Government In Panic Over Howard Application In Fannie Case

Government In Panic Over Howard Application In Fannie Case

Fannie Mae

Photo by NCinDC

Government in Full Panic Mode Over Howard Application in Fannie Case by Todd Sullivan, ValuePlays

This is pretty amazing stuff. Fairholme announced the hiring of J Tim Howard, former CFO of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) until 2004. They then petitioned the court to allow him to view documents covered in the protective order. Predictably, the government is panicking

The reasons they give:

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1- Howard owns share of both the common and preferred shares
2- Howard blames the gov’t for his departure from Fannie Mae
3- Howard wrote a book critical of the government
4- Howard has said he wants to be part of the solution for the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)

Fannie Mae, Freddie Mac: Terms of the Protective Order

Now, of course these objections are ridiculous on their face. The government says later in the brief (full motion here):

His deeply-held beliefs may color not only his view of confidential documents in this case, but also his willingness and ability to abide by the terms of the Protective Order both during and after the conclusion of litigation. Permitting Mr. Howard access to protected information unnecessarily places the confidentiality of that information at risk. U.S. Steel Corp. v. United States, 730 F.2d 1465, 1469 (Fed. Cir. 1984). Stated differently, the Government should not be subjected to the additional risk of providing its confidential and sensitive information to purported experts and consultants with such a long-standing and personal interest in the litigation. Even if he were not to intentionally misuse the information, Mr. Howard intends to continue to be involved in public discussions about mortgage finance and, as a result, could inadvertently disclose protected information.

Shorter version? “We are scared of Howard”

Let’s look closer. Every plaintiff in the case has an economic interest in the outcome of litigation (owns shares). All plaintiffs have also come out in opposition to the governments action either in court filings, public pronouncements or investor presentations. Further, all plaintiffs argue they have been harmed by the governments actions. Finally all in some way want to be part of the future of the enterprises (think of both Berkowitz and Ackman’s alternative plans for the Fannie Mae and Freddie Mac post litigation). Because of those facts the government’s reasoning from above can be dismissed without pause. If, as the governments claims he may do, Howard were to divulge protected information he would sabotaging his own efforts here (any evidence would then be non admissible & his action punishable) and if he did it post litigation it would have no effect on the outcome of these cases and would only open himself up to liability. In other words, he’d only harm himself.

Then, why does the government object? No one the plaintiffs have on staff would be able to provide the critical knowledge of the inner workings of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) that Howard can. He can look at protected information and immediately discern if what they are seeing was typical or atypical in regards to the operations and decision making of the GSE’s. This will give plaintiffs a roadmap to follow up on rather than chasing every possible lead in every different direction. Howard will be uniquely qualified to direct plaintiffs where to look and where to follow up and dig deeper.

What the government is trying to do here is aid their own effort by deny plaintiffs access to someone who would play a vital role in deciphering the millions of discovery documents that are sure to be coming. It has nothing to do with anything else….

Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.
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