(CN) — A federal judge has ordered the government to turn over documents related to its decision to permanently divert billions of Fannie Mae and Freddie Mac profits from investors to the U.S. Treasury following their $188 billion bailout in 2008.
Fairholme Funds is an investment fund run by Bruce Berkowitz. Mr. Berkowitz was named domestic equity fund manager of the decade by Morningstar Inc. in 2010, but since then his fund has massively underperformed the S&P 500 by nearly 12 percent annually, according to Seeking Alpha.
Part of the fund’s losses are due to its large holdings in Fannie Mae and Freddie Mac.
Value of preferred shares of the mortgage giants has dropped by more than half since Fairholme lost its federal lawsuit challenging the government’s 2012 amendment to the 2008 bailout terms. The amendment diverted Fannie and Freddie profits to the U.S. Treasury and eliminated dividends that normally go to private investors.
Investors described the amendment as requiring “Fannie Mae and Freddie Mac to pay a quarterly dividend to Treasury equal to the entire net worth of each enterprise, minus a small reserve that shrinks to zero over time.”
At the time of the amendment, Fannie and Freddie had received a $188 billion government bailout to avert collapse during the subprime mortgage crisis. Insolvent at the time, their profits have since rebounded and the government allegedly collects an annual dividend of $18 billion while private stockholders get nothing.
Fairholme’s Fifth Amendment takings claim continues in the Court of Federal Claims.
Berkowitz has spoken publicly in strong terms condemning the government’s conduct in changing the terms of the bailout. He said the lawsuit attacks “the government’s indefensible decision to enrich itself by putting Fannie and Freddie on the permanent brink of insolvency.”
In an opinion filed under seal September 20 and made public on Monday, U.S. Court of Federal Claims Judge Margaret Sweeney granted Fairholme’s motion to compel discovery in its entirety She rejected the government’s argument that the fund was just “picking the lint” of its massive document production.
Fairholme seeks documents from the Federal Housing Finance Agency regarding whether Fannie and Freddie were anticipated to be solvent in the future at the time of the amendment, how long the conservatorship was expected to last, and the reasons for the government’s decision to claim a dividend equal to the companies’ entire net worth.
The agency sought to withhold the requested documents under the deliberative process privilege, the presidential communication privilege, and the bank examination privilege.
One by one, Sweeney rejected all of the government’s reasons for keeping the documents privileged.
The documents include analysis prepared by BlackRock regarding Fannie Mae’s loss and capital projections, draft memos containing deliberations related to mortgage finance market reform proposals, memos from senior White House advisors to the president regarding housing policy ideas, and memos prepared by Treasury staff regarding the future of Fannie and Freddie.
“Plaintiffs’ evidentiary need for the information outweighs defendant’s interest in preventing the documents’ disclosure” because the information directly “implicates both the court’s jurisdiction and the merits of the case,” Sweeney said.
With regard to Fairholme’s demand for memos from senior White House advisers to the president about the conservatorship of Fannie and Freddie, Sweeney said the funds need for this information is “overwhelming” and “paramount.”
“The gravamen of plaintiffs’ complaint is that their property – the dividends due on their noncumulative preferred government stock and their right to receive a liquidation upon the enterprises’ dissolution, liquidation, or winding up – was taken without just compensation in violation of the Fifth Amendment to the United States Constitution. These documents are communications among the president’s senior advisers regarding housing reform policy as it specifically relates to the enterprises,” she said.
The judge further noted that the fund has no other way to access this evidence, and releasing it is unlikely to chill policy discussion among government employees as it is subject to a protective order.
Berkowitz praised the ruling in an emailed statement.
“Judge Sweeney’s decision to grant our motion to compel in its entirety is a very favorable development. Finding no clear reason in favor of extraordinary secrecy, Judge Sweeney astutely recognized that the government’s attempt to hide thousands of documents is unjustifiable, for the work of our government must withstand public scrutiny,” he said.
Fairholme Funds counsel Chuck Cooper also praised the ruling, with which “the court has taken a long stride in its mission to find the truth,” he said.
“Judge Sweeney’s ruling confirmed that the government has improperly withheld critically relevant documents from discovery in its ongoing attempt to shroud the government’s adoption of the New Worth Sweep in secrecy,” Cooper said.
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