Transparency Has Its Day in Court
A federal appeals court tore a new hole in the government’s shroud of secrecy as the U.S. Treasury siphons funds from mortgage giants Fannie Mae and Freddie Mac. With each new damning document released, the federal government’s argument deteriorates.
The government has fought aggressively to keep under wraps information regarding its seizure of the private companies in 2008 and expropriation of their profits in 2012. But with this unanimous ruling from the Federal Circuit Court of Appeals, transparency appears to be winning. And as more is exposed, the more it becomes clear that the government knew the two companies were valuable, but nevertheless destroyed that value by implementing the 2012 “sweep” amendment.
Like nearly every major financial institution, Fannie and Freddie faced acute distress during the financial crisis. In response, Congress advanced the two companies $187 billion in emergency funding and placed them under a conservatorship. As conservator, the Federal Housing Finance Agency is under a fiduciary obligation to marshal the companies’ assets for the benefit of all shareholders, which include private entities. But the government has violated that legal duty.
When the mortgage giants returned to profitability in 2012, the federal government negotiated with itself to amend its original agreement to “sweep” all of the companies’ profits into its coffers forever. Since then, the companies have generated more than enough cash to repay the cash infusion they received from the government during the downturn. The government, however, has “swept” an additional $63 billion on top of that. And with this month’s payments projected at another $10 billion, approximately $73 billion will have been siphoned out of companies beyond the emergency funding.
Rather than permit the companies to better recapitalize and create a substantial cushion to guard against the next downturn — or agree upon some other mutually advantageous solution — the government simply whisks away the companies’ profits to the U.S. Treasury. Fannie and Freddie have become government’s imprisoned cash cows.
Unsurprisingly, the companies’ private shareholders have turned to the courts for justice, arguing that the 2012 “income sweep” is an illegal seizure of their private property without just compensation. Like other investors who have filed dozens of other lawsuits, Fairholme Funds, a mutual funds company that is a shareholder in Fannie and Freddie, has battled the government to release materials related to the largely secret negotiations between different agencies of the federal government.
The government has asserted various privilege claims to keep confidential more than 11,000 documents, arguing that the information in the emails, draft memos, and other documents would destabilize the economy. This secrecy is so unusual that the New York Times intervened with the Court of Federal Claims requesting documents’ release. The government’s arguments are weak, especially when you consider that these materials — most between four and eight years old — are ancient history from the perspective of today’s markets. The courts agree.
Judge Margaret M. Sweeney of the Court of Federal Claims privately reviewed the secret documents and ruled that the government was unjustified in withholding the vast majority, ordering that they be released. And now the court of appeals has unanimously affirmed her decision (except for a small sub-set of privileged documents).
Attorneys for the investors are “confident that these documents will further discredit the government’s defense narrative,” as we shall see in the coming weeks. These examples are just the tip of the proverbial 11,000-document iceberg. With Judge Sweeney’s decision and this latest appellate ruling, it looks as though the courts will eventually order the release of the lion’s share. Rather than continue to play hide and seek with the court, it is time for the federal government to move towards greater transparency. Even as investors face legal setbacks on other fronts, it is imperative that the government’s actions be openly scrutinized.
The right to private property is a basic tenet upon which the United States was founded. Of the Declaration of Independence’s reasons for the American Revolution, a majority lament the King’s offenses against Americans’ private property. It is heartening to see the courts take on the federal government’s dereliction of its duties and defend private property as intended by our Constitution.
The government may have given into political pressures to siphon money from private investors, but we must insist on transparency and the rule of law if our economy — and our individual freedoms — are to flourish. That’s the American way.
Logan Beirne teaches financial markets and corporate law at Yale Law School. He is the CEO of Matterhorn Transactions, which provides M&A and credit deal analytics to legal and financial professionals across the US, UK, and Canada.