$FNMA #FANNIEGATE

Whitney Tilson: Gretchen Morgenson’s article on Fannie Mae and Freddie Mac

2. A great article by Gretchen Morgenson in today’s NYT about the government’s secretive, outrageous and illegal decision to implement the profit sweep re. the GSEs, and the attempts to cover up what they did afterward. I think courts are very likely to reverse this, which is why I’m long Fannie:

The August 2012 profit sweep surprised investors, but documents show that it came long after Treasury officials had indicated privately that they wanted to ensure Fannie and Freddie shareholders would receive none of the companies’ future profits.

A December 2010 memo to Mr. Geithner from Jeffrey A. Goldstein, undersecretary for domestic finance, referred to “the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the G.S.E.s in the future.”

It is impossible to predict how the judges overseeing the shareholder lawsuits against the government will rule on the Fannie and Freddie matters. But some investors are hopeful.

Joseph “Woody” Woodruff is a longtime Fannie Mae shareholder who was elected to the state circuit court in Tennessee last year after practicing law for decades.

“The federal government entered into a legal arrangement with the G.S.E.s that contained certain undertakings and fiduciary obligations,” Mr. Woodruff said, stressing that he was speaking as an investor, not as a judge.

“Then it unilaterally rewrote the terms of the relationship and began in a very lawless manner sweeping the profits and transferring them to the Treasury,” he added. “What’s up with that?”