Released Court Documents Send Fannie, Freddie Shares Soaring
By JOE LIGHT
Apr 12, 2016 2:03 pm ET
A federal judge on Monday unsealed some evidence in a case regarding the government’s treatment of the profits of mortgage-finance giants Fannie Mae and Freddie Mac, a move that sent shares of Fannie and Freddie up around 10% as of early afternoon Tuesday.
The cases surround the government’s August 2012 decision to sweep Fannie’s and Freddie’s profits. Investors in the companies’ preferred and common shares sued the government, claiming it was illegal.
One of the points of contention has been whether the government before implementing the profit sweep anticipated that the companies would soon report high profits. Some government officials have maintained that the profits were not anticipated or that it was unclear.
However, in an excerpt of a deposition unsealed Monday, ex-Fannie Mae chief financial officer Susan McFarland said she had met with Treasury officials on August 9th, 2012, days before the change to the bailout terms, and told them that Fannie would be profitable for the foreseeable future.
Ms. McFarland said she “even mentioned the possibility that it could get to a point in the not-so-distant future where the factors might exist whereby the allowance on the deferred tax asset would be released. We were not there yet, but, you know, you could see positive things occurring.”
As of early afternoon Tuesday, shares of Fannie and Freddie had risen about 10%.
The released portions of Ms. McFarland’s testimony are supportive of shareholders’ claims but are unlikely to be dispositive.
On August 8th, the day before Ms. McFarland said she met with Treasury officials and discussed the possible release of Fannie’s deferred tax assets, Fannie Mae reported earnings. In that report, Fannie officials said they “expect that, over time, our dividend obligation to Treasury will increasingly drive our future draws under” the bailout terms.
The shareholders’ attempts to reverse the decision to sweep profits have so far been unsuccessful. In 2014, Judge Royce Lamberth dismissed a case brought by shareholders, including Perry Capital LLC and Fairholme Funds Inc., stating in part that even assuming the shareholders’ narrative of events was true, the government could still change the terms.
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