Fannie Mae Conservatorship: Grassley Wants Answers

Fannie Mae Conservatorship: Grassley Wants Answers by Todd Sullivan, ValuePlays

Of course the stock of Fannie Mae and Freddie Mac are rallying today but lets take a step back for a moment. There has been a slow but nonetheless steadily growing chorus of folks in Congress questioning what is going on here recently.  Recently in January at the House Financial Services hearing there were some pointed exchanges with Watt , Richard Shelby seems to be tiring of the Conservatorship and Dem Capuano has been vocal about his disdain regarding their current state calling the net worth sweep “ridiculous”.

With members of Congress becoming  more vocal regarding Fannie Mae and Freddie Mac, the odds of material reform happening become less likely. While yesterday I opined that the governments requesting access for Navigant Consulting to protected documents was simply to prepare for trial, it may also be to answer incoming questions from members of Congress.

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For almost two years, shareholders of Fannie Mae and Freddie Mac have been asking the United States government about its 2012 decision to divert all of the mortgage finance giants’ earnings to the Treasury rather than let them repay taxpayers under the original bailout agreement.

But the government has declined to disclose documents relating to that decision, contending that some may be subject to presidential privilege.

Now, this cloak of secrecy has drawn the scrutiny of Charles E. Grassley, the Iowa Republican who is chairman of the Senate Judiciary Committee. On Tuesday, Mr. Grassley sent letters to the Justice Department and the Treasury asking for details about the decision and why the government has kept such a tight lid on documents relating to it.

“The taxpayer has a right to know what has transpired,” Mr. Grassley wrote in letters to both Eric H. Holder Jr., the United States attorney general, and Jacob Lew, the Treasury secretary. “But, instead of transparency, there appears to be an invocation of executive privilege. If true, this is cause for concern.”

A Justice Department spokeswoman said that its officials were reviewing the letter. A spokeswoman at the Treasury Department said its officials had not received the letter from Mr. Grassley’s office.

Fannie Mae and Freddie Mac, once proud and profitable companies established by the government to provide backing for home loans, were humbled by the mortgage debacle of 2008. That September, the government placed both into conservatorship. They received $187.5 billion from taxpayers to cover their losses.

Initially, Fannie and Freddie paid interest on the taxpayer loan. But in August 2012, the Treasury and the companies’ conservator, the Federal Housing Finance Agency, amended the deal to allow the government to sweep all the companies’ earnings into the Treasury.

In announcing the action, the government said it was intended to ensure that every dollar earned by the companies would benefit taxpayers.

That decision came just as the companies were returning to profitability, which has been beneficial for the Treasury. By March 31, 2015, it had received $228.3 billion from Fannie and Freddie, $40.8 billion more than they borrowed from taxpayers.

The government’s decision to divert all of Fannie Mae’s and Freddie Mac’s earnings was unexpected when it was announced. As conservator, F.H.F.A. was supposed to oversee the companies with an eye to stabilizing them and conserving their assets. Redirecting their profits to the Treasury has prevented the companies from building up a larger capital cushion to absorb future losses, should they arise.

The shares of both companies have continued to trade publicly since they entered conservatorship. As the companies recovered and their earnings ballooned, some shareholders contended that sweeping the profits into the Treasury was an improper taking by the government of private property. Several shareholders sued the government. The Obama administration has responded by fighting document requests and demanding an unusual degree of confidentiality over material relating to the decision.

In one such case, lawyers for the Justice Department defending against a lawsuit brought by Fairholme Fund, a mutual fund company and a Fannie and Freddie shareholder, have made extensive claims of privilege on documents surrounding the profit sweep.

Logs filed in the case in mid-January listed 231 Treasury documents in which the government cited various privileges. Presidential privilege was cited in 38 of those items and in seven documents involving F.H.F.A., the conservator.

In a letter to investors last January, Bruce Berkowitz, Fairholme’s managing member, criticized the government’s claims to secrecy. Fairholme officials declined to comment Tuesday on Mr. Grassley’s letters.

In the letter to Mr. Holder, Mr. Grassley asked for details about the executive privilege claims made by Justice Department lawyers, specifically whether President Obama personally invoked the privilege related to the documents. Mr. Grassley also asked Mr. Holder under what legal authority the sweep was authorized and whether the Justice Department spoke with Treasury or F.H.F.A. about its legality.

Mr. Lew was asked to tell Mr. Grassley why Treasury entered into an agreement with Fannie and Freddie to capture the companies’ earnings and how that agreement affects F.H.F.A.’s regulatory authority over the companies and its oversight of their capital positions.

The F.H.F.A. “has regulatory authority over both Fannie Mae and Freddie Mac and the statutory duties include the requirement that the F.H.F.A. ensure that each regulated entity operates in a safe and sound manner, including maintenance of adequate capital and internal controls,” Mr. Grassley wrote.

Mr. Grassley asked Mr. Holder and Mr. Lew to respond to his questions by April 20.

Gretchen has been covering this nicely with her previous articles here and here. Here is a link to Grassley’s letter (click for pdf)

I would not expect Grassley’s letter to be answered on time (April 20) but I expect an answer at some point. What will be interesting is what happens when the answers are provided. Here are the questions:

  1. Has the President personally invoked executive privilege over documents related to the Fannie Mae, Freddie Mac and Treasury Third Amendment agreement? If so, when? If not, why are DOJ attorneys citing that privilege as a reason to withhold those documents?
  2. Does the Third Amendment cause a breach of any of FHFA’s statutory duties to ensure that each regulated entity operates in a safe and sound manner? Please explain.
  3. During the negotiation of the Third Amendment between Treasury and FHFA, did DOJ communicate with any of the entities involved regarding its legality? If so, please describe those communications in detail.
  4. Under what legal authority was the Third Amendment authorized?
  5. Prior to litigation, did DOJ discuss with Treasury and/or FHFA the need to assert privileges, including executive privilege, over certain documents?

This is what I envision the answers being:

1- Yes. That information is contained in protected documents before the courts and cannot be released to the public

2- No

3- Yes… Please see #1, those communications are covered under the protective order


5- Please see #1, covered under the protective order

What is important is what happens next. Does Grassley push? Does he go public with his dismay?  Does he decide to hold hearings on it and start hauling people in under oath to answer questions? If his inquiry stops with this letter, it is a non-event. If it is just the beginning of something far greater, it is huge.

Don’t underestimate the timing of this either. We are 18mos away from the next Presidential election.  The full court press on that will start this fall and it might be to the GOP’s advantage to begin hearings then as a way to inject more controversy into the Democratic side. Painting Democrats as stealing shareholders money (union, retirees etc) could be pretty effective and put Dems on the defensive. Damaging the current White House occupant with controversy in an election cycle limits his ability to effectively campaign for the Democratic candidate. Another side effect could be to then see a chorus of Dems rise up calling for more transparency from Treasury, FHFA and the White House on this (assuming they are getting heat about this on the campaign trail) adding to the pressure for FHFA to just call it a day on the conservatorship. On the flip side, as I said in March of 2014, the Democrats can just as easily use this situation to their own advantage.

The interesting part is that both parties can benefit by eliminating the conservatorship and the net worth sweep.

Assuming Grassley does not get what I expect to be unsatisfying answers until sometime in May, then hearings may not be scheduled until after the July/August summer recess after a few more letters go back and forth. There are no current material elections coming up this year so the balance of power in Congress will not be in danger of changing until 2016 so Grassley can take his time.

I am not advocating for this, I am just stating that politics are a reality here and anything that goes on with the GSE’s will be politically motivated and must be considered.