Fannie Mae – Glimpses Of Sunlight As The Government’s Wall Is Chipped Away In Sweep Suits by Investors Unite

A mere seven documents made public yesterday (and posted here) have made it much more clear that government officials were trying to sidestep the law and confiscate the earnings of Fannie Mae and Freddie Mac  beginning in 2012 – and that government lawyers have gone to great lengths to conceal this.

The New York Times’ Gretchen Morgenson today identified key revelations in redacted depositions related to litigation over the audacious Third Amendment in 2012 to the conservatorship of the two companies: Government officials knew that Fannie Mae and Freddie Mac were, in fact, not in a “death spiral” despite what government lawyers have asserted. Quite the opposite was true. Revenue projections used in government deliberations leading up to the Net Worth Sweep show the companies were poised to kick off billions in profits. Therefore, the government’s contention that the Sweep was necessary to protect taxpayers from future losses at Fannie Mae and Freddie Mac is more implausible now than ever.

Fannie Mae’s former CFO, Susan McFarland, stated in a deposition last July that she told high-level officials at the Treasury on Aug. 9, 2012 that the company was, “now in a sustainable profitability, that we would be able to deliver sustainable profits over time.”  In response to particular query from Mary Miller, then a top Treasury official, about the potential revenue effect of a reversal of an accounting entry, known as a deferred tax asset, McFarland said that Fannie Mae could soon reap about $50 billion in income. Tax assets deferral is required under accounting rules when a company began earning profits again. This was just days before the Sweep was announced.

When the Sweep was announced, McFarland said her reaction was that it “was probably a desire not to allow capital to build up within the enterprises and not to allow the enterprises to recapitalize themselves.” This would track with the thinking in a 2011 internal Treasury memo leaked last summer.

Another revelation from the documents unsealed Monday was that Mario Ugoletti, a former Treasury official who was a former special adviser to the director of the Federal Housing Finance Agency, signed an affidavit in December 2013 declaring that neither the Treasury nor FHFA knew that the companies’ deferred tax assets were about to be reversed in the months leading up to the Sweep. But in a deposition in May, he said he wasn’t sure what these agencies knew about the imminent revenue windfall. His apparent contradiction is underscored by the high degree of awareness among officials about the companies’ expected profitability evident in the documents.

The documents were unsealed Monday by U.S. Court of Federal Claims Judge Margaret M. Sweeney. It is an important development amid related efforts by shareholders to pursue information that has no business being hidden from public view at this point.

What they reveal raises serious questions about what else is in the over 12,000 documents the government is still trying to keep under wraps under a misapplied assertion of executive privilege. The obfuscation and secrecy is even more pronounced when one considers that government lawyers have asserted the specific, high-level claim of “presidential privilege” over 45 documents.

These documents also cast doubt on whether U.S. District Judge Royce Lamberth had all the facts or was too hasty in declaring in the fall of 2014 that the government acted within its powers under the Housing and Economic Recovery Act in another suit brought Perry Capital over the Sweep.

Finally, the transcripts reveal a determined effort to keep McFarland and other officials from answering questions. Nearly every question posed by attorneys for Fairholme Funds, Inc. in the depositions was met with a knee-jerk objection from government lawyers. The responses ultimately provided are revealing, just the same.

Investors Unite has long argued that the Third Amendment Sweep violated the HERA’s requirement that their assets be “conserved and preserved” so they could be restored to a “sound and solvent” condition. With the newly unsealed documents, we can reasonably conclude that government officials likely suspected this as well and remain dogged in their efforts to hide this fact.

We have also sought to overcome claims of executive privilege and get to the bottom of how and why the Sweep was conceived.  As the process of chipping away at the government’s wall of secrecy continues, we will continue to provide analysis of what government officials knew and when they knew it.

Anyone who believes in policies that expand access to affordable housing for working Americans or who simply thinks the rule of law, property rights and transparency still matter in a democracy should be watching these developments carefully.

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