Latest Documents Confirm Government Scheme to Snag GSE Profits

- February 16, 2017

Here we go again. More documents and more evidence that government officials were saying one thing and thinking another with regard to the Net Worth Sweep.

Newly released documents demonstrate that just prior to implementing the so-called Net Worth Sweep to the Fannie Mae/Freddie Mac conservatorship in the summer of 2012, Treasury officials fully expected the companies to start generating substantial income. There was no “death spiral” as government lawyers subsequently asserted in court. There was just a tempting pot of money to use for whatever the Administration wanted.

So, can shareholders substantiate their claim that the Net Worth Sweep resulted in a “taking” of property without compensation, in violation of the 5th Amendment to the U.S. Constitution? With each new document released, the answer is unquestionably “yes!”

Among the latest documents, there is a July 20, 2012 email from Treasury Under Secretary for Domestic Finance Mary Miller to several senior Treasury officials and Brian Deese in the White House, which explained an attached document was, “…our collective thoughts on how to signal a plan to amend the PSPAs (preferred stock purchase agreements).” She noted Treasury Secretary Tim Geithner asked to see this as well.

Among the thoughts on how to “signal” the change were the following:

– Under the Net Worth Sweep “the taxpayer will benefit from all future earnings of the GSEs. Under the current framework we are limited to the 10% dividend.”

– “We believe the taxpayers will be in a better position to benefit from any GSE profits as they are wound down.”

– “Is the taxpayer in a worse off position?”

– “No – they are in a better position. Under the current arrangement Treasury’s upside was capped at the 10% dividend, now the taxpayer will be the beneficiary of any future earnings produced by the GSEs.”

Since enacting the Net Worth Sweep, the government has consistently claimed that its actions benefitted the U.S. taxpayer. But these documents demonstrate something else: There was no death spiral that the taxpayer needed to be protected from. The government knew that Fannie and Freddie were on the verge of becoming hugely profitable, and the officials who perpetrated the Sweep wanted that money. In perpetuating the sweep and draining the companies of their capital, the government actually placed the taxpayer at more risk. The government’s Orweillian claims about protecting the taxpayer are wearing thin, and we wonder how much longer they can credibly make this argument.

Further underscoring this point, in yet another document, Anne Eberhardt, of the outside audit firm Grant Thornton, emailed a document to government officials on June 29, 2012, that focuses, in part, on the “deferred tax assets” of Fannie and Freddie. This accounting sleight of hand has long been the focus of efforts to clarify how government officials assessed the financial condition of Fannie and Freddie. With an expected windfall as the companies returned to profitability, Treasury officials enacted the Sweep to get their hands on the cash instead of allowing Fannie and Freddie to use the assets to rebuild their net worth. Ironically, Geithner wrote recently in Foreign Affairs that the country is safer for now from a repeat of the 2008 financial crisis, partially because banks are required to have larger capital cushions.

The Eberhardt email is important because the government has consistently relied on financial information from Grant Thornton to argue its case in Court. Now unsealed material by Grant Thornton employees is helping to rebut the government’s arguments: Recall that among seven documents released last spring was a deposition from former Treasury official Mario Ugoletti regarding the deferred tax assets that, at best, raised serious questions about how transparent government officials were regarding their knowledge of the companies’ financial situation. Ugoletti may have committed perjury, but a more important question for the Justice Department is who else at Treasury has been misrepresenting the facts to Courts?

The Trump Administration inherited a conservatorship that has been dragged out and mismanaged and a legacy of embarrassing defeats in court. No doubt, incoming Treasury Secretary Mnuchin and other officials in the new Administration will be increasingly eager to come clean about the facts and distance themselves from the legal and financial mess the Obama Administration left behind.