The battle over the future of the two government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac took another turn on Monday, this time one that looks favorable to the GSEs' stockholdersThe battle over the future of the two government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac took another turn on Monday, this time one that looks favorable to the GSEs' stockholders. Federal Claims Court judge Margaret M. Sweeney unsealed documents dating back to August 2012 that may undermine the government defense in a lawsuit with the two mortgage giant's stockholders. Those documents appear to throw new light on a revision of the Senior Preferred Stock Agreement between the GSEs and the U.S. Treasury that formed the basis of the government's massive loan to the GSEs when they were placed in conservatorship in 2008.
The government has argued that the revision, which required the GSEs to sweep their quarterly profits into the Treasury and specifically denying them the opportunity to recapitalize, was done to protect taxpayers from future losses at the corporations which were said to be in a death spiral and financially weak. That change, from the set 10 percent dividend that was required by the original stock agreement, prompted stockholder Fairholme Funds to fill suit in 2014, arguing that this collection of profits was an improper taking of private property without compensation.
According to Gretchen Morgenson, writing in the New York Times, among the documents that were unsealed are parts of three depositions taken by Fairholme's attorneys relating to what the government knew about the two GSEs' financial conditions in 2012. In one deposition, Susan McFarland, former chief financial officer of Fannie Mae, said she told Treasury officials in August 2012 that Fannie was "now in a sustainable profitability, that we would be able to deliver sustainable profits over time." She also told them that the company would soon have a $50 billion one-time influx of cash through an accounting entry known as a deferred tax asset which, under accounting rules, a company is required to take when it begins earning profits again. Another document from McFarland that was unsealed was a presentation containing 10 years of internal financial projections that indicated the company would not require further taxpayer assistance.
It was only a week after meeting with McFarland that the Treasury and the Federal Housing Finance Agency (FHFA), the conservator of the two GSEs, announced the revision in the stock agreement. McFarland said she felt it was her conversation that drove the government to change terms in order to seize corporate profits. "When the amendment went into place," she said, "part of my reaction was they did that in response to my communication of our forecasts and the implication of those forecasts, 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."
Among other documents released was a deposition from Mario Ugoletti, a former Treasury official and special advisory to the director of the FHFA. In December 2013 Ugoletti signed an affidavit stating that neither Treasury nor FHFA envisioned that the GSEs deferred tax assets were about to be released, generating huge profits and that the Treasury's move was not intended to increase compensation to the Treasury. However, in his later deposition he said he did not know whether the Treasury or FHFA knew about the potential GSE profits when the sweep requirement was enacted.
Also released was a document from Grant Thornton, the accounting firm hired to do financial analysis on the companies, which casts additional doubt on the government's contention that it considered Fannie and Freddie to be in a dire financial condition in 2012. That document shows Freddie's financial results through the first quarter of 2012 along with handwritten notes from an unnamed employee of the accounting firm noting how those profits would require reversing the valuation allowance, probably in 2013 or 2014.
Since Fannie and Freddie returned to profitability in 2012, they have sent to the Treasury more than $50 billion over the amount they received during the bailout but still owe the entire amount they drew down. Their profits continue to be swept into the Treasury each quarter.
The Times said the suit's proceedings have been shrouded in secrecy from the beginning when the court allowed a Justice Department request for confidential treatment of thousands of pages of materials. The department's lawyers have asserted presidential privilege in 45 documents.
The Justice Department has not commented on the court's action.