Economy & Business

Let the Sunshine of Disclosure Disinfect Fannie Mae Litigation

Investors in the mortgage giants deserve a chance to make their case.

In the coming days and weeks, federal judge Margaret Sweeney will rule on a motion to compel the federal government to disclose tens of thousands of documents sought by Fairholme Funds Inc. related to the federal conservatorship of Fannie Mae and Freddie Mac. The government’s attempt to shield these documents via a claim of executive privilege looks absurd, especially since the documents may reveal wrongdoing on the part of the Treasury Department. Let’s hope Judge Sweeney forces the government to turn those documents over.

The suit had its origins in 2008, when the federal government moved to prevent the collapse of the federally chartered enterprises Fannie Mae and Freddie Mac, which buy mortgage loans from banks and bundle them into securities that are sold to investors. This is aimed at helping to keep markets liquid so that banks can make more home loans. That year’s Housing and Economic Recovery Act provided Fannie and Freddie with billions in public funds and placed them in conservatorship under the authority of the newly established Federal Housing Finance Agency (FHFA), but did not eliminate the interests that private shareholders had in Fannie and Freddie. In 2012, when the companies began generating profits again, Treasury Department officials negotiated what has become known as the Net Worth Sweep. The Net Worth Sweep diverts nearly all net income from both enterprises to the Treasury. Thus Fannie and Freddie have sent over $241 billion to the Treasury, leaving Fannie and Freddie shareholders out in the cold.

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In 2013 Fairholme Funds filed a federal suit, alleging that the government exceeded its authority and ignored the law’s requirement to conserve the assets of the enterprises. Essentially, Fairholme Funds, Inc., et al. v. United States, et al. alleges that FHFA and the government engaged in illegal takings. The Treasury likely wanted to use the revenues to strengthen its hand in budget negotiations and hoped ultimately to wind down Fannie and Freddie, so the rights of shareholders were apparently an afterthought. The legality of the Sweep and the implications for shareholders, taxpayers, capital markets, and homebuyers have been the subject of several other lawsuits and a contentious debate ever since.

#share#On the narrow issue of documents relevant to the Net Worth Sweep, Judge Sweeney has demonstrated a healthy skepticism regarding the government’s claims that over 77,000 of them must be shielded from public view and that over 11,000 cannot even be shared privately with Fairholme Fund’s lawyers. She’s not alone in voicing doubts about the government’s position. For over a year, the sheer volume of documents for which the government has sought confidential treatment has drawn scrutiny from Senate Judiciary Committee chairman Charles Grassley and numerous media outlets. Judge Sweeney’s ruling on Fairholme’s motion to compel could be pivotal in the litigation and could vindicate the public’s right to learn more about the Sweep and its propriety.

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“Executive privilege” traces back to President George Washington and his infrequent decisions to withhold documents from Congress. In modern times, the practice of shielding documents and conversations has ballooned. Courts have allowed presidents to assert confidentiality to ensure they can get candid advice and to protect matters of national security. In the Fairholme case, the government has invoked a variety of privilege claims focusing on the “deliberative process” or the process by which the government makes decisions. This privilege, meant to shield pre-decisional materials, is not absolute and requires a department head to review the supposedly privileged documents and determine that the privilege actually applies. But the government has invoked this privilege in such a sweeping and troubling manner that Judge Sweeney’s intervention is necessary.

For instance, federal officials have not attested that they have reviewed the supposedly privileged documents and that these documents qualify for the privilege. Moreover, the government asserts a privilege over documents shared with FHFA but also asserts that FHFA is not the “United States.” But if FHFA is not the United States, documents shared with it cannot be shielded by the deliberative-process privilege: Sharing pre-decisional documents with entities outside the government waives the privilege, preventing its subsequent invocation.

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In invoking executive privilege in such a wholesale way — attempting to keep secret over 10,000 documents — the administration has given yet another black eye to the concept of executive privilege. The courts have instructed that the privilege should be construed narrowly to permit parties “seeking discovery to obtain sufficient information” and that the government bears the burden of establishing that its invocation is valid. The government has not met its burden and has followed its Net Worth Sweep with an Under-the-Rug Document Sweep, one that prevents plaintiffs from seeing documents they need to demonstrate that the Net Worth Sweep is inconsistent with federal law. Judge Sweeney should be guided by the wisdom of Louis Brandeis, who counseled that sunlight was “the best of disinfectants.” The Net Worth Sweep smells like rotting fish, and some cleansing is desperately in order.

— Saikrishna Prakash is the James Monroe Distinguished Professor of Law and Horace W. Goldsmith Research Professor at the University of Virginia School of Law.


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