In 1986, famed Magellan Fund manager Peter Lynch touted Fannie Mae as “the best business, literally, in America.” At that time, Fannie Mae had a price-to-earnings ratio of one. Lynch noted that “when a company can earn back the price of its stock in one year, you’ve found a good deal.” Thirty years later, the price-to-earnings ratio of Fannie Mae is back at one – but the circumstances are quite different. In our view, current prices of Fannie Mae as well as its smaller cousin Freddie Mac do not reflect the economic value of existing assets, let alone future earnings power, embedded in these world-class franchises. Indeed, the companies are not priced for arun-off of their existing businesses; they are priced for the permanent expropriation of all assets.
Fannie Mae and Freddie Mac represent 16.4% of Fund assets, primarily in the form of preferred stock. For those unfamiliar, Fannie Mae and Freddie Mac are simple and straightforward insurance companies. They are not banks. There isn’t a local Fannie Mae or Freddie Mac branch on the street corner. Unlike the big banks, Fannie Mae and Freddie Mac did not commit any consumer fraud in the run-up to the financial crisis. The two do not originate mortgages and they do not deal directly with individual homeowners. However, when it comes to funding our nation’s housing market, Fannie Mae and Freddie Mac are mission critical. The companies have helped tens of millions of American families buy, rent, or refinance a home even during the toughest economic times when banks and other lenders shun mortgage risk. Bottom line: Fannie Mae and Freddie Mac are the housing finance system in America, and earn a nominal amount (less than 40 basis points) for ensuring that the venerable 30-year fixed-rate mortgage remains widely accessible and affordable.
During the 2008 financial crisis, Fannie Mae and Freddie Mac helped save America’s home mortgage system and resuscitated our national economy by continuing to provide liquidity when credit and insurance markets froze solid. According to a comprehensive analysis by Thomas Ferguson and Robert Johnson published in the International Journal of Political Economy, federal regulators explicitly directed Fannie Mae and Freddie Mac to initiate massive purchases of “home mortgages and mortgage bonds to stem declines in those markets and alleviate pressures on the balance sheets of private firms,” particularly “overburdened banks.” Then in 2012, Treasury’s decision to usurp all of the profits from each company in perpetuity (the so-called “Net Worth Sweep”) improved the federal budget deficit in an election year and avoided protracted debt ceiling negotiations with Congressional Republicans.
Roger Parloff’s recent Fortune magazine piece – “How Uncle Sam Nationalized Two Fortune 50 Companies” – details the de facto nationalization of Fannie Mae and Freddie Mac by the federal government and the determined effort by a handful of bureaucrats to hide the truth from the public:
For reasons that remain shrouded in secrecy to this day, the Treasury Department and the companies’ conservator, the Federal Housing Finance Agency (FHFA) – two arms of the same government – agreed to radically change the terms of what the GSEs would owe in exchange for the moneys they had already received. Instead of a 10% annual dividend on all the bailout funds drawn … the dividend was now to be set at 100% of each GSE’s net worth. One hundred percent. That is to say, any and all profit they posted. And this would be so in perpetuity … The two firms, on their way back to health, were effectively nationalized. The sudden change was called the “third amendment,” an innocuous-sounding designation that belies its momentous consequences … If this strikes you as, well, un-American, you’re not alone … The government’s alleged nationalization of two enormous corporations raises potentially landmark constitutional issues – comparable to President Harry Truman’s attempt to nationalize steel mills during the Korean War … Seven years into their conservatorship, the GSEs remain adrift, with shrinking capital reserves and no exit plan—a dormant, festering crisis … Documents and depositions from officials at Treasury and FHFA, obtained in discovery in a suit brought by Fairholme Funds, show that the government’s story is “highly misleading” in some respects and “outright false” in others, plaintiffs lawyers allege in court briefs … The lawyers can’t tell the media (or even their clients) specifically what the documents and depositions show, however. That’s because Court of Federal Claims Judge Margaret Sweeney has ordered those materials sealed from public view, at the government’s behest. Bewilderingly, the Justice Department has persuaded her that disclosure of that information—concerning a now three- to eight-year-old decision-making process of tremendous public interest—might cause “dire harm” and “place this nation’s financial markets in jeopardy” … The spectacle of a conservator wiping out shareholders just as the companies he’s supervising are about to have their best years in history simply doesn’t smell right. It’s hard to picture the Supreme Court letting it stand.
The market gyrations experienced during 2015 do not reflect our progress in halting Treasury’s unlawful taking of Fannie Mae’s and Freddie Mac’s assets. Indeed, newly discovered evidence – which shows the government’s defense to be outright false – was subsequently presented to the D.C. Circuit Court (under seal as required), and plaintiffs in other cases from the Northern District of Iowa to the Eastern District of Kentucky have now obtained these documents as well. We remain confident that Treasury’s deliberate effort to realign the equity of each company and allocate all profits to itself in perpetuity is strictly prohibited by federal and state law, and anticipate that several of these cases will be adjudicated this year.
Today, taxpayers own 79.9% of Fannie Mae and Freddie Mac. In this respect, taxpayers are fully aligned with private shareholders of these extremely valuable companies. In our view, anyone claiming that shareholders are seeking remuneration at “taxpayer expense” is peddling fiction. Only the disingenuous would assert that recapitalization of these companies would take decades and come at taxpayer expense, as if retaining earnings precluded the ability of each company to raise equity from private investors. Only those beholden to special interests would ignore the substantial reforms implemented at Fannie Mae and Freddie Mac over the last eight years and pretend that the companies are somehow doomed to repeat the past upon release from conservatorship. Only those who oppose the dream of American homeownership would attempt to dismantle President Franklin Roosevelt’s New Deal by eliminating two publicly traded, shareholder-owned companies that have single-handedly provided $7 trillion dollars – yes, Trillion – in liquidity to support America’s mortgage market since 2009.
Shareholders simply request that the Treasury Department respect the capital structure of each company, respect the economic bundle of rights associated with our securities, and respect the law setting forth the rules of a conservatorship as decreed by Congress. The economist Herbert Stein once famously said: “If something cannot go on forever, it will stop.” Sooner rather than later, we believe the Net Worth Sweep will be halted and a common sense solution will prevail: Fannie Mae and Freddie Mac will transform into low-risk, public utilities with regulated rates of return, just like your local electric company.
In late 2013, the Committee on Financial Services (Committee) initiated a review of the Obama Administration’s contingency planning in the event that the debt ceiling is not raised. The Committee’s efforts to obtain relevant documents from the Department of the Treasury (Treasury) and the Federal Reserve Bank of New York (New York Fed) were met with non-compliance, necessitating the issuance of subpoenas to both agencies. Almost two years after its initial inquiries, the Committee finally obtained copies of internal records of the New York Fed showing that Treasury has not been forthright with Congress or the American people concerning the Administration’s debt ceiling contingency planning. Specifically, these documents show that:
- Treasury is capable of prioritizing principal and interest payments on the debt and the New York Fed has been running “tabletop” debt ceiling exercises regarding these sorts of contingencies since at least March 2011.
- Treasury has sought to withhold from Congress and the American people information about the Administration’s contingency plans, for the purpose of pressuring Congress to acquiesce to the Administration’s position that any increase in the debt ceiling not be accompanied by spending constraints.
- Contrary to Treasury’s testimony before Congress that the Administration has never made any decision to prioritize debt payments, internal New York Fed documents reveal that Treasury was planning to prioritize payments during the debt limit impasses of 2013.
- Internal New York Fed documents reveal that both New York Fed and Federal Reserve Board employees objected to Treasury’s efforts to conceal the Administration’s contingency plans because concealing this vital information added unnecessary risk to an already volatile situation.
- Treasury appears to have actively obstructed the Committee’s investigation of this matter by directing the New York Fed to withhold information from the Committee for approximately two years.
The Committee is releasing this report to allow the American people and holders of U.S. Treasury debt to make informed judgments on this important issue.
These are the identical concerns at issue in the use of Executive Privilege in the litigation by shareholders of Fannie Mae and Freddie Mac. Clearly, the Third Amendment Sweep of the GSE’s profits, conceived and executed in the midst of the August congressional recess in 2012, created a revenue stream for the Treasury and strengthened its hand in budget showdowns with Congress. In a May 17, 2013 letter to congressional leaders Treasury Secretary Lew cited revenues from Fannie Mae and Freddie Mac as a way to essentially buy more time to allow the government to meets its obligations until Congress formally raised the debt limit.
The takeover of Fannie and Freddie was not a rescue. Unlike all commercial or investment bank interventions during the crisis, Treasury’s decision to force the Companies into conservatorship was not a response to any imminent threat of failure. Rather, it was a calculated policy decision by Treasury, made at a time of Treasury’s choosing and with ample advance planning. That decision—which resulted in the effective nationalization of Fannie and Freddie— was made without statutory authority and after Treasury overrode the Companies’ own regulator, the Federal Housing Finance Agency (“FHFA”), which had deemed them to be in compliance with their capital standards and safety and soundness requirements.
Below Schedules is Subject to Change without Notice.
Order Regarding Administrative Records on February 10, 2016
Treasury and FHFA to file an Administrative Record by Mar. 10, 2016 (?)
Treasury and FHFA will file renewed motions to dismiss by Mar. 18, 2016
Saxton Plaintiffs will file their objection by Apr. 18, 2016
Treasury ad FHFA will file their Replies by May 18, 2016
Revised Perry Appeals Court briefing schedule:
Appellees’ Brief Filed on December 21, 2015
Appellants’ Reply Brief (Class Plaintiff) filed on February 2, 2016
Appellants’ Reply Brief (Institutional Plaintiff) filed under Sealed on February 2, 2016
Deferred Appendix on or before February 16, 2016
Joint Appendix Volume II of V (This file is 12 MB)
Joint Appendix Volume III of V (This file is 24 MB)
Final Briefs on or before March 8, 2016
Oral Argument on April 15, 2016
Jacobs and Hindes Delaware Case Schedule:
Plaintiffs’ briefs completed January 15, 2016
Filing from January 15, 2016
Myron Steele on behalf of Jacobs and Hindes case, click here to view.
Myron Steele request to certify Questions for Supreme Court Ruling, click here to view.
- Does Delaware law permit preferred stock of a corporation to have a cumulative dividend right equal to the entire net worth of the corporation, payable quarterly in perpetuity, as provided in Section 2 of Fannie Mae’s Amended and Restated Certificate of Designation of Terms of Variable Liquidation Preference Senior Preferred Stock, Series 2008-2, dated September 27, 2012 (which is attached hereto as Exhibit A)?
- Does Virginia law permit preferred stock of a corporation to have a cumulative dividend right equal to the entire net worth of the corporation, payable quarterly in perpetuity, as provided in Section 2 of Freddie Mac’s Amended and Restated Certificate of Creation, Designation, Powers, Preferences, Rights, Privileges, Qualifications, Limitations, Restrictions, Terms and Conditions of Variable Liquidation Preference Senior Preferred Stock (Par Value $1.00 Per Share), dated September 27, 2012 (which is attached hereto as Exhibit B)?
Tim Howard, Fannie Mae’s former CFO, wants to file an Amicus Brief
FHFA’s reply briefs in support of their Motion to Dismiss due on or before February 16, 2016.
Treasury’s reply briefs in support of their Motion to Dismiss due on or before February 16, 2016.
Defendants’ response to the Application for Certification due on or before February 16, 2016.
Plaintiff’s reply in support of the Application for Certification due on or before February 26, 2016
Revised Fairholme Funds Sweeney Case Schedule:
Plaintiffs’ filed a Motion to Compel on November 23, 2015.
Plaintiffs’ Jurisdictional Discovery Extended. Estimated End Date March 31, 2016.
Depositions completed on January 14 and 20, 2016. Subject to Extension.
Defendant’s response to plaintiffs’ Motion to Compel completed under sealed on January 21, 2016.
A joint status report completed on January 28, 2016.
Plaintiffs’ Redacted reply to Defendant’s Motion to Compel response completed under sealed on February 1, 2016.
*****Fairholme Sweeney Case Schedule Update*****
Schedule for consolidated briefing of motions to dismiss the complaints in this case and the related actions.
- Plaintiffs in this and the related cases may file amended complaint(s) no later than 45 days after the Court’s resolution of plaintiffs’ pending Motion to Compel (ECF No. 270) unless the Court should permit further discovery by the plaintiffs.
- Defendant will file an Omnibus Motion to Dismiss seeking dismissal of this and all related actions before this Court no later than 120 days after the expiration of the period for filing the amended complaint(s);
- Plaintiffs in this case will file their response to Defendant’s Omnibus Motion to Dismiss no later than 90 days following the filing of the Omnibus Motion to Dismiss, and plaintiffs in each of the related cases will be permitted to file their own separate response to Defendant’s motion also within 90 days following the filing of the Omnibus Motion to Dismiss;
- Defendant will file a reply in support of its Omnibus Motion to Dismiss no later than 90 days following the filing of response(s) to the Omnibus Motion to Dismiss in this and related cases.
Assuming discovery draws to a close on Mar. 31, 2016, the “estimated timetable” would be:
- Plaintiff Amended Complaints around May 15, 2016;
- Defendant Omnibus Motion to Dismiss around Sept. 12, 2016;
- Plaintiff Responses to the Omnibus Motion to Dismiss around Dec. 11, 2016;
- Defendant Reply in support of Omnibus Motion to Dismiss around Mar. 11, 2017;
- Judge Sweeney’s decision on Omnibus Motion to Dismiss some time thereafter.