Day: March 1, 2017

republished below in full unedited for informational, educational, and research purposes:

On July 9, 2013, Fairholme Funds, Inc., a mutual fund that held
preferred stock issued by the Federal National Mortgage Association,
commonly known as “Fannie Mae,” and the Federal Home Loan Mortgage
Corporation, commonly known as “Freddie Mac,” filed suit
against the U.S. government in the U.S. Court of Federal Claims,
seeking “just compensation” under the Fifth Amendment for their property
when the Obama administration, in the so-called “Net Worth Sweep” of
2012, confiscated all Fannie and Freddie profits.
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.”