation laid out potential ways that Treasury could create value and stability for the Companies, principally by restructuring Fannie’s and Freddie’s stock. See Blackstone Presentation 34-40. It also gave an overview of the Companies’ situation, including their overall financial health and the White House’s emphasis on winding down the Companies. See Blackstone Presentation 27-33.

Fannie Mae, Freddie Mac: The argument

Perry Capital now joins Fairholme’s requests to this Court for supplementation of the Record. See Fairholme Mot. to Supplement 14-27; Fairholme Reply 9-22. The APA requires courts to review the “whole record,” 5 U.S.C. § 706, meaning “neither more nor less than what was before the agency at the time it made its decision.” Marcum v. Salazar, 751 F. Supp. 2d 74, 78 (D.D.C. 2010) (citing IMS, P.C. v. Alvarez, 129 F.3d 618, 623 (D.C. Cir. 1997)). The Record filed here, however, has gaping holes. As Fairholme has explained, some of those gaps are known: key financial projections and associated records referenced by other documents, the missing Freddie Mac projections, materials from the Department of Justice, and privilege logs to justify any documents that Treasury and FHFA have withheld. See Fairholme Mot. to Supplement 17-20; Fairholme Reply 10-17. The government’s filings here suggest other gaps as well, further justifying supplementation of the filed Record. See Fairholme Mot. to Supplement 20-27; Fairholme Reply 17-22.

Now, the recent revelation of the Blackstone Presentation further bolsters Fairholme’s request for relief. It is clear that the document should have been included in Treasury’s Administrative Record all along. As a Treasury spokesman explained, the Blackstone Presentation was a “part of the policy making process.” Freed, supra (“‘As part of the policy making process, Treasury routinely engages with key stakeholders, market participants and consumer advocates. Treasury did not issue a Request for Proposals, and no contract was awarded,’ [a Treasury spokesman] said Tuesday in an e-mailed statement.”). And while Treasury included other financial analyses of the Companies in the Record it filed, those documents purport to support the government’s arguments by showing gloomier outlooks. See Treasury 3285 (Moody’s Presentation to Treasury: Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) Capital Positions (Apr. 4, 2012)); see also, e.g., Treasury 1893 (Moody’s: Plan to Raise Fannie Mae and Freddie Mac Guarantee Fees Raises Question of Support (Sept. 26, 2011)); Treasury 3248 (Deutsche Bank: The Outlook in MBS and Securities Products (Mar. 14, 2012)).

Fannie Mae, Freddie Mac: Omission of the Blackstone Presentation troubling

The omission of the Blackstone Presentation is particularly troubling because it undermines at least four key arguments that Treasury and FHFA have made so far in this case. Cf. Walter O. Boswell Mem’l Hosp. v. Heckler, 749 F.2d 788, 793 (D.C. Cir. 1984) (remanding after agency’s initial record failed to disclose key documents, including those “quite critical” of the key agency study, and recognizing that when there is “no check upon the failure of the agency to disclose information adverse to it, the normal pressures towards inclusion of all relevant material in the record before the court are absent”).

First, FHFA and Treasury have maintained that they never considered—and need not have considered—the tens of billions of dollars in deferred tax assets held by the Companies, even though those assets were recognized immediately after the Sweep Amendment and resulted in a dividend to Treasury of more than $50 billion. See Treasury Reply 47; FHFA Reply 56; see also APA Opening Br. 17 & n.6, 72-73, 77-78; APA Reply 41-42. Indeed, FHFA’s litigating declaration asserts that the agency never “discuss[ed]” the deferred tax assets while considering the Sweep Amendment and that neither FHFA nor Treasury “envision[ed]” the quick recognition of those assets. FHFA 0009-0010. Yet the Blackstone Presentation suggests a way that “Fannie Mae and Freddie Mac’s could experience a build-up of capital”: “[i]ncreased capitalization of tax attributes.” Blackstone Presentation 35 (emphasis in original). Therefore, Treasury at least knew the importance of the deferred tax assets more than a year before the Sweep Amendment.

Second, FHFA’s and Treasury’s defense of the Sweep Amendment rests largely on their “downward spiral” narrative. They claim that without the Sweep Amendment, the Companies would have continually borrowed to pay Treasury’s dividends and soon exhausted Treasury’s funding commitment. See, e.g., FHFA Opening Br. 22-26; Treasury Opening Br. 16-18, 27. They have disputed Plaintiffs’ charge that, since the Companies’ finances were improving, the narrative is fiction. See FHFA Reply 7-10; Treasury Reply 43-47; see also APA Opening Br. 67-68. Treasury did not disclose that, a year before it executed the Sweep Amendment, the Blackstone Presentation provided a road map for the Companies to pay the Treasury dividends without new borrowing from Treasury, while remaining solvent. Blackstone Presentation 34-40. The Presentation suggested that “Fannie Mae and Freddie Mac’s are showing improved financial performance and stabilized loss reserves” and that “Treasury funding for Fannie Mae and Freddie Mac’s continues to slow.” Id. at 28- 29. The Blackstone Presentation contradicts the arguments FHFA and Treasury have made so far regarding the need for the Sweep Amendment.

Third, and relatedly, FHFA and Treasury have disputed that there were reasonable alternative solutions to the Sweep Amendment, contending that no alternative would have solved the purported “downward spiral.” See Treasury Reply 48-52; FHFA Reply 1, 7-10, 55-56; see also APA Opening Br. 79-82. Yet the Blackstone Presentation proposed a variety of methods to restructure the Companies whereby the restructured Companies would not require additional Treasury Funding. See Blackstone Presentation 34-42. Although the proposed restructuring would have diluted the publicly held preferred stock, the Companies could have been profitable, while eliminating the circular payments to, and borrowings from, Treasury, thereby providing potential profit to holders of the publicly held preferred stock. Even though Blackstone proposed several methods to restructure the Companies, Treasury apparently failed to consider any of the suggestions as a substitute for the Sweep Amendment.

Fourth, FHFA has denied that it improperly acted at Treasury’s direction when it decided to execute the Sweep Amendment. See FHFA Reply 10-11; see also APA Opening Br. 51. Plaintiffs previously noted that “[e]ven more evidence supporting this conclusion [that FHFA acted at Treasury’s direction] is likely to be disclosed if the Court orders Defendants to supplement the inadequate administrative records they have submitted thus far.” APA Opening Br. 51 n.10. Now, the Blackstone Presentation does exactly that. It shows that Treasury was the sole recipient of the Blackstone Presentation setting forth strategies to restructure the Companies, with FHFA—the agency purportedly running the Companies—nowhere to be found. This evidence supports the conclusion that FHFA was merely acting at the behest of Treasury, instead of independently analyzing the Sweep Amendment, which it must do to meet its obligations as a conservator for the Companies.

Fannie Mae, Freddie Mac: Doubts on the completeness of the Record

Given the apparent gaps that Fairholme already identified in the Record, and the further doubts about the completeness of the Record raised by the Blackstone Presentation, Perry Capital requests that this Court order Treasury and FHFA to produce a full and complete Record immediately. The government is reviewing many of its documents anyway in response to the Fairholme discovery requests in the Federal Claims Case and is expected to produce 800,000 pages—nearly 200 times the size of the Record filed by Treasury and FHFA. This review and production will undoubtedly reveal documents that should have been included in the Record filed in this case. The government will suffer no added burden by producing the legally required, complete Record in this case. The Record should therefore be supplemented to enable the Court to review the full and proper Record when ruling on the parties’ dispositive motions.

Finally, if this Court agrees that the government must supplement the Record, this Court should not tie the deadline for production of the supplemented Record to the discovery deadlines in the Federal Claims Case. Unlike discovery in the Federal Claims Case, the Record here was due long ago. FHFA and Treasury should correct the clear deficiencies as soon as possible, and the Court should proceed with a hearing on the dispositive motions promptly.


For the foregoing reasons, Perry Capital respectfully requests that the Court enter an order requiring supplementation of the Record filed by Treasury and FHFA.

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