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#FannieGate, $fmcc, $fnma, Capuano, Fannie Mae, FHFA, Freddie Mac, HERA, HR1036, HR1673, Margaret Sweeney, Melvin Watt, Michael Stegman, Mulavney, Third Amendment Sweep, Treasury
March 29, 2015 Summary
It is quite clear that both the Legislative and Executive Branches are not going to do much in the next two years to address the GSEs Conservatorship debacle. It’s all politics and “We the People” will suffer from the portfolio wind down terms within the PSPA. Presently, many in the Legislative Branch want to hide the truth like Ed Royce and placing huge risk towards “We the People” while others like Blackburn and Capauno want to do the right thing and fix the problem before “We the People” encounter another financial crisis. Going forward, the Legislative Branch expects Treasury and FHFA to resolve the GSEs Conservatorship but both agencies claim it is the responsibility of the Legislative Branch. The responsibility was clearly spelled out in the HERA Statute which Treasury and FHFA collaborated and trumped in 2008 with the creation of PSPA.
The Obama Administration wants to clearly expropriate as much funds as possible from the GSEs before they end their term in 2016. It’s so obvious that they want to pass the problem to the next Administration regardless if it is Democrats or Republicans. Obama doesn’t care to protect and defend the Constitution but rather pass the buck to the next Administration while stating that the Legislative Branch should resolve the GSEs Conservatorship.
Judicial Branch is the only hope for real justice. So far, Federal Claims Court under Margaret Sweeney is displaying real justice towards “We the People” by allowing discovery to continue. She seems to be seeking the truth while cutting through the trickery (BS) from the defendants.
Your Honor, Judge Sweeney is showing no fear towards the Administration and other government agencies.
On March 31, 2015, Judge Sweeney will be conducting another Status Conference Call. Plaintiffs are seeking to begin deposition sooner rather than later while Defendants are seeking more delay. It’s clear; Defendants are trying their best to hide the truth and delay access to evidence and facts.
Legislative Branch:
It appears that Congressmen and Senators are starting to understand the 2008 Financial Crisis’ sequence of events resulting towards the GSEs Conservatorship. With the knowledge of the truth, evidence and facts, Congressman Blackburn and Congressmen Capauno introduced Bills seeking to correct the wrongs from the previous legislative action.
From the most recent hearings under oath, Capuano grilled Jack Lew, Secretary of Treasury and confirmed that the purpose of the Net Worth Sweep was to support the General Fund Budget while Mulvaney questioned Melvin Watt, and confirmed that PSPA trumped “violated” the HERA Statute as soon as FHFA invoked the Conservatorship. It is clear that Jack Lew is waiting for the Obama Administration to provide direction of what to do with the GSEs according to the testimony during the most recent hearing.
Senator Shelby is also seeing the light knowing that there are no other alternatives than returning GSEs back to their rightful owners. Senator Shelby was quoted:
“My God, we might as well leave them where they are if we’re going to do that,”
“I don’t know if we would do anything in the area of Fannie Mae and Freddie Mac,’’
“We’ll see what’s doable. I don’t want to do something to make it worse than it is.”
Links references provided below:
Congressman Marsha Blackburn of Tennessee
Congressman Michael Capuano of Massachusetts
Michael Capuano authored HR 1036 Bill
Michael Capuano Grilled Jack Lew
Congressman Mick Mulvaney heated questioning of Director of FHFA, Melvin Watt
Executive Branch:
From January’s 2015 Obama Arizona visit, Obama clearly stated, “I’ve called on Congress to wind down the government-backed companies known as Fannie Mae and Freddie Mac.” (No applause)
In late March of 2015 at the National Council of State Housing Agencies Legislative Conference, Dr. Michael Stegman described the Obama Administration hidden agenda from trumping HERA statute while saying the responsibility to end the Conservatorship is through Legislation. The truth and facts is that the responsibility has been clearly spelled out in HERA. However, in 2008, Treasury and FHFA, Conservator managed to “Trump” the law with the PSPA according to Melvin Watt. See above reference.
Counselor to the Secretary for Housing Finance Policy Dr. Michael Stegman, speaking at Monday’s National Council of State Housing Agencies Legislative Conference, said:
“I know that many of you want to know where we are on housing finance reform. On this subject, let me be clear: the Administration stands by our belief that the only way to responsibly end the conservatorship of Fannie Mae and Freddie Mac is through legislation that puts in place a sustainable housing finance system that has private capital at risk ahead of taxpayers, while preserving access to mortgage credit during severe downturns.”
Judicial Branch:
Judge Margaret Sweeney in the Federal Claims Court is allowing Fairholme, Plaintiff to forge ahead with discovery under protective order. US Federal Claims Court under Judge Margaret Sweeney shows no fear in seeking the truth and justice.
After March 31, 2015, we shall know where we are with Discovery in the Fairholme Case. The expectation is that Judge Sweeney will continue to allow Plaintiffs to move forward to seek evidence to address the Motion to Dismiss.
TH717 
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Fairholme Funds, Inc., et al. v. USA 3/31/2015
PROCEEDINGS
—–
(Proceedings called to order at 11:03 a.m.)
MR. COOPER: — Fairholme and others. With me this
morning, Your Honor, are Mr. Colatriano —
MR. COLATRIANO: Good morning, Your Honor.
MR. COOPER: — well known to the Court, and Mr.
Thompson —
MR. THOMPSON: Good morning, Your Honor.
MR. COOPER: — also well known to the Court. On
the phone today is our client, the general counsel of Fairholme, Christine Cubias.
THE COURT: And for the United States?
MR. DINTZER: Good morning, Your Honor. Kenneth Dintzer for the Department of Justice, representing the United States. And with me at counsel table today, Your Honor, is Gregg Schwind, Elizabeth Hosford, Renee Gerber, and Anthony Schiavetti.
THE COURT: Very good. Thank you so much.
MR. DINTZER: Thank you, Your Honor.
THE COURT: Well, before we begin this morning, I advise the parties of some troubling activity that
wanted to
has occurred that in no way involves your clients. It’s troubling to the Court because there is the specter that’s — that may have been raised that there may be some unscrupulous
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1 people that might be trying to prey on investors. I don’t
2 know if that’s, in fact, the case or not, but I will just let
3 you know what happened yesterday.
4 Faxed to our Court, to nearly every judge on this
5 Court and special master, was a 38-page document. It’s
6 rambling, largely incoherent. It references today’s status
7 conference, the case number, the conservatorship, FHFA, the
8 Department of Treasury, the network sweep, the housing —
9 well, HERA. The document also references King James I, as
10 well as the First Charter of Virginia from 1606, quotes from
11 the Holy Bible, Franklin and Eleanor Roosevelt, and double-
12 entry bookkeeping. The individual who sent these — this —
13 responsible for the mass faxing refers to herself as the
14 “revocable living trust.” I’ve seen that in a number of tax
15 cases with sovereign citizen cases. I don’t know if she’s
16 part of that or not. I have no idea.
17 But, one, it was troubling to have this mass fax
18 nonsense going on, but upon further investigation, I’ll just
19 say, by my law clerk, as it turns out there is — now, I
20 don’t know whether these articles are accurate or whether
21 they’re — just something appears in cyberspace doesn’t mean
22 it’s accurate, but there are articles that appear online that
23 claim that the individual with the identical name to the
24 person who sent the fax was involved in a number of
25 confidence schemes and one Ponzi scheme. And I don’t know
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1 whether it originated out of Canada, but it targeted U.S. and
2 Canadian investors.
3 Apparently, they were able to bilk, I believe, over
4 600 investors out of their hard-earned money and I would hate
5 to think that any of the stockholders, the shareholders in
6 Fannie and Freddie, are being targeted by unscrupulous
7 people. AllIcansayisif–I’mnotsureifthisisthe
8 public service announcement portion, something that I don’t
9 usually — I’ve never engaged in before, if an investor would
10 be contacted by someone who claims that they represent the
11 Court, that those people should know that no one has been
12 retained by this Court to engage in asset recovery.
13 Apparently, part of these other Ponzi schemes, if,
14 in fact, what I read online is accurate, that the individual,
15 again with the same name as the person who sent the fax —
16 I’m not saying it’s the same person; I’m not even saying any
17 of these articles I read are even accurate — but someone
18 with the same name apparently claimed to be an expert in
19 asset recovery.
20 So, just people should be cautious about with whom
21 they deal, and we all heard about the Nigerian prince who’s
22 in need of assistance. We’ve all heard about the scams from
23 — in theory, cold calls from the IRS telling the individual
24 that their — that they owe the Government X number of
25 dollars and would they please provide their bank account
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1 information or they’d even be willing to take a credit card
2 over the phone.
3 So, you have to know who you’re dealing with. You
4 need to be careful, and I just mention that today, just in
5 case there are some citizens here in the courtroom today who
6 may have received either a phone call or otherwise be
7 contacted by this individual. I have alerted the U.S.
8 Marshals. They’re involved; they are investigating this.
9 The phone calls to various chambers yesterday from this
10 individual indicated that it was from a federal office, it
11 had WITS on the caller ID; therefore, a number of the
12 chambers thought it really was someone from the Federal
13 Government contacting them.
14 It was a spoofed caller ID. And, you know, there
15 are ways that people can alter the phone numbers that they’re
16 using so it appears that it’s coming from the IRS or the
17 Federal Government. So, just please be careful with whom you
18 deal.
19 So, I apologize for taking counsel’s time this
20 morning with that, but it was of concern to me. So, I thank 21 you.
MR. DINTZER: Thank you, Your Honor.
MR. COOPER: Thank you.
THE COURT: I’m ready to begin.
MR. COOPER: I think we’re here, Your Honor, this
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1 morning on Mr. Schwind’s request, and so perhaps it would be
2 more appropriate for him to open the proceedings.
3 MR. SCHWIND: Thank you, Your Honor, and good
4 morning. What we would like to do is provide the Court today
5 first a general update — a status update of where we are
6 with discovery and then turn to the issue identified by the
7 parties in the joint status report, having to do with the
8 depositions of government witnesses.
9 As to the status of discovery, the Court extended
10 the period of discovery in this case until the end of June.
11 Since the last status conference on February 25th, document
12 review has continued, and since then, there have been further
13 productions of Treasury and FHFA documents, again, the two
14 agencies that are the focus of document discovery in this
15 case.
16 We have also produced a revised privilege log. In
17 total, just to give the Court an idea of the volume of
18 documents we’re talking about, we have now produced in this
19 case, in this litigation, over 400,000 pages of documents.
20 That’s from FHFA and Treasury combined. We hope to complete
21 our document production in April, and that, of course, will
22 be pending final resolution of the privilege logs. We’ve
23 agreed with Plaintiffs to produce revised privilege logs
24 every two weeks. We’re going to continue to do that, and
25 we’re making our best efforts to complete those logs by
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1 sometime in May.
2 In addition, we have met with Plaintiffs. Your
3 Honor will recall at the last status conference that the
4 Court asked the parties to meet and try to —
5 THE COURT: You kindly agreed.
6 MR. SCHWIND: — talk about whether there were any
7 privilege issues that were categorical in nature, that didn’t
8 require a document-by-document review or anything like that
9 or any type of categorical privilege issues that could be
10 briefed while document discovery is ongoing. We’ve done
11 that. The parties have exchanged some ideas on some
12 categorical privilege issues that they believe, again, do not
13 require the type of document-by-document review that would be
14 incredibly time-consuming at this time.
15 That said, we are concerned that a number of what
16 we’ll call sideshow issues raised by Plaintiffs will delay
17 our completion of document discovery and our completion of
18 the privilege logs in this case. And I want to talk about
19 those in conjunction with the second issue, again, the one
20 identified in our joint status report having to do with the
21 depositions of government witnesses.
22 We want to make the Court aware of some potential
23 problems out there, and I think we’ve all been involved in
24 cases where judges have looked askance at us and said why
25 didn’t you tell me about this earlier. So, we’re merely just
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1 doing — we’re trying to make the Court aware so if this does
2 come up later on, we’ve at least tried to solve it up front.
3 First of all, the depositions that Plaintiffs have
4 proposed, and we agreed on dates with them, but these
5 depositions have several elements to them that make them —
6 that make them premature and potentially disruptive. First,
7 we have not completed our document productions of either FHFA
8 or Treasury documents. Moreover, Fairholme has stated that
9 it intends to challenge many assertions of government
10 privilege in this case. And, of course, if the Court
11 sustains any of those challenges, it may result in the
12 production of additional documents.
13 Now, what this means is that Fairholme intends to
14 depose government witnesses before documents have been
15 produced in this case, and we’ve told Plaintiffs this, point
16 blank. And we’ve told them that we believe these depositions
17 are premature. And, again, we’ve agreed on dates with
18 Plaintiffs, because the Court did allow depositions in its
19 February 26th, 2014, discovery order, and we understand that.
20 We’re not trying to fight that.
21 But what we do have a problem with, and this is why
22 we wanted to bring this to the Court’s attention today, is
23 that assuming these depositions go forward, we’re not going
24 to agree to further depositions of these witnesses should
25 Plaintiffs say, well, oh, now, we have these new documents.
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1 2 3 4 5 6 7 8 9
THE COURT: Understood.
MR. SCHWIND: And — and Plaintiffs have not agreed with that. We’ve told them we’re not going to agree, we’re going to move to quash, and Plaintiffs’ response has been, well, we’ll deal with that problem when it happens.
THE COURT: No. I agree with you. I’m going to wait to hear what Plaintiffs’ counsel has to say, but it’s — what’s always been fair is you don’t have to have this kind of piecemeal approach to a deposition, that if a counsel wants to engage in a deposition without having all of the documents, they do so at their peril. It’s one bite at the
10
11
12 apple.
13 It’s one thing if you’re talking about, well,
14 30(b)(6) deponent, you’re trying to find out who is a
15 repository of the — of documents, if you’re trying to
16 identify additional witnesses down the chain, and that’s a
17 purpose of the deposition, but if the purpose of the
18 deposition is to depose individuals to find out how they’re
19 tied to the specific documents and to get further insights
20 into what transpired, then they get one bite at the apple.
21 They get to take one deposition.
22 MR. SCHWIND: Thank you, Your Honor. And just
23 to — I won’t dwell on that aspect anymore.
24 THE COURT: Can you explain a little more to me,
25 though, what is — with these witnesses, what is — are they
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taking a deposition to determine whether or not there are other repositories of information? Is that the purpose of the deposition? Or is it to depose and I’ll hear — obviously I’ll hear — get the Plaintiffs’ world view — but what is your understanding of these depositions?
MR. SCHWIND: Well, none of the depositions is a
Rule 30(b)(6) deposition.
THE COURT: Right. No, I understand that.
MR. SCHWIND: First of all, Your Honor.
THE COURT: But, I mean, is it —
MR. SCHWIND: Second — and, secondly, of course,
Plaintiffs haven’t disclosed, nor do they necessarily have an obligation to tell us —
THE COURT: Right.
MR. SCHWIND: — all the matters that they want to question the witness on. But the parameters of the depositions, as we understand it, are the Court’s — are the subjects in the Court’s discovery order.
THE COURT: Okay.
MR. SCHWIND: That said, our expectation, and we expect this to be accurate, is that this is not, you know, Plaintiffs trying to find out where documents are. One of the witnesses, for example, is one of the signatories to the third amendment. Okay, it’s the former director of the FHFA. There are two other FHFA witnesses, again, whose names are on
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1 a number of documents that we’ve produced in this case and
2 that were — at least one of them was involved with the third
3 amendment; another one was involved in the conservatorship
4 decision back in 2008. So, we expect these to be substantive
5 depositions, not merely depositions of the type Your Honor
6 referred to.
7 THE COURT: The only exception that I would find to
8 what I said would be if at the deposition of another witness
9 if something — if there would be something unforeseen that
10 would come up, the Plaintiffs could not have anticipated,
11 despite having all the documents they need, that there might
12 be — there can be grounds for reopening a deposition, but to
13 take multiple depositions of the same individual is — it’s
14 not fair and it’s not efficient. So, you know, I’ll wait to
15 hear what the Plaintiff has to say. They may have a good
16 explanation as to why they want to go down the road that they
17 do, but I’m just indicating to you what I — how I would —
18 how I intend to rule if Plaintiffs cannot give me a good
19 reason as to why they want to engage in this piecemeal
20 approach to deposing a particular witness.
21 MR. SCHWIND: Right. Thank you, Your Honor. And I
22 just want to point out briefly that everything we do is
23 essentially a distraction from our main focus right now,
24 which is document production, which is getting the privilege
25 logs done. And this would be a major interference with our
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1 ability to do that.
2 Again, we are trying to work with Plaintiffs, but
3 if they could merely, again, push these out until after we
4 finish those things, again, it would greatly assist our
5 ability — excuse me — to complete document production on
6 the schedule that the Court has set out, which is our intent.
7 Thank you, Your Honor.
8 THE COURT: Understood. Thank you.
9 Sorry to be the wet blanket before you even start,
10 Mr. Cooper.
11 MR. COOPER: Well, Your Honor, I think there is
12 some confusion at work here, and I hope I can clear it up.
13 If counsel for the Government is saying that his only concern
14 is that we wait to take any deposition until he completes his
15 document production, which he has said he will complete, and
16 I’ve not heard even today or before today any suggestion that
17 he’s off track here, but that he will complete document
18 production by the end of April.
19 If that — and that — and that after that time he
20 will have no concerns about our going forward with
21 depositions in May and in June, because, remember, we have an
22 end-of-June discovery cutoff. Then I — then I don’t think
23 we’re going to have any disagreement. We’ll be willing to
24 put the depositions that we have scheduled with counsel by
25 agreement, which — one of which takes place on April 17th,
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the other one takes place on April 29th. We’ll be happy to put those over for two weeks or so.
THE COURT: Well, let me —
MR. COOPER: But —
THE COURT: Well, let me just ask. Mr. Schwind,
will you be able to complete the production of documents as Mr. Cooper has outlined?
MR. SCHWIND: The production of documents, Your Honor, but not the — not the completion of the privilege logs in this case. We still have the issues out there, and, again, if it’s Plaintiffs’ intent to challenge privilege, and if Plaintiffs hope to discover more documents as a result of that privilege challenge process, we think that — assume we can do that. But the answer to your questions are yes, we do, but we don’t think that solves the problem.
THE COURT: Then I understand —
MR. COOPER: There’s the rub.
THE COURT: — and that’s — well, that’s why I’m
going back and forth. And when do you think the privilege log completion — when do you anticipate completing the privilege logs? I know you said you’re supplementing every two weeks. Was that correct?
MR. SCHWIND: Yes, Your Honor.
THE COURT: Okay.
MR. SCHWIND: We are targeting May. We’ll say end
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1 of May. I don’t want to commit to any earlier than that.
2 THE COURT: Okay. Okay, the end of May. All
3 right. And I will — and I know the last thing you want me
4 to do is to reset the deadline, but rather than have the
5 Plaintiff be penalized by having the clock run out on them, I
6 will enlarge the discovery schedule so that you have the
7 entire universe of documents that you need, that you will
8 have all the privilege logs that you need before you conduct
9 your depositions. I mean, fair is fair.
10 MR. COOPER: Your Honor —
11 THE COURT: But, again, I know you don’t want to
12 keep pushing out the time.
13 MR. COOPER: There is the further issue that
14 counsel for the Government has raised with us, but which has
15 not come forward clearly yet, and that is, after the document
16 production is complete at the end of April and after we get a
17 nonprovisional final privilege log, which we have been
18 assured is going to contain thousands of documents, after we
19 get that by the end of May, I have little doubt, frankly,
20 that the parties — that the Plaintiffs are going to dispute
21 some of the claims of privilege. And at that stage, we will
22 have a document-by-document arm wrestle with the Government
23 over that.
24 Our concern is this, Your Honor, and it has been
25 what we, at least, have understood to be the Government’s
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1 explicit position, that our depositions should not take
2 place, not only until the end of May and beginning presumably
3 in June with an end of June deadline, which you’ve just said
4 you will relax, but rather that the depositions, as far as
5 the Government is concerned, should not take place until all
6 privilege issues have been resolved.
7 And it is their position, as at least we understand
8 it, that if a deposition takes place before all privilege
9 issues are resolved and the Government feels it necessary to
10 instruct a witness not to answer because of a claim of
11 privilege and we contest that claim and the Court ultimately
12 agrees with us, that we will not have an occasion after that
13 because the Government will preclude our ability to possibly
14 re-empanel that witness and ask that witness about a document
15 that has just now come into our possession that we never had
16 before.
17 Now, the Court opened the hearing by noting that if
18 our purpose in these depositions is to question a witness
19 about a document or about documents and there’s substantive
20 knowledge of the case, on the topics and only the topics that
21 this Court has authorized us to inquire into, we understand
22 that, we accept those restrictions in deposition discovery,
23 no less than in document discovery. But if our purpose is to
24 do that and we don’t have a document because we’ve not waited
25 until the end of document discovery, well, then we’re taking
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1 that risk. We understand that. We understand that. We
2 won’t get a second bite at that witness with respect to a
3 document that is produced to us as responsive.
4 But what we can’t accept, Your Honor, and we can
5 find no authority that suggests we ought to accept, the
6 notion that if a deposition is taken before all privilege
7 issues have been resolved, as they almost always are, in my
8 experience anyway, it’s not at all infrequent that claims of
9 privilege come up in depositions.
10 THE COURT: You’re absolutely right.
11 MR. COOPER: Not at all infrequent. And those
12 claims get either resolved by the parties or they get brought
13 to you and you resolve it, and once it’s resolved, then with
14 — if the party disputing the claim of privilege prevails,
15 some new information comes forward. And then maybe it
16 warrants asking that witness more questions and bringing them
17 back together for that narrow purpose.
18 And, Your Honor, we’re just — we just want to make
19 sure — because we understand the Government to take a
20 position contrary to this, we want to make sure that we will
21 not be foreclosed here and now from coming back possibly if
22 nonprivileged information comes into our possession after
23 what we expect to be a lengthy period of disputing on
24 privilege issues. The Government expects and has said in its
25 papers here that it expects that to take months.
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1
2 privilege log that we have received, the provisional
3 privilege log, as the Court will recall from our last
4 conference, not even final, we haven’t got a single document
5 or final claim of privilege yet that we could bring to this
6 Court and get this process started, if we disputed it. And
7 maybe we won’t dispute these thousands of documents, but the
8 truth is we know we will because we’ve got 900 provisional
9 claims of privilege, and if they remain, there’s going to be
10 some disputes.
11 But after we get in the end of May thousands of
12 assertions of privilege over documents, we believe we’re
13 going to have meritorious objections to those claims to bring
14 to the Court. And, Your Honor, we do not think it is
15 feasible to delay depositions until all that is done. I know
16 of no precedent for doing that. And if the disputes over
17 privilege yield additional information and it warrants an
18 additional deposition, at least to the Plaintiffs’ mind, and
19 the Government resists, we’ll bring our complaint to you and
20 you’ll either agree with us or you’ll agree with them. But
21 that’s how these things work.
22 THE COURT: Well, just — well, let me just ask you
23 this. I mean, Mr. Schwind has represented to me that over
24 approximately 400,000 pieces of paper — I don’t think it’s
25 just been documents.
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We don’t doubt that it will if, in fact, the
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1 MR. SCHWIND: Pages.
2 THE COURT: Pages have been produced. Thank you.
3 Now, I could have a dedicated phone line for the time that
4 you’re going through depositions and you all can have me on
5 speed dial and I can just sit at my desk all day and do
6 nothing but rule on privilege, whether a document is
7 privileged. That doesn’t seem to be terribly — I understand
8 why the Plaintiff would be anxious to move forward with
9 taking the deposition, but isn’t it cleaner to have all the
10 documents produced and then determine what’s privileged and
11 what’s not by whether you were going seriatim and just taking
12 each document and making that determination where the parties
13 can agree as to what’s privileged and what’s not.
14 The general case, at least in my experience as a
15 litigator, was when a — it was not unusual to have a
16 document challenged at a deposition as being privileged, but
17 it was more the unusual case — and it wasn’t that there
18 would be a banker’s box full of documents that were going to
19 be challenged. It might have been one or two, three or four
20 at the most. Maybe that’s just my unique experience. But I
21 never — it was a rare occurrence that someone would go into
22 a deposition knowing that 45 documents were going to be
23 challenged and they would have to bring it to the judge that
24 day for a ruling.
25 MR. COOPER: And, Your Honor, I — forgive me,
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1 because I didn’t mean to suggest that scenario. The scenario
2 I expect is one in which we will not have those documents,
3 those 45 documents. We will not have them.
4 THE COURT: Right.
5 MR. COOPER: We’ll be taking a deposition, but we
6 will be — you know, again, the deposition discovery will be
7 delayed a period of months, according to the Government
8 itself, as the parties dispute over the validity of the
9 claimed assertion of privilege, assertions that we can’t
10 bring to you on a categorical basis —
11 THE COURT: Right.
12 MR. COOPER: — because the Government and we, you
13 know, can’t — we’ve only identified — the Government’s only
14 agreed to one categorical issue that could be resolved by the
15 Court in advance, and that simply isn’t going to narrow the
16 privilege issue. So, that’s off the table. We are — the
17 parties and the Court, unfortunately, are going to be going
18 through document-by-document assertions of privilege and
19 disputes.
20 And, so, we’d like to take depositions now or
21 promptly anyway, at least after the close of document
22 discovery, when they have said — they have produced all
23 responsive, nonprivileged documents to us. We have them all.
24 The only thing they’re not producing to us are the privileged
25 ones, the thousands of privileged ones. We’d like to begin
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1 depositions because if, again, deposition discovery is
2 delayed until all the disputes are resolved, that would delay
3 depositions months from now. And, Your Honor, that has very
4 real costs to the interests, we believe, in our professional
5 judgment, to our — to our — the interest that we’re here to
6 advance, our client’s interest.
7 So, the scenario, Your Honor, will be that there
8 will be documents that we don’t have to question a witness
9 about, but that months later, after a dispute has been
10 resolved and the Court perhaps resolves it favorably to the
11 Plaintiffs, we’ll come into the possession of a document or
12 documents that will then warrant a supplemental deposition to
13 ask the witness about those particular documents, a narrow,
14 focused deposition at that time. But this is not at all
15 unusual.
16 What we are — you know, we’re hopeful that the
17 Court will not suggest here or advise us, that it’s the
18 Court’s judgment, that if we take a deposition even after
19 document production is complete, but before the drawn-out
20 process of resolving privilege claims has been completed,
21 that any victories we may win in that process will — will do
22 us no good, at least in the sense that we won’t be able to
23 then potentially seek the Court’s permission to take a
24 supplemental deposition of a witness that we’ve already
25 deposed.
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1 THE COURT: What would you be gaining, Mr. Cooper,
2 by — rather than having the entire universe of documents
3 that you need to depose a witness, what good does it do to
4 move forward with that deposition?
5 MR. COOPER: Your Honor, we are very concerned
6 about the period of time that it has taken — that’s
7 discovery taken already. We’re at the one-year anniversary
8 of the discovery. We’ve had — now, we’re on our third
9 extension of time with respect to discovery. It may well be,
10 Your Honor, that the depositions we contemplate taking now,
11 we won’t — you know, what we can’t know is whether we will
12 find it necessary to come back to the Court and ask for a
13 supplemental deposition because of newly released and
14 disclosed information.
15 And, Your Honor, witnesses’ memories fade and these
16 events, particularly the events with respect to the third
17 amendment
18 witnesses
19 to — you
20 about the period of time that has taken place.
21 THE COURT: How much —
are — with every passing day, they’re fading and become unavailable and they become more difficult know, to schedule and we’re becoming very nervous
22 MR. COOPER: One thing I should say, that the
23 depositions that we have now agreed to schedule, the
24 Government has agreed to schedule with us, are depositions
25 that are limited to some FHFA personnel, three FHFA
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1 personnel. We identified them after the January 28th, I
2 think, status conference when the Government represented to
3 the Court and to us that FHFA document discovery was very
4 nearly complete, that there would be only one more document
5 production relating to FHFA documents.
6 And, Your Honor, we got a substantial document
7 production with respect to FHFA documents last week, late
8 last week. We assumed that FHFA document production was
9 done. We were informed this morning that that’s not
10 and, in fact, there are going to be more than one —
11 additional one that, on January 28th, the Government
12 represented was left. And, so, we focused on FHFA personnel
13 because we assumed that we would have the complete document
14 production with respect to FHFA personnel. And the only
15 thing left would be documents that they withheld on a claim
16 of privilege that may or may not come into our possession
17 down the road.
18 So, Your Honor, we — that sensible process is
19 exactly what occurred to us as well. But we — again, we are
20 very, very reluctant to delay deposition discovery. I’m put
21 in mind of an exchange — I’m sure you don’t remember this,
22 but an exchange that you and I had in — back in July of
23 2014, when we were arguing about the Government’s motion for
24 a protective order and when the Court put in place the order
25 — the confidentiality requirements that have governed
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1 discovery ever since. But the Court urged me to start taking
2 — just take depositions.
3 “THE COURT: Well, let me ask you this, with the
4 documents, what about just taking depositions of
5 conservators?”
6 And then I respond, “Well, we’re looking forward to
7 doing that.
8 “THE COURT: Wouldn’t that just resolve it? You
9 wouldn’t have to then ask for any internal documents. I
10 mean, do you get what you need to meet the ripeness
11 argument?” One of the jurisdiction arguments. “And take one
12 at a time, your choice.”
13 I responded, “Yes, but, Your Honor, we do
14 anticipate taking depositions and we’ve identified and the
15 Government has identified individuals to us who have the
16 relevant information in their possession. Before we take a
17 deposition, we believe that the discovery that the Court has
18 authorized is a necessary element of that.”
19 Then the Court responded, “Well, discovery —
20 obviously, it includes depositions.”
21 So, Your Honor, it’s — we’ve — now, it’s nine
22 months after that exchange and, yes, we’ve been anxious to
23 take depositions throughout those nine months. We believe
24 that our interests are being prejudiced now by not taking
25 depositions. And, so, we would like to move forward and we
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1 would plan to move forward unless the Court has an objection
2 to it. But, again, we — we are — we urge the Court not to
3 foreclose now, in advance, the possibility that the Court
4 might agree down the road that newly produced information
5 would warrant a supplemental deposition.
6 THE COURT: Well, no one has requested that I quash
7 a deposition. It sounds like what you all are looking for is
8 an advisory ruling, which judges don’t provide. But I
9 certainly — I don’t want to see witnesses inconvenienced.
10 MR. COOPER: Of course not.
11 THE COURT: However, if Plaintiffs can make an
12 argument at a later time as to why they need to — why it was
13 prudent to take the deposition, because I don’t know whether
14 someone is — no one has said that any of the witnesses are
15 gravely ill, but if to make sure that memories don’t fade any
16 more than they generally do. I don’t know whether or not you
17 would be able to wrap up the dispute with discovery within
18 just a few months. If you could, it would make sense to
19 perhaps wait on the depositions. If you can’t and it’s going
20 to be an extended time period, then I can understand why you
21 might want to move forward.
22 But since there’s only one of Mr. Schwind and his
23 other colleagues, then I don’t know, given the limited
24 resources they have, whether they can both be conducting
25 depositions and conducting document reviews and producing
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1 privilege logs. So, I don’t know. I guess you just have to
2 weigh what you think is best for your client and make the
3 prudent decision.
4 MR. COOPER: Your Honor — yes, Your Honor, I
5 appreciate that, and that is what we have been — obviously,
6 our guiding standard from the beginning and today. And,
7 again, if the only thing at work here is postponing the
8 depositions until the end of April when the Government has
9 represented it will have completed document production, then
10 that’s something we can live with. Postponing the
11 depositions until after, you know — you know, who knows how
12 long of litigating privilege disputes with the Court, that’s
13 something that is going to be very, very hard for us to live
14 with. But, you know, I hear the Court and I really don’t
15 have anything to add to those points.
16 THE COURT: Very good, thank you.
17 MR. SCHWIND: Thank you, again, Your Honor. I just
18 want to respond briefly to Plaintiffs’ assertion that we have
19 stated that the privilege challenge process was going to
20 involve months. We have never said that. In fact, the only
21 thing delaying discovery after May, after we hopefully
22 complete our privilege logs, is Plaintiffs’ challenge to
23 documents. So, it’s not our expectation that the privilege
24 challenge document will take months. It’s really up to
25 Plaintiffs what they choose to make of that process.
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1
2 proposing is the norm. We have time in this case to do
3 things in the right order. They haven’t put on any even hint
4 of prejudice, any demonstrated prejudice. We have time to do
5 things in the right order in this case and, again, I think,
6 as Your Honor has suggested, the right order is that
7 Plaintiffs have documents, then they do their depositions,
8 and we go forward after that. So, I just want to make that
9 point again, that how long this process takes, the privilege
10 challenge process is up to Plaintiffs. So, for Plaintiffs to
11 say it’s not fair to make them put off depositions until this
12 process is complete, well, they have control of that process.
13 THE COURT: Well, certainly, what you and Ms.
14 Hosford and Mr. Dintzer, going forward in the privilege logs,
15 I mean, it’s certainly — it’s not as though Plaintiffs are
16 in the driver’s seat. I mean, they have to review the
17 privilege logs that you provide and then determine what they
18 will challenge or what makes sense to them.
19 So — but what seems to me, at this stage, is that
20 it makes sense to wait until documents — the entire universe
21 of documents have been produced and then they can examine the
22 privilege logs and then make a determination of whether or
23 not it’s prudent to move forward. In the ideal world, they
24 would wait and review the privilege logs with you, determine
25 if perhaps you might have been overly conservative in
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So, we don’t think that what Plaintiffs are
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1 documents you’ve designated to be privileged, work out what
2 issues you can, then bring the remaining ones to me. I have
3 confidence that you all can resolve that on your own, but if
4 you need me to become involved, I’m happy to do so.
5 But that’s the ideal world. I don’t know
6 whether — but, again, I can understand from Mr. Cooper’s
7 perspective that if the process would take another eight
8 months or so, that that’s so far removed from the original
9 time line that the Plaintiffs will be concerned about
10 memories fading. But, you know, again, that’s a decision
11 that each counsel will make on behalf of their client as to
12 what is in their best interest. But I appreciate everything
13 that you and your colleagues have done in moving the case
14 forward and staying on top of the discovery issue.
15 MR. SCHWIND: Thank you, Your Honor. We’ll
16 continue to do so.
17 THE COURT: Thank you.
18 Mr. Cooper?
19 MR. COOPER: Thank you, Your Honor, as will we.
20 Thank you.
21 THE COURT: Okay, very good. Well, thank you very
22 much. I’m delighted that the two sides, while having very
23 differing views of the case certainly, seem to work very well
24 together despite, again, having different world views. But
25 if there’s something else that you think I can assist the
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1 parties in doing with regard to resolving any of the
2 privilege disputes, please bring that to me sooner than
3 later. It’s up to Plaintiffs as to how they want to conduct
4 the depositions, you know, what time line. You all are very
5 able counsel.
6 So, I — and I’m sure you will do what is in your
7 clients’ best interest, and then if the Government has a
8 different world view in terms of whether or not depositions
9 should have been taken at the time they were originally
10 taken, well then, I’ll deal with that when it comes.
11 Hopefully, we won’t go down that road, but whatever you need
12 to do on behalf of your client, I know you will. And
13 whatever you give me to resolve, I will resolve. So, thank
14 you very much and good morning.
18 a.m.)
MR. COOPER: Thank you, Your Honor.
MR. SCHWIND: Thank you, Your Honor.
(Whereupon, the hearing was adjourned at 11:46
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CERTIFICATE OF TRANSCRIBER
I, Sara J. Vance, court-approved transcriber, certify that the foregoing is a correct transcript from the official electronic sound recording of the proceedings in the above-titled matter.
DATE: 3/31/2015
s/Sara J. Vance
SARA J. VANCE, CERT
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The key statement from Judge Sweeney is “It’s up to Plaintiffs as to how they want to conduct the depositions, you know, what time line. You all are very able counsel.”
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Charles Gasparino interviews Mark Calabria on Fox Business on April 1, 2015
http://video.foxbusiness.com/v/4147734290001/fannie-and-freddie-breaking-the-law-/?playlist_id=933116651001#sp=show-clips
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Ignoring Rule of Law Imperils Financial System, Former FDIC Chair on IU Member Call
April 1, 2015
In the midst of the 2008 financial crisis, the government imposed a “tough deal” to shore up Fannie Mae and Freddie Mac and helped stabilize housing finance, but the government’s current actions are making it more likely there will be a another crisis and this one could be worse, warned former FDIC Chairman William Isaac on an Investors Unite conference call earlier today.
Mr. Isaac released a paper co-authored with former Sen. Bob Kerrey, “How the Fannie and Freddie Conservatorship Has Undermined the Resolution Process,” explaining the bad precedent set by the government when it enacted the Third Amendment Sweep in 2012. Isaac also highlighted his concerns in an op-ed published in today’s Wall Street Journal.
During the call, Mr. Isaac decried the lack of urgency on the part of regulators and policymakers in resolving the status of the GSEs from the conservatorship and diverting their capital to a variety of government budgetary needs.
“They are not toys for the government to play with,” he said.
During his chairmanship at the FDIC (1981-85), the nation’s seventh-largest bank – Continental Illinois – teetered on the edge of collapse. Within a few days of learning of the crisis, the FDIC moved to takeover the bank and set a new course for it; within the span of a few months, solutions, including a new Board of Directors, were in place, and over the next few years, the bank was reprivatized and eventually sold to Bank of America.
Beyond there being “no excuse” for the length of time the GSEs have been in limbo, Mr. Isaac said the government changing the terms of the deal it put into place in 2008 threatens the nation’s financial system.
“It’s not good policy. It doesn’t settle the market,” he said. “I’m always looking at the next crisis, and I don’t want to make the next crisis worse because of the actions taken during the current crisis.”
The specific actions he’s referring to are draining Fannie’s and Freddie’s capital reserves. In 2002, Fannie Mae had about $30 billion in equity and Freddie Mac had a similar level; by 2007, Fannie had increased that to $44 billion and Freddie was around $27 billion. Today, though, Fannie has just under $4 billion and Freddie is down to $2.6 billion. Those reserves will need to be replaced for the companies to be able to effectively operate in the market once the conservatorships end – something which should have happened years ago. That money, as we know, is going into the U.S. Treasury general fund where it’s being spent.
Investors Unite Executive Director Tim Pagliara, who hosted the conference call, called this “blatantly irresponsible.” In his opening remarks, Pagliara noted that at the time of the financial crisis, Fannie and Freddie were nearly 100-times leveraged; today, thanks to the illegal Third Amendment Sweep, they are 700-times leveraged with almost $5 trillion in liabilities.
An advisor to Investors Unite, Mr. Isaac commended Congresswoman Marsha Blackburn (R-TN) for recently introducing legislation that would place Fannie and Freddie into escrow until significant reforms are made. In his Wall Street Journal piece, Mr. Isaac wrote:
“Fannie and Freddie’s investors are justifiably outraged, and some of them have sued the government for its actions. But the public should also be concerned. By denying Fannie and Freddie the ability to accumulate capital, the government is putting taxpayers on the hook for any future losses they may incur.
“The Obama Treasury is ignoring the threat. A senior Treasury official, Michael Stegman, told a Goldman Sachs conference earlier this month that recapitalizing Fannie and Freddie would come at taxpayer ‘expense.’ The only logical reading of this analysis is that a dollar going to rebuilding capital is one less dollar going into the Treasury’s general fund. Mr. Stegman has it backward: The risk of another massive taxpayer bailout, arising from undercapitalization, is precisely why Treasury must end the net-worth sweep and allow Fannie and Freddie to emerge from the limbo of conservatorship.”
Mr. Isaac noted in both the op-ed and on the call that he supported the government’s “tough terms” when it effectively acquired ownership of 79 percent of the GSEs’ common stock. As structured, these terms avoided a complete government takeover of the GSEs and protected taxpayers from future bailouts but now, the Third Amendment sweep and inaction on the GSEs, it is the government that is not living up to the terms of the deal. And this sets a dangerous precedent, he warned.
“We’re losing sight of the rule of law, and the financial system won’t work without that,” he said.
Check the Investors Unite website in the coming days for a replay and transcript of the call.
About Investors Unite: Formed by Tennessee activist investor and CapWealth Advisors Chairman and CEO, Tim Pagliara, Investors Unite (www.investorsunite.org) 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.
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How the Fannie and Freddie Conservatorship Has Undermined the Resolution Process
By William Isaac and Senator Bob Kerrey | April 2015
Click to access Isaac.Kerrey-Fannie-Freddie-3.30.15.pdf
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A Step in the Right Direction for Fannie Mae and Freddie Mac Shareholders
Recently, a bill was introduced in the House of Representatives that would overhaul the way Fannie Mae (NASDAQOTCBB: FNMA ) and Freddie Mac’s (NASDAQOTCBB: FMCC ) profits are handled. While this won’t directly benefit the agencies or their shareholders right away, it could go a long way toward fixing both the agencies themselves and the current status of the shareholders, which many people believe isn’t exactly fair.
The bill and what it would do
Rep. Marsha Blackburn (R-Tenn.) introduced the bill in order to create a place to put Fannie and Freddie’s profits until Congress figures out what to do with the two government-sponsored enterprises. Basically, all of the agencies’ profits would be placed into an escrow account, rather than straight into the Treasury’s pocket as they have been since Fannie and Freddie became profitable several years ago.
For one thing, the bill could protect taxpayers from the need for further bailouts should the GSEs lose money. Under the current arrangement, 100% of the agencies’ profits, as well as a chunk of their reserves, are sent to the Treasury as a “dividend” payment for the bailouts they received. This is fine while the agencies are making billions of dollars, but what happens if another decline in the housing market occurs and the agencies are facing losses? Having several billion dollars in escrow could prevent the taxpayers from having to inject any more cash into Fannie and Freddie.
Why shareholders should be happy
It’s important to note that this bill wouldn’t actually change anything about the current state of Fannie Mae and Freddie Mac or their current conservatorship. The agencies still won’t be able to keep their profits as reserves or make any distributions to shareholders.
The newly created escrow fund wouldn’t be under Fannie and Freddie’s control. In fact, the bill clearly states that any reserve established under this act shall not be considered an asset of the enterprises, other than as part of a capital restoration plan once GSE reform actually takes place.
However, shareholders should still view this as a positive development. As I mentioned, all of Fannie and Freddie’s profits are currently given to the Treasury — an arrangement that many people argue is illegal. If capital were put into escrow, it could eventually be used to recapitalize the agencies and return them to an independent status.
Even under the most optimistic case for shareholders, the government has rights to about 80% of Fannie and Freddie, but 20% would certainly be better than 0%. Shareholders have made a solid argument that if the GSEs were allowed to recapitalize, shares could easily be worth 10 times what they are now.
What else needs to happen before shareholders get paid?
A creation of an escrow fund for Fannie and Freddie’s profits would certainly remove one obstacle to a solution for shareholders. However, there is still a long road ahead before shareholders could potentially see any returns from their investment.
There are currently several lawsuits pending against the current arrangement, led by activist investors such as Bill Ackman and Bruce Berkowitz. A favorable outcome could change the profit-sharing arrangement, but this is an uphill battle. One judge has already dismissed several of the lawsuits, and a separate judge is set to hear arguments on several others.
Regardless of what happens, shareholders should hope this bill makes its way through Congress. If shareholders are successful in challenging the current state of the companies, having billions of dollars of capital reserves in escrow will make Fannie Mae and Freddie Mac much stronger independent entities.
http://www.fool.com/investing/general/2015/04/01/a-step-in-the-right-direction-for-fannie-mae-and-f.aspx
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Fannie and Freddie May Need More Bailouts
The federal policy to ‘sweep’ the housing giants’ profits sets them up for more trouble.
By WIlliam M. Isaac
March 31, 2015 6:51 p.m. ET
The Inspector General for the Federal Housing Finance Agency (FHFA) recently reported that Fannie Mae and Freddie Mac might need more government bailouts if housing markets decline. The problem: lack of capital reserves to serve as a buffer against future losses.
The FHFA’s warning wasn’t the first. Last month on an earnings call, Fannie Mae CEO Tim Mayopoulos also warned that the company’s lack of capital “increases the likelihood that Fannie Mae will need additional capital from Treasury at some point.”
This problem is no accident: It is the result of a deliberate decision in 2012 by the Treasury Department to sweep Fannie’s and Freddie’s profits into the federal government’s coffer. Treasury’s “net worth sweep” is illegal and economically dangerous. It needs to end
It’s not difficult to understand concerns over another bailout of Fannie and Freddie. In 2008 Treasury rescued the mortgage giants from insolvency, ultimately with $187 billion of taxpayer money. Treasury was acting under the 2008 Housing and Economic Recovery Act, which created a framework for the government to decide what to do with the two companies.
The government could have put them into receivership, but nobody wanted the taxpayer to assume the $5 trillion in liabilities on the their balance sheets, and the U.S. needed to reassure bondholders (mostly foreign) that they weren’t about to be wiped out. And so, after being rescued, the two companies were placed into a conservatorship administered by the FHFA, with a mandate to “conserve and preserve” Fannie and Freddie for their shareholders while the companies rebuilt their capital.
Nearly seven years later Fannie and Freddie remain in conservatorship. As of Dec. 31, 2014, they have repaid the government $227 billion—roughly $40 billion more than they were originally loaned. Yet instead of allowing the companies to build a capital reserve like any large financial institution, the Obama administration is stripping both companies of 100% of their profits. This is based on a change to the conservatorship agreement made by Treasury in 2012 requiring Fannie and Freddie to pay a 100% dividend to Treasury each quarter.
The government had every right to impose harsh terms on private investors when it saved the two companies from failure in 2008. It did that by taking 79% of the company from private stockholders and taking senior preferred stock with a 10% dividend.
No problem so far. But for the government to come back four years later and unilaterally change the terms of its deal is troubling—and it will cause significant problems for regulators in getting the private sector to help in a future crisis.
Fannie and Freddie’s investors are justifiably outraged, and some of them have sued the government for its actions. But the public should also be concerned. By denying Fannie and Freddie the ability to accumulate capital, the government is putting taxpayers on the hook for any future losses they may incur.
The Obama Treasury is ignoring the threat. A senior Treasury official, Michael Stegman, told a Goldman Sachs conference earlier this month that recapitalizing Fannie and Freddie would come at taxpayer “expense.” The only logical reading of this analysis is that a dollar going to rebuilding capital is one less dollar going into the Treasury’s general fund. Mr. Stegman has it backward: The risk of another massive taxpayer bailout, arising from undercapitalization, is precisely why Treasury must end the net-worth sweep and allow Fannie and Freddie to emerge from the limbo of conservatorship.
Some would argue that recapitalizing Fannie and Freddie would itself present a threat to the taxpayer, given the troubled history of these institutions and the role they played in the financial crisis. This is a farcical argument: We can allow the two government-sponsored enterprises to recapitalize and then, if policy makers develop a better alternative, wind them down in an orderly liquidation process.
Policy makers can disagree about what future role there should be for Fannie and Freddie in housing finance. But there should be no disagreement about the need to observe and respect the rule of law.
Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is a senior managing director at FTI Consulting. He advises Investors Unite, a shareholder group opposed to the Treasury’s sweep of Fannie Mae and Freddie Mac profits.
http://www.wsj.com/articles/william-m-isaac-fannie-and-freddie-may-need-more-bailouts-1427842261
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February 3, 2015 Fairholme Capital Management Public Conference Call Bruce Berkowitz Transcript available at:
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March 31, 2015
MEDIA TELECONFERENCE
Former FDIC Chairman William Isaac to Present New Paper on Investors Unite Teleconference on Wednesday, April 1 at 2:00 p.m. EST
Isaac Says Fannie & Freddie Sweep by Government Flies in the Face of Law and Could Undermine Future Resolution Cases
WASHINGTON – On Wednesday, April 1 at 2:00 p.m. EST, William Isaac, former Chairman of the Federal Deposit Insurance Corporation (FDIC), will release a sharp critique of the federal government’s 2012 decision to sweep all of the profits of Fannie Mae and Freddie Mac to the Treasury.
In the paper Isaac details how the amended conservatorship of Fannie Mae and Freddie Mac has deprived the government sponsored enterprises (GSE) of their ability to rebuild capital and has put taxpayers at risk of being asked to fund another rescue of the mortgage finance giants.
Isaac will also explain how the government’s abrupt change to the terms of the 2008 Housing and Economic Recovery Act (HERA) sets a bad precedent because vibrant private capital markets depend on confidence that the government can be counted on to adhere to the rule of law.
Investors Unite Executive Director Tim Pagliara will host the media teleconference and Isaac will present his new analysis and will be available for questions from the media.
To join the teleconference, please RSVP to media@investorsunite.org. Those who RSVP will receive an advance copy of the paper ahead of the call.
WHO:
Tim Pagliara, Executive Director of Investors Unite and CapWealth Advisors Chairman and CEO
William Isaac, former Chairman of the Federal Deposit Insurance Corporation (FDIC)
WHAT: Media Teleconference: William Isaac Argues Fannie & Freddie Sweep by Government Changes the Rules of the Game
WHEN: Wednesday, April 1 at 2:00 p.m. EST
DIAL: Toll Free: (800) 288-8975
NOTE: Please RSVP to media@investorsunite.org
About Investors Unite: Formed by Tennessee investor and CapWealth Advisors Chairman and CEO, Tim Pagliara, Investors Unite (investorsunite.org) is a coalition of over 1,400 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.
http://investorsunite.org/former-fdic-chairman-william-isaac-to-present-new-paper-on-investors-unite-teleconference-on-wednesday-april-1-at-200-p-m-est/
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Were Fannie, Freddie Negotiations Done in Good Faith?
By Philip van Doorn | 02/27/14 – 01:21 PM EST
NEW YORK (TheStreet) — The battle over Fannie Mae (FNMA) and Freddie Mac (FMCC) is heating up, and it would appear that Mario Ugoletti will be very busy answering questions in court for the foreseeable future.
Ugoletti served as the U.S. Treasury’s director of the Office of Financial Institutions Policy and participated in the drawing up of the government’s agreement to bail out Fannie and Freddie, while later serving as a special adviser to former acting Federal Housing Finance Agency Director Edward Demarco and helping draw up the subsequent agreement through which nearly all of the government sponsored enterprises’ profits are being swept to the government, leaving private investors in the cold. Ugoletti now serves as a special adviser to FHFA Director Mel Watt, who assumed his post in January.
Ugoletti’s written testimony provided for a class action suit raises many questions about the government’s decision to take nearly all of the profits of Fannie Mae and Freddie Mac in the form of dividends, a well as the timing of the decision.
First, some background:
Fannie Mae and Freddie Mac, the two mortgage giants that together purchase the vast majority of newly originated mortgage loans in the United States, are known as the government sponsored enterprises, or GSEs. The GSEs at the height of the credit crisis in September 2008 were facing insolvency and were therefore taken under government conservatorship.
The GSEs are regulated by the FHFA, which is directly controlling Fannie and Freddie since they remain in conservatorship.
Under their original conservatorship agreements, the GSEs were required to pay the government annual dividends of 10% on senior preferred shares issued to the U.S. Treasury for bailout assistance.
Through the fourth quarter of 2011, Fannie Mae continued to make draws from the Treasury — that is, to borrow more — in part to cover the 10% dividends it owed to the Treasury, until the value of the Treasury’s preferred shares in Fannie increased to $117.1 billion.
Freddie made a small draw on the Treasury during the first quarter of 2012, bringing the government’s preferred stake in that company up to $72.3 billion. The Treasury in 2008 was also handed warrants to acquire up to 79.9% of the GSEs common shares, “for a nominal” payment, according to testimony provided by Ugoletti after being subpoenaed as part of a class action lawsuit brought against the government by a group of private investors — including Fairholme Funds — holding common and junior preferred GSE shares.
While their borrowings from the Treasury were growing, the GSEs didn’t issue additional senior preferred shares to the government. Instead, the value of the government’s preferred stakes in Fannie and Freddie grew from their initial values of $1 billion apiece.
So the Treasury’s stake in the GSEs has totaled $189.4 billion since the end of the first quarter in 2012, and both GSEs have been profitable since the second quarter of 2012. On August 17, 2012, after Fannie Mae reported second-quarter income of $5.1 billion and after Freddie Mac reported second-quarter income of $3.0 billion, The FHFA and the Treasury agreed on a “third amendment” to the original bailout agreements, through which all profits of Fannie Mae and Freddie Mac, save initial capital cushions of $3 billion for each GSE, would be swept to the Treasury.
To backtrack for a moment — the “second amendment” to the bailout agreements called for an “initial cap” on the Treasury’s investment in the GSEs of $200 billion, plus the amount of draws made through the end of 2012.
With the GSEs not only having returned to profitability but having stopped making draws on the Treasury, it was no surprise to see private investors suing the government for a seat at the table.
Fannie and Freddie both announced their second-quarter earnings this week, along with significant dividend payments to be made in March. Following the March payments, the GSEs’ dividends paid to the government will total $199 billion, exceeding the value of the Treasury’s investment over a period of roughly five years. That’s a fat return — far greater than the original 10% coupon on the government’s senior preferred shares — and there is no mechanism in place for either Fannie or Freddie to repurchase any of the government-held preferred shares.
A major portion of those dividends was made possible by the recovery of nearly $71 billion in deferred tax asset (DTA) valuation allowances by Fannie and Freddie during 2013, however, the GSEs are currently earning enough to have plenty of cash left over to rebuild their capital if they were paying the government the original 10% dividend, and would possibly be able eventually to begin paying back the government’s principal investment, if they were allowed to.
With so much money coming in from the GSEs, money which lowers the federal deficit, nobody in Washington has much incentive to do anything other than keep the status quo for as long as possible.
Shares of Fannie and Freddie were very strong on Wednesday and Thursday, after Judge Margaret Sweeney in the U.S. Court of Federal Claims ruled that the Fairholme lawsuit against the government could proceed to the discovery phase. The government had sought to have the Fairholme lawsuit thrown out.
This all brings us back to Mr. Ugoletti.
Windfall to Government
In his written testimony in December, Ugoletti said the third amendment to the bailout agreement in August 2012 — through which nearly all of Fannie and Freddie’s earnings are being swept to the government — was made to “resolve” concerns that the Treasury wouldn’t be able to maintain its commitment to support the GSEs.
The following is from Ugoletti’s written testimony:
Thus, the intention of the Third Amendment was not to increase compensation to the Treasury — the amendment would not do that — but to protect the Enterprises from the erosion of the Treasury commitment that was threatened by the fixed dividend.
It sure didn’t turn out that way. The Treasury has been paid much much more than the original 10% it was looking for.
Nobody Considered the DTA?
Ugoletti also said:
At the time of the negotiation and execution of the Third Amendment, the Conservator and the Enterprises had not yet begun to discuss whether or when the Enterprises would be able to recognize any value of their deferred tax assets. Thus neither the Conservator nor Treasury envisioned at the time of the Third Amendment that Fannie Mae’s valuation allowance on its deferred tax assets would be reversed in early 2013, resulting in a sudden and substantial increase in Fannie Mae’s net worth, which was paid to the Treasury in mid-2013 by virtue of the net worth dividend.
Ugoletti expects us to believe that a team of professionals, charged with managing two huge entities with combined balance sheets of $5.3 trillion in June 2012, hadn’t considered that the GSEs, having returned to profitability in the midst of the U.S. housing recovery, would be able to recover their deferred tax assets. It seems incredible that the FHFA would have overlooked such an important accounting item. The path toward DTA recovery should have been clear, because both GSEs were profitable during the second quarter of 2002, both had stopped increasing their borrowings from the government and both comfortably covered their 10% dividends to the Treasury for that quarter.
Were Their Backs Really to the Wall?
Ugoletti in his testimony also said:
By late 2011, analysts and key stakeholders, including institutional and Asian investors in the Enterprises’ debt and mortgage backed securities (MBS), began expressing concerns about the adequacy of Treasury’s financial commitment to the Enterprises after January 1, 2013, when the cap on the Treasury’s funding would become fixed.
OK, that’s a valid concern. However, the market hadn’t fallen out for Fannie or Freddie’s MBS by August 2012, when both GSEs were clearly profitable and after both had easily covered their second-quarter 2012 dividends. Why was there a rush to put the sweep of nearly all GSE dividends to the Treasury in place, when nobody’s back was to the wall?
The Federal Housing Finance Agency responded to a request comment from Ugoletti by saying the agency would be unable to comment.
Institutional investors holding junior preferred and common shares of Fannie and Freddie believe they are in a winning position, although they will to wait quite some time for the court cases to be resolved.
Following gains of 11% each on Wednesday, common shares of the GSEs were again very strong on Thursday. Fannie’s common shares were up 11% in afternoon trading to $4.96, while Freddie’s common shares were up 13% to $4.86, after that company reported its fourth-quarter earnings.
The GSEs’ junior preferred shares were also strong, with Fannie Mae’s preferred Series F shares (FNMAS) shares 9.6% to $12.05, and Freddie’s preferred Series Z (FMCKJ) up 6.8% to $12.34. Both preferred issues have face values of $25.00.
http://www.thestreet.com/story/12460239/1/were-fannie-freddie-negotiations-done-in-good-faith.html
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Bruce Berkowitz named names of senior Treasury officials joining FHFA. The PSPA and 3rd Amendment were not created at arms length! The truth should arrive in Deposition!
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You’re doing a fantastic commentary on this situation and I hope more people start supporting this blog.
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Thank you for your support. I’m hoping for the release of the GSEs sooner rather than later. I’m trying to do my part with this blog.
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The path forward for reform of Fannie Mae and Freddie Mac does not look promising.
As time passes since September 2008, the perceived urgency for reform seems to recede. Delay prolongs the uncertainty over the government’s future role in residential mortgage finance, which in turn is a deterrent to private capital re-entering the market, and makes the government’s role appear more difficult to replace.
[Delay also raises the likelihood that deeper reform will be judged as too difficult to accomplish, and raises the risk that the conservatorships are ended by returning Fannie Mae and Freddie Mac to private status with only minor changes to their charters.]
That is, the key recommendation of the U.S. Treasury and U.S. Department of Housing and Urban Development (2011) white paper – that Fannie Mae and Freddie Mac should be wound down – would in fact not come to pass.
This would be a colossal missed opportunity to put U.S. residential mortgage finance on a more stable long-term footing.
[Translation – Only Feasible Alternative is to Return Fannie Mae and Freddie Mac to Private Status with only minor Changes to their Charters]
See page 30 under Conclusions and the Road Ahead.
Click to access sr719.pdf
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