Fannie Mae – Legal Scholar: Third Amendment Is A “Sham Transaction”

Fannie Mae – Legal Scholar: Third Amendment Is A “Sham Transaction”
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Legal Scholar On IU Teleconference: Third Amendment Is A “Sham Transaction” by Investors Unite

The Federal Housing Finance Agency showed “no pretense” of acting in the best interest of Fannie Mae and Freddie Mac despite the obligations it had as conservator, an attorney for Perry Capital said during the Investors Unite teleconference Thursday. A noted legal scholar referred to the Third Amendment sweep was a “sham transaction.”

Listen to the teleconference here or below

If you missed this call, you missed a lot.

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Matthew D. McGill, a partner at Gibson, Dunn and Crutcher, which is representing Perry Capital in its lawsuit against the federal government, joined the call as did Richard Epstein, the Laurence A. Tisch Professor of Law at NYU and a senior lecturer at the University of Chicago. Perry Capital recently appealed the ruling by U.S. District Judge Royce Lamberth to reject shareholders’ claims that the government overstepped its authority in the Sweep. Epstein recently published an op-ed in Forbes discussing the AIG and GSE lawsuits alleging improper action by the government in those high-profile interventions (spoiler: the GSE shareholders have the stronger case).

During the call, there was a brief discussion about whether Perry Capital would entertain a settlement with the government. As reported in Politico Pro, McGill said they were “of course willing to resolve” the issue, but that “to date, the government has expressed no interest in that.”

McGill also had blunt words for how FHFA has conducted itself as a conservator:

“The most fundamental point is that the FHFA actions as conservator totally disregarded the fiduciary duties they held as conservator. There has been no pretense of acting in the best interest of the companies.”

McGill went on to say that the “stuck in a death spiral” narrative the government has been pushing about the health of Fannie Mae and Freddie Mac to explain the 2008 action to infuse them with cash and put them in conservatorship has been shown to be “conclusively false.” He noted the dividends the enterprises were required to pay to the Treasury could be paid in-kind and did not have to be paid in cash. Therefore, it was a “remarkable turn of events” that, when the companies were suffering tremendous losses that were almost entirely non-cash accounting losses imposed by the FHFA as conservator, the write-down of deferred cash created an enormous hole that Treasury was obliged to fill. Conveniently then, after the Third Amendment Sweep was enacted, the loan-losses were reversed and tax assets written back up resulting in the companies sitting on billions of dollars in assets that were subsequently handed over to the Treasury.

Professor Epstein provided a comprehensive review of the jurisdictional matters at hand in each of the lawsuits that have been filed – Perry Capital, Fairholme Funds, and the individual shareholders in Iowa. He, like McGill, also addressed the shroud of secrecy the government insists in drawing over these matters.

“It’s an open scandal that the government continues to demand secrecy. The Obama Administration has pledged to be the most open, and they have completely failed in this regard,” he said. “The strategy here by the government is to delay the release of documents in the Fairholme case because it will completely change how the appeal looks.”

Epstein added, “When you take all the money from somebody, that’s not mere regulation – that’s an outright confiscation, and that’s what’s going on here.”

Asked what could be done by the Administration right now to resolve matters, both McGill and Epstein said that it is within the power of the FHFA and the Treasury to end the Third Amendment sweep.

“The Third Amendment was an executive action. It was an agreement between agencies so the administration could put through today another agreement to end the sweep. That is within their purview,” McGill said.

An excellent point, and one with which we wholeheartedly agree. We’d like to thank Professor Epstein and Mr. McGill for their time and expertise. We also want to thank the nearly 200 people who participated in the teleconference, especially those who submitted questions. There has been a robust conversation on social media about the call, and we’re glad to be able to provide these forums to give investors a voice in the ongoing debate.

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