Troll Alert: The @WSJ ‘s Latest on GSE Litigation

Consider this, the US government is seeking to withhold over 11,000 documents from investors suing them over 2012’s net worth sweep (they are saying 77,000 can never be seen by the public). Why? Clearly whatever is in those documents undermines or even destroys the defense they have laid out.

Now, further consider the reasoning they are giving for doing this.  They are saying the documents fall under the “deliberative process” and “executive privilege” …

Additionally consider those two defenses are only reserved for the government. If the GSE’s are deemed not government entities but private ones and the FHFA “stepped into their shoes” in 2008 (meaning they stepped into a private company’s shoes) then consider the government’s sole defense for withholding those 11,000 damaging documents is now gone

Keep that in mind when you read the below and consider the utter and total absurdity of it….

The government’s sole defense for keeping damaging documents hidden has been rejected by two courts now……..and this is bad for shareholders??????????

Judge Sweeney has said the government “can’t have it both ways” as they’ve argued that FHFA is both the government and private entity.  These courts are making her decision to force the government to turn over damaging docs very easy. The government actually had settlement negotiations last fall with plaintiffs, just watch how fast they re-engage when Sweeney rules against them here. The government had been paid back in full with a hefty profit and still owns 79% of the GSE’s via warrants ( when they exercise them). Settling is the far better choice vs explaining away what is in those documents they desperately want to hide

I’ve said it for some time now gang, the WSJ is just trolling for page views in its coverage of the GSE litigation. If the below does not dispel any doubts you might have had……..god help you. I’ve ignore them for the past 6 months or so but this was just too easy to respond to…

I’ve disagree plenty with the tripe they penned on the litigation to date but this is the first time I thought I was reading an “Onion” article….

March 6, 2016 12:55 p.m. ET

The U.S. government keeps racking up wins in legal cases involving Fannie Mae and Freddie Mac. That is bad news for investors challenging terms of their bailouts, namely a profit-sweep arrangement with the Treasury Department.

A crucial question in many cases brought in various federal courts is the independence of the Federal Housing Financial Authority in dealings with the mortgage companies and the Treasury Department. Shareholders’ lawyers have said statutory provisions barring courts from second-guessing the FHFA’s decisions as a conservator should be ignored if the agency was acting at Treasury’s behest.

But two different federal courts recently handed down rulings rejecting similar claims that the FHFA is an agent of the U.S. government.

On Tuesday, a federal judge in Virginia dismissed a case brought by Meridian Investments over a proposed sale of low-income housing tax credits by Freddie. While Meridian Investments Inc. v. Federal Home Loan Mortgage Co. didn’t directly involve investors in Fannie or Freddie, it strikes at the heart of one of the most closely followed investor lawsuits.
Shortly after Freddie was taken into conservatorship, Freddie and Meridian entered into negotiations for the sale of tax credits. Freddie ultimately backed out, citing Treasury’s rejection of a similar sale by Fannie. Under their bailout terms, Fannie and Freddie can’t sell assets without such permission.

A key question in the case was which statute of limitations should apply. If the deal was between a private party and a U.S. government agency, the federal government’s six-year statute of limitations would apply and the case could go forward. If it were between two private parties, Virginia’s five-year limit would apply.

Obviously, the FHFA is a federal agency. But citing several earlier cases, the court held that when the FHFA is acting as Freddie’s conservator, it steps into the place of a private company. Likewise, Freddie doesn’t count as a government agency just because it is under FHFA control.

What about Treasury’s role? Meridian argued the terms were so favorable to Freddie, the company and the FHFA must have been acting as agents for the Treasury, not independently. If the Treasury ordered the FHFA to reject the deal pursuant to taxpayer interests, the FHFA and Freddie should be treated as government actors, Meridian argued.

The court rejected this, saying the FHFA didn’t seek Treasury consent because it was an “instrumentality” of the government or agent of the Treasury. It sought consent as conservator because Freddie had a contractual obligation to the Treasury.

Two weeks ago, the U.S. Court of Appeals for the Ninth Circuit reached a similar conclusion for purposes of the False Claims Act. The plaintiffs in U.S. ex Rel. Adams v. Aurora Loan Services had argued FHFA control made the companies “government agencies.” The court said this was backward: The conservatorship puts the FHFA into their shoes as private companies.

These decisions are likely to weigh heavily against investors suing to block the Fannie and Freddie profit sweep in the U.S. Court of Federal Claims, which hears cases against the federal government. Judge Margaret M. Sweeney has said her court’s jurisdiction depends on the question of whether “the FHFA was an agent and arm of the Treasury.” If not, the court wouldn’t have jurisdiction.

While the other decisions aren’t binding on the Court of Claims, they carry what is known as “persuasive authority” and may influence Judge Sweeney’s decision.

Not everyone agrees these decisions are terrible for Fannie and Freddie shareholders. Some have found solace in the idea Fannie and Freddie are still considered private companies.

But this overlooks the fact the Virginia decision vindicated arguments made by the FHFA, which is opposing the shareholder lawsuits. It is unlikely the FHFA’s lawyers scored a victory in the Meridian case only to hurt their own position in the larger Fannie and Freddie investor cases.

History suggests investors should pay close attention to such decisions even though they aren’t directly related to the shareholder suits. The dismissal of one such lawsuit by Judge Royce Lamberth in 2014, which led to a significant fall in Fannie’s and Freddie’s shares, was foreshadowed by a number of smaller government victories.

The legal currents continue to run against Fannie and Freddie shareholders.

To see more posts on any of the companies mentioned in this article, enter their stock ticker symbol in the search box.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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