Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, highlights the depositions of Fannie Mae provided to the court that could be made public. The stock is soaring and while Bove sees positives he also notes that there is a troubling trend of Government cover-up here.
Fannie Mae Depositions
Apparently Judge Sweeney of the Federal Claims court in Washington indicated today that some of the depositions provided to the court could be made public. These depositions will be available to the Appeals Court on April 15th when arguments will be heard concerning the decision by Judge Lamberth in a Washington District Court to stand by the government’s position.
I have had the opportunity to read snippets from these depositions. They are clear in indicating that it has always been the intent of the Administration to eliminate Fannie Mae and Freddie Mac (FMCC/$1.28/Buy). Moreover that it would attempt to do so by weakening their capital base and their ability to generate net income. This is directly contrary to the Congressional intent for these companies as stated in the Housing and Economic Recovery Act of 2008 (HERA).
The deposition of Susan McFarland, Fannie Mae’s ex-CFO is enlightening. It points out that the Treasury, the FHFA, and the Board of Fannie Mae were made aware in early August 2012 that the company, and presumably Freddie Mac, would be net profitable through 2022. It was also discussed that the deferred tax asset could be reversed and the loan loss allowances reduced. It was speculated that $50 billion could become available to the company. Plus, more would be obtained from the demands that banks compensate the institution for bad loans.
Apparently days after this information was made available to the Treasury and the FHFA, these entities moved as quickly as possible to institute the amendment that would sweep all of the profits of Fannie Mae to the government. The reason given for the sweep was that Fannie Mae might need more funding.
If Ms. McFarland’s testimony is correct, then the reason given for the sweep was a falsehood since the Treasury was well aware that the company could pay its dividend. Apparently, the government was also aware that Fannie Mae did not have to pay the dividend in cash. In essence, even the reason that the sweep was necessary to save Fannie Mae’s cash position was incorrect and the Treasury knew it.
These depositions provide more data but the key point is that the government was intent upon disobeying HERA and destroying these two companies. The reasoning provided for instituting the cash sweep did not square with the facts if the McFarland testimony and that of a Treasury employee Jeffrey Foster are correct.
What is also very discouraging is that the portion of the depositions I read were more than 50% composed of government lawyers objecting to every question asked. The President, Congress, and the Treasury have publically stated repeatedly, when putting rules in place for the banking industry, that transparency is absolutely required. It is an embarrassment for this country that the government, itself, violently disagrees with what it preaches when it comes to the government providing transparency