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Judge Seeks More on GSE Profit Sweep

Gavel Three BHDepositions unsealed last month showed that key officials at the GSEs may have known they were about to be profitable in 2012. Now the judge wants to see more.

A federal judge ordered the unsealing of seven previously sealed depositions related to the sweeping of GSE profits into Treasury (the Net Worth Sweep) with results that sparked an industry-wide discussion over whether the government knew that the GSEs were about to become profitable in 2012 at the time the Net Worth Sweep was enacted.

Now Judge Margaret Sweeney in the U.S. Court of Federal Claims, who is presiding over Fairholme Funds’ lawsuit against the government over the Net Worth Sweep, has stated that she wants to review all the documents that the government has kept private to this point regarding any litigation over the government’s conservatorship of Fannie Mae and Freddie Mac, according to a blog post from Investors Unite is a coalition of private investors committed to the preservation of shareholder rights for all invested in the GSEs.

Fairholme Funds, a Florida-based mutual fund that is one of the biggest GSE investors, sued the government in 2013 over the profit sweep, and the suit is still pending. Fairholme’s suit is one of approximately two dozen lawsuits filed against the government by shareholders of Fannie Mae and Freddie Mac over the Net Worth Sweep.

Judge Sweeney made clear in unsealing seven documents last month that sparing public servants from embarrassment is not a reason to hide the operations of government from the public,” the blog post on Investors United reads. “Indeed, these recent revelations go to more serious issues at the heart of litigation over the Sweep—the rule of law and transparency in government.”

The question of whether or not the government was invoking executive privilege by keeping documents related to the Net Worth Sweep sealed was first brought up by U.S. Sen. Chuck Grassley (R-Iowa) in April 2015. The topic was recently revisited in a white paper by law professorSaikrishna Bangalore Prakash.

“Indeed, these recent revelations go to more serious issues at the heart of litigation over the Sweep—the rule of law and transparency in government.”

Investors Unite

According to Investors Unite, the documents released in the last two weeks contain even more hints that government officials knew about the pending profitability of the GSEs when the bailout agreement was amended in August 2012. The blog post cites Jim Parrott, who in 2012 was a senior adviser in the White House on housing policy, sending an email to senior officials at Treasury the day the Net Worth Sweep was announced stating that diverting Fannie's and Freddie's profits would eliminate “the possibility that they ever go (pretend) private again.”

Lawyers for the government have claimed that the GSEs were in the midst of a “death spiral” in the years immediately following their combined $187.5 bailout in 2008, and that the Net Worth Sweep was enacted in order to protect taxpayers. Investors Unite notes, however, that the newly unsealed documents point out that in 2012 just before the Net Worth Sweep began, Fannie Mae executives characterized the next eight years as the the golden years of GSE profitability.”

Indeed, 2012 was the first year of profitability for the GSEs after the bailout and they have remained profitable since (though Freddie Mac has taken a loss in two of the last three quarters). Under the pre-August 2012 terms of the bailout agreement, the GSEs were required to pay only a 10 percent dividend on their draw from Treasury.

The documents that Sweeney has ordered unsealed in the last two weeks can be viewed by clicking here.


About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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