republished below in full unedited for informational, educational, and research purposes:
In 2008, when the economy went into recession over the collapse of the subprime mortgage market, Congress passed the Housing and Economic Recovery Act, HERA, to save Fannie and Freddie by a federal bailout that placed the two Government Sponsored Entities, GSEs, into government conservatorship, with the U.S. Treasury recapitalizing Fannie and Freddie by issuing to the GSEs $187.5 billion in senior preferred stock with a 10% dividend designed to repay the U.S. Treasury over time.
But in 2012, when Fannie and Freddie became profitable, as the mortgage market returned with rigorous credit underwriting and a zero-interest rate environment maintained by the Federal Reserve, the Obama administration initiated a “Net Worth Sweep,” designed to confiscate 100% of the profits generated by Fannie and Freddie.
The result was that private shareholders like Fairholme Funds were paid nothing on their Fannie and Freddie stock.
In August 2012, the Obama administration engineered an amendment to the Senior Preferred Stock Purchase Agreements creating a variable dividend that allowed the U.S. Treasury to grab all Fannie and Freddie profits, regardless how large Fannie and Freddie’s earnings might be.
In 2016, U.S. District Judge Rosemary Collyer, in the case U.S. House of Representatives v. Burwell, ruled the Department of Health and Human Services could not use taxpayer dollars to pay Obamacare insurance subsidies Congress refused to fund.
To solve this problem, the Obama administration defied the District Court by diverting profits confiscated from Fannie and Freddie to pay the Obamacare insurance subsidies Congress had refused to fund.
To block the progress of the Fairholme lawsuit, the Obama administration asserted executive privilege, seeking to withhold some 77,945 documents from the public view, including some 12,251 documents the government wanted completely withheld (even from the federal court).
The plaintiffs in the lawsuit asserted the government’s purpose in seeking to keep the documents secret was to conceal the government’s motives in seizing from private and institutional shareholders their stock dividends in Fannie and Freddie the government wanted to seize.
“The government has asserted the information could be ‘disruptive to markets.’ However, it is difficult to imagine how discussions by officials as far back as eight years ago and emails on matters as mundane as daily press clips could impact today’s markets, which, by definition operate on the very latest information,” wrote constitutional law scholar John Yoo. “Executive privilege is available for presidents to use in highly sensitive matters, and its use is constrained by specific procedures.”
“In the pending litigation on the Net Worth Sweep, the government has applied this privilege in an overly broad and unjustified manner,” Yoo continued. “Either federal officials are trying to cover up something they know is illegal, or we are witnessing an unprecedented and disturbing obsession with secrecy.”
On Oct. 4, 2016, Judge Margaret M. Sweeney of the U.S. Court of Federal Claims in Washington, D.C., gave her first order demanding the release of some of the documents that the government sought to withhold – documents the New York Times reported reached “the highest levels of the Obama administration.”
The New York Times further reported the government initially had argued that in seizing Fannie and Freddie, it had acted to protect taxpayers from future losses because the companies were in “a death spiral” and taxpayers needed protection from future losses.
But documents Judge Sweeney forced to be released made clear the government moved to seize all earnings of Fannie and Freddie just before the two mortgage giants were about to become profitable.
Fairholme and the other plaintiffs in the case had asked Judge Sweeney to review a sample of 56 documents in the case to determine if the government had a legitimate argument to seal the documents.
After her review, Judge Sweeney ruled that the documents should be released because Fairholme had an “overwhelming” need for the documents and no other source of available evidence “would similarly inform their understanding” of the events surrounding the profit sweep.
On Jan. 30, 2017 a three-judge panel for of the U.S. Court of Appeals for the federal circuit ruled unanimously that 48 of the 56 documents were not privileged, but should be released to the plaintiffs.
In writing their order, the three-judge panel expressed sympathy for the plaintiffs’ argument that the documents the government sought to seal would reveal (if made public) that Fannie and Freddie were not in a threat of a “death spiral” to insolvency when the Net Worth Sweep was ordered by the government in 2012.
Instead, the three-judge panel suggested the respondents should have access to the 48 documents in their attempt to prove the GSEs were reporting substantial profits at the time that were more than sufficient to cover the Treasury’s original 10% dividend guarantee and potentially to pay dividends to the other shareholders as well.
At issue was the plaintiff’s argument the Treasury appropriated the stock held by private investors to generate what the Treasury knew would be a massive return on the investment to the government.
FannieFreddieSecrets.org, a website created to make easily readable the documents Judge Sweeney through a series of rulings starting in October 2016, has revealed public archives and a deposition from Susan McFarland, Fannie’s former chief financial officer, from July 2015.
In her deposition, McFarland refuted projections made by Grant Thornton, the accounting firm the government had hired to do a financial analysis on Fannie and Freddie, speculating that Fannie Mae was going to lose $13 billion in 2012, the year in which the Obama administration decided to start confiscating Fannie and Freddie earnings.
McFarland revealed in the deposition that she had told high-level officials at the Treasury on Aug. 8, 2012, that the company (Fannie Mae) was “now in a sustainable profitability, that we would be able to deliver sustainable profits over time.” McFarland added that while Fannie was “not there yet,” she as financial officer “could see positive things occurring.”
A letter from then Secretary of the Treasury Jacob L. Lew, addressed to then House Speaker John Boehner dated May 17, 2013, also rejects the government contention the Fannie and Freddy were in “a death spiral” at the time of government confiscation.
In the letter, written at a time when the Treasury was preparing to engage in “extraordinary measures” because Congress had not yet authorized an increase in the statutory debt limit, Lew explained to then-House Speaker Boehner that Treasury had just learned “last week” that it was anticipating a payment of $60 billion from Fannie Mae to be delivered on June 28, 2013.
In another document unsealed by Judge Sweeney, a Grant Thornton, purportedly showing Freddie Mac’s deteriorating financial condition, contained a marginal note handwritten by an unidentified Grant Thornton employee, saying: “3 yrs. of cum. profits, you start to think about releasing the valuation allow. The valuation allow. When probably 2013, 2014.”
In the second case, originally filed as Perry Capital LLC vs. Lew (now, Perry Capital LLC, for and on behalf of Investment Funds for which it acts as investment manager, Appellant v. Steven T. Mncuhin, in his official capacity as the Secretary of the Department of the Treasury, Et Al., Appellees) the investment manager Perry Capital LLC sued the Treasury Department over the decision made in the “Net Worth Sweep” of 2012, and specifically the decision made on August 17, 2012, through which the Obama administration succeeded in engineering an amendment to the Senior Preferred Stock Purchase Agreements that resulted in the private and institutional shareholders of Fannie and Freddie being shut off from receiving future dividends on their Fannie and Freddie stock.
On Feb. 21, 2017, the U.S. Court of Appeals for the District of Columbia Circuit ruled the Obama administration had acted within its authority under HERA.
While this decision was widely viewed as a victory for the government, the ruling of the U.S. Court of Appeals was very narrow, arguing only that the statutory claims of Perry Capital LLC were barred by the Recovery Act’s strict limitation on judicial review.
Instead of dismissing the plaintiffs’ claims, the Circuit Court remanded the case to the lower District Court to litigate contract-based claims regarding their rights as shareholders to have received Fannie and Freddie dividends.
Translated into ordinary English, the Circuit Court punted, sending the case back to the District Court where the Perry’s contractual claims regarding the rights of shareholders to receive dividends could be properly litigated at trial.
In what has become a complicated case, legal analysts still maintain that at the District Court level, Perry LLC stands an excellent chance to force the Treasury “to return the money, which it had no right to receive in the first place.”