fter the Housing Crisis, a Cash Flood and Silence
FEBRUARY 14, 2015
Fair Game
By GRETCHEN MORGENSON
On Aug. 17, 2012, the federal government began expropriating all the earnings of Fannie Mae and Freddie Mac, the mortgage finance giants that succumbed to the 2008 crisis.
Now the government is taking extraordinary measures to keep secret the deliberations surrounding that action. What exactly is it trying to hide?
That is the question being asked by a Fannie and Freddie shareholder who has sued the government over the 2012 profit grab. The investor contends that the move amounted to an improper taking of its property; the government disagrees.
Margaret M. Sweeney, a judge in the Court of Federal Claims, will determine who is right. But in the meantime, consider the remarkable secrecy demands that the government has made in the matter.
Previously undisclosed court records show that the Justice Department has asserted presidential privilege to prevent 45 documents from being produced. These materials — emails, draft memos and news releases — were created by officials at the Treasury Department and the Federal Housing Finance Agency, the overseer of Fannie and Freddie since they collapsed in 2008.
There’s no doubt the taxpayer bailout of Fannie and Freddie in September 2008 was a political nightmare. For decades, the companies had maintained that their mortgage operations posed no risk to taxpayers; their pals in Congress echoed this refrain.
But then came the mortgage debacle, and taxpayers had to shore up the companies with $187.5 billion.
Initially, Fannie and Freddie had to pay interest on the loan. But in August 2012, the Treasury and F.H.F.A. abruptly changed the agreement; under the so-called third amendment, the government began sweeping all the companies’ profits into the Treasury.
Since then, Fannie and Freddie have been immensely profitable. As of last December, the Treasury had received a total of $225.4 billion from the companies. An additional $153.3 billion in receipts from Fannie and Freddie could be generated through fiscal year 2025, according to estimates in the 2016 budget offered by the president.
The initial $187.5 billion loan remains outstanding, however, because of the deal’s structure.
Watching these profits pour into the Treasury, shareholders cried foul. Contending the sweep was unjust, one of those with large stakes in both Fannie and Freddie securities — the Fairholme Fund — sued the government in July 2013. From the outset, the government demanded extreme secrecy in the case. Lawyers at the Justice Department secured confidential treatment of almost all the 150,000 pages of documents submitted by the Treasury and F.H.F.A. by late January. Even the plaintiff bringing the case is barred from viewing these documents; only its lawyers can see them.
The government has also fought every discovery request made by the Fannie and Freddie shareholder. Officials at the Treasury and F.H.F.A. claim that disclosure of documents relating to their actions would destabilize the economy and financial markets and raise mortgage rates.
Really? The documents the judge has ordered the government to produce were created three to seven years ago. How could they unsettle the markets now?
Even more intriguing, though, is the Justice Department’s broad assertions that 669 of the documents it must produce are subject to various privileges and not to be disclosed. The government even claimed that privileges applied to documents it had not yet reviewed, court records show.
According to previously undisclosed logs filed as part of the case, most of the documents are said to be covered by attorney-client privilege or deliberative process privilege, which protects intragovernment communications before a final decision is made in a matter.
But the government has invoked presidential privilege on 45 documents created either by officials at the Treasury or the F.H.F.A., the regulator charged with conserving Fannie and Freddie’s assets and stabilizing the institutions “with the objective of returning the entities to normal business operations,” as its website states.
The privilege logs, which are not confidential and were obtained by The New York Times, offer clues about what the government does not want revealed.
Logs filed in mid-January, for example, list 231 Treasury documents the government claims are subject to privilege. The 38 items subject to presidential privilege include emails, news releases, memos and even news summaries circulating between officials at the Treasury and the White House about changing the terms of the companies’ loan repayment.
Logs involving F.H.F.A. materials show 438 documents subject to privilege. Seven assert presidential privilege. Additional logs asserting privilege are expected.
I asked the Justice Department why its privilege claims were so extensive. Emily Pierce, a Justice Department spokeswoman, said the logs show only provisional determinations of privilege and that they could change as the issues are narrowed in litigation.
In a Jan. 28 letter to investors, Bruce Berkowitz, Fairholme’s managing member, questioned the broad sweep of the government’s claims to secrecy.
“Why are F.H.F.A. and, particularly, Treasury resisting discovery so fiercely?” he wrote. “Is it because the document trail directly implicates some of the president’s most senior advisers in the White House?”
Fairholme officials and their lawyers declined to comment further about the case.
The question that Mr. Berkowitz raised is more than fair. The problem with the apparent involvement by Treasury and White House officials in the decision to commandeer Fannie’s and Freddie’s earnings is that by congressional statute, the F.H.F.A. is supposed to be an independent agency, tasked by law to protect the safety and soundness of the companies. Letting the companies’ profits flow to the Treasury had the opposite effect. Allowing them to rebuild their capital with profits after they repaid the taxpayer seems more like it.
If the government has its way, we may never know what involvement executive branch officials had in changing the Fannie and Freddie agreement. But recall what was going on in mid-2012. The presidential election was in full swing, and Democrats and Republicans were clashing over the debt ceiling. That May, in a shock to many, Fannie and Freddie reported profits from their operations for the first time since the mortgage crisis. The amount: $4.5 billion. And plenty more was to come.
Certainly, giving the Treasury access to billions of dollars in the companies’ profits during this time provided financial flexibility to the executive branch that Congress might not otherwise have approved.
Whatever the case, it is disturbing that the government goes to such lengths to shroud the details of the profit-sweep decision. It reminds me of a comment made by Ferdinand Pecora, the hard-driving prosecutor who investigated Wall Street’s role in the crash of 1929. In his memoir, “Wall Street Under Oath,” he wrote: “Had there been full disclosure of what was being done in furtherance of these schemes, they could not long have survived the fierce light of publicity and criticism.”
Mr. Pecora was writing about the banking practices of the time. But his assertion resonates today.