Fannie Mae And Freddie Mac – The Government’s Seizure of Private Property Behind a Veil of Secrecy

Updated on

Tim Pagliara Discusses Pending Legal Cases Related To Fannie Mae And Freddie Mac – Investors Unite Legal Call

WASHINGTON, D.C. — On Thursday, October 6 at 10:30 am EDT, Investors Unite Executive Director Tim Pagliara will host a teleconference to discuss the state of affairs of the many pending legal cases related to Fannie Mae and Freddie Mac shareholders, including the recent unsealing of Judge Margaret Sweeney’s order denying claims of privilege over documents that the government has sought to withhold from the public.

Fannie Mae

Pagliara will be joined by Cooper & Kirk Partner David Thompson, who represents plaintiffs in Sweeney’s court, and University of Virginia Law Professor Saikrishna Bangalore Prakash, author of a white paper, The Government’s Seizure of Private Property Behind a Veil of Secrecy, which discusses the misuse of executive privilege in this litigation.

To join the teleconference, please RSVP to [email protected].

WHO: Tim Pagliara, Investors Unite Executive Director and CapWealth Advisors Chairman and CEO

David Thompson, Partner, Cooper & Kirk

Saikrishna Bangalore Prakash James Monroe Distinguished Professor of Law and Horace W. Goldsmith Research Professor at the University of Virginia School of Law

WHAT: Investors Unite Call on Judge Sweeney’s Opinion

WHEN: Thursday, October 6th, 10:30 am EDTDIAL IN:800-895-0198; Conference ID: Investors RSVP:Please RSVP to [email protected]

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 110-289.1 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.2

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 and Freddie. 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.3 This unanticipated and ongoing profit sweep rendered privately held shares in Fannie and Freddie almost worthless.4 Commonly called the “Net Worth Sweep,” the Treasury has diverted over $246 billion into the government’s general coffers.5

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”6 of Fannie and Freddie, 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.”7 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.8 This invited the conclusion that Treasury was trying to shrink the federal deficit by using profits from Fannie and Freddie. 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 and Freddie.

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 and Freddie.9

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.10

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.11 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 the full PDF below.


About Investors Unite: Formed by Tennessee activist investor and CapWealth Advisors Chairman and CEO, Tim Pagliara, Investors Unite ( is a coalition of private investors from all walks of life, committed to the preservation of shareholder rights for all invested in Fannie Mae and Freddie Mac. The coalition works to educate shareholders and lawmakers on the importance of adopting GSE reform that fully respects the legal rights of Fannie Mae and Freddie Mac shareholders and offers full restitution on investments.

Leave a Comment