Fannie Mae – Investors Unite Launches, Unveils Paper On Government Secrecy

Fannie Mae – Investors Unite Launches, Unveils Paper On Government Secrecy

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Fannie Mae – Investors Unite Launches, Unveils Paper On Government Secrecy by Investors Unite

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A popular government, without popular information, or the means of acquiring it, is but a prologue to a farce or a tragedy; or, perhaps both. – James Madison, 1832

The Father of the Constitution wrote this toward the end of his long life. Madison was not only a cutting-edge political philosopher but also a shrewd political operative and judge of character.  He knew that those entrusted with power would be susceptible to mischief and misdeeds. The governing system he shepherded into existence was designed to minimize that risk and make sure the governed were responsible for the Republic’s success.

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In that spirit, Investors Unite launched a website that shines a light on the government’s effort to block access to what policymakers had in mind when they concocted the Net Worth Sweep of all of Fannie Mae and Freddie Mac’s earnings starting in 2012. is a clearinghouse of information on this issue. It features a two-minute video that provides an overview of the issue, several court documents and news stories as well as a recently released white paper, “The Government’s Seizure of Private Property Behind a Veil of Secrecy,” by University of Virginia Law Professor Saikrishna Prakash.

Investors have vigorously contested the legality of the Net Worth Sweep for over two years. This has prompted debate not only about the policy change but also broader questions regarding housing finance policy. More and more, however, the zeal with which the government has misused “executive privilege” and claims of “protected information” to impede the legal challenges merits special attention.  This website, which will continue to be updated, consolidates a trove of useful information as the legal struggle inches toward its eventual resolution.

This spring a federal judge signaled her belief that the government’s justification for keeping thousands of documents sealed was getting thinner every day. When U.S. Court of Federal Claims Judge Margaret Sweeney decided to unseal seven of those documents, she made it a point to provide her rationale, thus throwing down the gauntlet on the government’s persistent obfuscation. She took particular aim at the idea that discussions from four years ago or more could harm the economy today. She wrote:

While the court recognizes that protection of the Nation’s financial markets and fledgling financial institutions were legitimate goals when the court first entered its order, with the passage of time, the potential for harm to the Nation’s markets and then-fledgling financial institutions no longer exists. Instead of harm to the Nation resulting from disclosure, the only “harm” presented is the potential for criticism of an agency, institution, and the decision-makers of those entities. The court will not condone the misuse of a protective order as a shield to insulate public officials from criticism in the way they execute their public duties.

In essence, she recognizes that current and former public officials might squirm in the sunlight but the public’s right to know must prevail.

Judge Sweeney’s April 11 order is on the website.  So are logs of documents (emails, press clippings and other pieces of information) the government has asserted is “privileged” and therefore off limits to the public.  Note that these lengthy documents are just lists of items the government wants to keep secret. The actual documents add up to 120,000 pages or more. Also included are court filings from plaintiffs explaining why they should have access to the information.

In addition, over the last year the government’s stonewalling has drawn scrutiny from journalists, members of Congress and legal experts. The site provides links to articles in the New York Times, commentaries and analyses by distinguished thinkers such as John Yoo and the white paper by Prof. Saikrishna Prakash, which was the subject of an Investors Unite teleconference last week.

The paper explores the government’s pursuit of “partial secrecy” by attempting to limit review of some documents to only plaintiff’s lawyers as well as “total secrecy” with a very broad assertion of executive privilege over thousands of documents – essentially declaring them off limits even to plaintiffs’ attorneys. The Fifth Amendment of the U.S. Constitution empowers citizens to seek redress from a “taking” by the government. Prakash concludes that the government continues to fall short in justifying its attempt to curtail that right. He noted during today’s call that Judge Sweeney has signaled that protective order over so many documents is no longer necessary, “if it ever was necessary.”

The government’s sidestepping of the law is troubling. Its attempt to cover up its actions makes it even worse. The more the public knows about this farce, the clearer the imperative to remain vigilant to undo the harm to shareholders and help avoid tragedies of government misdeeds in the future.

Finally, we know our active membership and attentive followers will let us know if there is more to include on the website. We have tried to make it especially easy with our “Have a Tip?” button.  Simply click to submit suggested additions for the website.

Fannie Mae & Freddie Mac – The Government’s Seizure Of Private Property Behind A Veil Of Secrecy

By Saikrishna Bangalore Prakash

In response to a private lawsuit seeking relief from the government’s expropriation of all the future profits of Fannie Mae and Freddie Mac, the executive branch has invoked “executive privilege” to shield thousands of documents from disclosure. However, when private parties allege government wrongdoing, the government’s interest in securing confidential advice should yield to the plaintiffs’ need to prove their case. Private parties, in this case shareholders of Fannie and Freddie, have billions of dollars at stake, while the public has inestimable interests in open government, the rule of law, and accountability. Given the circumstances, the court reviewing the claim of executive privilege should rebuff the executive’s attempt to cast a shroud of secrecy over its expropriation. While the executive’s generalized interest in confidentiality may prevail in other contexts, its relatively weak interest in this case should not trump the constitutional rights of plaintiffs seeking just compensation for a taking of their property.


Fannie Mae and Freddie Mac, federally-chartered and privately-owned companies, were established to provide market liquidity and stability by maintaining a pool of lending capital for mortgages. Amid uncertainty about their financial health in the midst of the 2008 financial crisis, Congress enacted the Housing and Economic Recovery Act (HERA), PL 110-289. One of its provisions created the Federal Housing Finance Agency, an independent regulatory agency authorized to act as a conservator. In this capacity, HERA expressly required FHFA to “preserve and conserve” Fannie’s and Freddie’s assets and property so that the entities could be restored to a “sound and solvent” condition. HERA drew from language in the Federal Deposit Insurance Act, the Depression Era statute that stipulates principles and practices governing insolvency of financial institutions.

Under HERA, the Treasury Department provided liquidity to Fannie Mae and Freddie Mac and, in return, received warrants for 79 percent of the shares of companies’ common stock and $1 billion worth of senior preferred shares. Yet the government was not content with the deal it struck with FHFA.

In August 2012, the U.S. Treasury Department amended the investment agreement with FHFA and obtained for itself a quarterly sweep of the profits of Fannie Mae and Freddie Mac. As justification for the one-sided terms, FHFA asserted that the new policy would prevent Fannie Mae and Freddie Mac from having to draw on public funds to meet its dividend obligations to the Treasury. This unanticipated and ongoing profit sweep rendered privately held shares in Fannie Mae and Freddie Mac almost worthless. Commonly called the “Net Worth Sweep,” the Treasury has diverted over $246 billion into the government’s general coffers.

The Net Worth Sweep prompted scrutiny almost immediately as questions arose as to whether Treasury had overstepped legal bounds. Treasury itself spoke of a “managed wind down” of Fannie Mae and Freddie Mac, something not provided for by law. Two critics of the Treasury’s actions are Mark Calabria, a former congressional aide, and Michael Krimminger, a former chief counsel for the Federal Deposit Insurance Corporation, both of whom were intimately involved in drafting HERA. They note, “Congress consciously chose to vest FHFA with the sole authority on whether to proceed with a conservatorship or receivership. The roles of other agencies, notably Treasury, were purposely made narrow and limited. The Banking Committee’s intent in HERA was to limit the role of Treasury to one of creditor, even if a preferred creditor. Both the House and Senate Committees with jurisdiction on the legislation debated a larger policy role for Treasury but ultimately rejected it. The drafters of HERA never envisioned, nor intended, for Treasury to maintain a large equity stake in the companies.” Given FHFA’s status as an independent agency, its role as a conservator, and Treasury’s limited statutory authority, FHFA and Treasury were supposed to maintain an arm’s-length relationship, not a cozy one where Treasury could dictate terms to FHFA.

What makes the institution of the Net Worth Sweep particularly suspicious was that Fannie Mae and Freddie Mac were profitable even before the sweep and have largely remained so ever since. This invited the conclusion that Treasury was trying to shrink the federal deficit by using profits from Fannie Mae and Freddie Mac. Relatedly, given their profitability and Treasury’s stated objective of “winding down” the companies, the Net Worth Sweep may have been conceived and executed as part of a strategy of terminating Fannie Mae and Freddie Mac.

The Fairholme Funds Suit

Beginning in 2013, investors in Fannie Mae and Freddie Mac brought a number of suits, alleging variously that Treasury’s and FHFA’s conduct exceeded their statutory authority, violations of the Administrative Procedures Act, breach of contract against FHFA as conservator, and breach of implied covenants. Some cases alleged that FHFA, as a conservator, had violated a fiduciary duty owed to shareholders. By agreeing to Treasury’s siphoning of all the profits, FHFA had dissipated (rather than conserved) the assets of Fannie Mae and Freddie Mac.

In Fairholme Funds v. United States of America, filed in 2013 before the U.S. Court of Federal Claims, private holders of preferred stock made a different charge. They asserted that, by redirecting all future profits to the Treasury, the federal government had effectively acquired their preferred shares and given them nothing in return. In essence, the investors asserted that the federal government had “taken” their property without just compensation, in violation of the Constitution’s Fifth Amendment.

The investor-plaintiffs in Fairholme Funds sought discovery from the Federal Housing Finance Authority and the Treasury Department. Discovery is a pre-trial request for documents and depositions directed to the opposing party. Plaintiffs need discovery as a means of proving their claims. In this case, the plaintiffs sought to establish that Fannie Mae and Freddie Mac were financially sound at the time of the inauguration of the Net Worth Sweep and that plaintiffs therefore had “a reasonable investment-backed expectation” of return. After all, if the companies were generating profits and were financially sound at the time the Sweep went into effect, the government confiscated something of tremendous value from shareholders.

See full white paper below.

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