Friday, September 19, 2014

First court loss today 9/19/2014

TRUST, derivatively on behalf of )
Plaintiff, )
v. ) Civil Action No. 13-206 (ABJ)
DEPARTMENT, et al., )
Defendants. )
Plaintiff Gail C. Sweeney Estate Marital Trust has brought a shareholder derivative
lawsuit on behalf of the Federal National Mortgage Association (“Fannie Mae”) against
defendants Fannie Mae, the United States Department of the Treasury (“Treasury”), Secretary of
the Treasury Jacob J. Lew, the Federal Housing Finance Agency (“FHFA”), and FHFA Director
Melvin L. Watt.1 Am. Compl. [Dkt. # 32]. Plaintiff asserts four counts in the amended
complaint: breach of fiduciary duty, abuse of control, mismanagement, and waste of corporate
assets. Id. ¶¶ 146–63. Plaintiff seeks declaratory and injunctive relief, and attorneys’ fees and
costs. Am. Compl., Prayer for Relief, ¶¶ A–B.
The FHFA is the Conservator of Fannie Mae, id. ¶ 26, and it has moved to substitute
itself as plaintiff in this case, arguing that only the Conservator has standing to pursue claims on
1 The amended complaint names Acting FHFA Director Edward J. Demarco as a
defendant, but pursuant to Federal Rule of Civil Procedure 25(d), the Court has automatically
substituted Director Watt in his stead.2
behalf of Fannie Mae. Renewed Mot. of FHFA as Conservator of Fannie Mae to Substitute for
Shareholder Derivative Pl. & Mem. of P. & A. in Supp. [Dkt. # 37] at 2 (“FHFA Mot.”).
Plaintiff does not disagree that, as a general matter, only the Conservator has standing to sue on
behalf of Fannie Mae. But plaintiff contends that in this case, the Conservator suffers from a
“manifest, disabling and irreconcilable” conflict of interest that prevents it from pursuing Fannie
Mae’s interests, and that plaintiff should therefore be permitted to bring this action. Am. Compl.
¶ 93; Pl.’s Opp. to FHFA Mot. & to Resp. of Defs. U.S. Dep’t of Treasury & Sec’y of Treasury
[Dkt. # 41] at 1 (“Pl.’s Opp.”). The Court finds that there is not a “manifest, disabling and
irreconcilable” conflict of interest in this case and that plaintiff lacks standing to sue on behalf of
Fannie Mae, so it will grant the FHFA’s motion to substitute.
dated today 9/19/2014
basically plaintiff cant sue on behalf of fannie mae. only conservator can do that. 

This is a loss for us on court front, but does not change other cases where plaintiff is not trying to sue on behalf of fannie. FHFA will substitute as plaintiff and then drop case.

Obama's chances to wind down Fannie and Freddie before November slipping away

Obama's chances to wind down Fannie and Freddie before November slipping away


Yet Johnson-Crapo has made no progress in the broader Senate, lacking support from Republicans and Democrats who believe that it doesn't do enough to promote affordable housing and unfairly gives an advantage to big banks.
And it faces grim prospects in the next Congress as well, with Johnson — its namesake — set to retire. The Democrats who could take over the Banking Committee chairmanship, widely thought to be Sen. Sherrod Brown of Ohio or Sen. Chuck Schumer of New York, both voted against Johnson-Crapo.
Johnson's likely Republican successor, Sen. Richard Shelby of Alabama, also voted against the measure. Long a critic of the government-sponsored enterprises before they got into trouble during the financial crisis, he would be expected to pursue a more conservative approach to reform — one that would be just as likely to fail to gain traction in a divided Senate.

How Much Capital Does a GSE Need? None

How Much Capital Does a GSE Need? None

Thursday, September 18, 2014

Private sector loans, not Fannie or Freddie, triggered crisis

Private sector loans, not Fannie or Freddie, triggered crisis

McClatchy NewspapersOctober 12, 2008 



Not only is this Third Amendment an unprecedented power grab that violates shareholder property rights, but the process use d by the Treasury Department to develop the amendment provided n either an opportunity for public comment nor t he customary transparency safeguards that permit we the people to hold our government accountable.

Wednesday, September 17, 2014

Why Fannie and Freddie Were NOT Culprits in the Great Recession

Why Fannie and Freddie Were NOT Culprits in the Great Recession

Congress passed the Community Reinvestment Act.
From Wikipedia we learn:
“The Housing and Community Development Act of 1992 established an affordable housing loan purchase mandate for Fannie Mae and Freddie Mac, and that mandate was to be regulated by HUD. Initially, the 1992 legislation required that 30 percent or more of Fannie's and Freddie's loan purchases be related to affordable housing. However, HUD was given the power to set future requirements. In 1995 HUD mandated that 40 percent of Fannie and Freddie's loan purchases would have to support affordable housing. In 1996, HUD directed Freddie and Fannie to provide at least 42% of their mortgage financing to borrowers with income below the median in their area. This target was increased to 50% in 2000 and 52% in 2005. Under the Bush Administration HUD continued to pressure Fannie and Freddie to increase affordable housing purchases – to as high as 56 percent by the year 2008. In addition, HUD required Freddie and Fannie to provide 12% of their portfolio to "special affordable" loans. Those are loans to borrowers with less than 60% of their area's median income. These targets increased over the years, with a 2008 target of 28%.
To satisfy these mandates, Fannie and Freddie announced low-income and minority loan commitments. In 1994 Fannie pledged $1 trillion of such loans, a pledge it fulfilled in 2000. In that year Fannie pledged to buy (from private lenders) an additional $2 trillion in low-income and minority loans, and Freddie matched that commitment with its own $2 trillion dollar pledge. Thus, these government sponsored entities pledged to buy, from the private market, a total of $5 trillion in affordable housing loans.
I hold the view that the government caused the housing crisis.
As you can see from the above article, and Wikipedia It was the Community Reinvestment Act BY CONGRESS and the HUD director that FORCED fannie and freddie to take alt-a and subprime loans starting in 1992 at 30% of their book. By 2008 HUD had forced fannie and freddie to had to take 56% of their book with these CRAP loans. by 2008 they had pledged more than 5 trillion dollars for crap loans because they had NO choice due to HUD regulators and the US congress mandate.
And yet, the twins had only suffered minimally only 4% of their book went into forclosure.
The converse is the PLS market with wallstreet, Bear sterns, lehman brothers, The big banks suffered 25% foreclosure rates and PLS went bankrupt. This is your private mortgage market (PLS) at its finest. The same congress wants to hand the keys to our mortgage market to the 25% crowd after Forcing the 4% losses on fannie and freddie. 

Pressured to Take More Risk, Fannie Reached Tipping Point

Pressured to Take More Risk, Fannie Reached Tipping Point

nytimes Published: October 4, 2008 

as it was happening!!!

Between 2005 and 2008, Fannie purchased or guaranteed at least $270 billion in loans to risky borrowers — more than three times as much as in all its earlier years combined, according to company filings and industry data.

at the end of 2004 tim howard was out by a fake sec takeover as proven by courts in 2012 to be FALSE.

Mudd became the CEO and Raines was out!

(Regulators, spurred by the revelation of a wide-ranging accounting fraud at Freddie, began scrutinizing Fannie’s books. In 2004 they accused Fannie of fraudulently concealing expenses to make its profits look bigger.
Mr. Howard and Mr. Raines resigned. Mr. Mudd was quickly promoted to the top spot.) this we know was FALSE.

Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.

Between 2005 and 2007, the company’s acquisitions of mortgages with down payments of less than 10 percent almost tripled. As the market for risky loans soared to $1 trillion, Fannie expanded in white-hot real estate areas like California and Florida.

In the following months to come, Mr. Dallavecchia (chief risk officer of fannie)warned that some markets were becoming overheated and argued that a housing bubble had formed, according to a person with knowledge of the conversations. But many of the warnings were rebuffed.
Mr. Mudd told Mr. Dallavecchia that the market, shareholders and Congress all thought the companies should be taking more risks, not fewer, according to a person who observed the conversation. “Who am I supposed to fight with first?” Mr. Mudd asked.
In the interview, Mr. Mudd said he never made those comments. Mr. Dallavecchia was among those whom Mr. Mudd forced out of the company during a reorganization in August.In the following months to come, Mr. Dallavecchia warned that some markets were becoming overheated and argued that a housing bubble had formed, according to a person with knowledge of the conversations. But many of the warnings were rebuffed.
Mr. Mudd told Mr. Dallavecchia that the market, shareholders and Congress all thought the companies should be taking more risks, not fewer, according to a person who observed the conversation. “Who am I supposed to fight with first?” Mr. Mudd asked.
In the interview, Mr. Mudd said he never made those comments. Mr. Dallavecchia was among those whom Mr. Mudd forced out of the company during a reorganization in August.

The White House also pitched in. James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies’ lending standards so they could purchase as much as $40 billion in new subprime loans. Some in Congress praised the move.

In July, Mr. Paulson asked Congress for authority to take over Fannie and Freddie, though he said he hoped never to use it. “If you’ve got a bazooka and people know you’ve got it, you may not have to take it out,” he told Congress.
Mr. Mudd called Treasury weekly. He offered to resign, to replace his board, to sell stock, and to raise debt. “We’ll sign in blood anything you want,” he told a Treasury official, according to someone with knowledge of the conversations.
But, according to that person, Mr. Mudd told Treasury that those options would work only if government officials publicly clarified whether they intended to take over Fannie. Otherwise, potential investors would refuse to buy the stock for fear of being wiped out.
“There were other options on the table short of a takeover,” Mr. Mudd said. But as long as Treasury refused to disclose its goals, it was impossible for the company to act, according to people close to Fannie.
Then, last month, Mr. Mudd was instructed to report to Mr. Lockhart’s office. Mr. Paulson told Mr. Mudd that he could either agree to a takeover or have one forced upon him.
“This is the right thing to do for the economy,” Mr. Paulson said, according to two people with knowledge of the talks. “We can’t take any more risks.”
Freddie was given the same message. Less than 48 hours later, Mr. Lockhart and Mr. Paulson ended Fannie and Freddie’s independence, with up to $200 billion in taxpayer money to replenish the companies’ coffers.
The move failed to stanch a spreading panic in the financial world. In fact, some analysts say, the takeover accelerated the hysteria by signaling that no company, no matter how large, was strong enough to withstand the losses stemming from troubled loans.
Within weeks, Lehman Brothers was forced to declare bankruptcy, Merrill Lynch was pushed into the arms of Bank of America, and the government stepped in to bail out the insurance giant the American International Group.

We are approaching a turning point in the the Fairholme v. USA lawsuit.

radcliffff  10 hours ago Flag

We are approaching a turning point in the the Fairholme v. USA lawsuit.

1) The transcript of the 7/16/14 Fairholme v. USA’s status meeting, shows Schwind told Judge Sweeney that the Gov’t would be finished reviewing the documents within the month of August.

2) In the transcript of the 8/13/14 Fairholme v. USA’s status meeting, Judge Sweeney:
a) Effectively told Mr. Cooper that he should file motions to compel if the Gov’t doesn’t cooperate with his discovery requests, and he responded by promising to file one by the following week, i.e., the week of 8/20/14 (Since he didn’t file one, we can assume that the Gov’t attorneys are probably cooperating);
b) Told the Gov’t attorneys that:
i) If they have any documents that address the key documents in question in the case, i.e., documents show that the White House, Treasury or any branch of Gov’t were directing the FHFA such that it was not acting as an independent Gov’t agency, they must turn them over to the Plaintiffs attorneys and inform their clients, effectively, Obama, Lew and Watt, that they must be turned over. In addition, since there is a blanket protective order in place to make sure the public can’t see any of the documents, they cannot invoke privilege to block the Plaintiffs attorneys from seeing them. And if they don’t cooperate, she’ll see motions to compel the production of them from Mr. Cooper.
ii) While every document that initially falls under the blanket protective order, the Gov’t will review and remove privilege from every document that doesn’t qualify for it and if it doesn’t, Judge Sweeney will see to it that they are removed, even if she has to require briefs from both sides before doing so.

This means that at the next status meeting, the Gov’t can no longer claim it hasn’t read all 800K documents (again Schwind said they would have finished reading everything within August), so it either complied with the judge’s 8/13 instructions or defied them. If they were defied, Mr. Cooper would have
had to finally file a motion to compel. Since the Judge already asked Mr. Cooper to file a motion to compel, i.e., so she could get on with doing her job, we already know how she will rule, even if we have to wait for the Gov’t to file another usless time killing opposition brief. Either way, this will be the turning point that effectively settles the issue of the Sweep. After that, they will go after the evidence that further strengthen’s their case, provides legally actionable evidence against many members of both administrations, and then on to the warrants, which was the true purpose of expanding discovery back to 2008! If Judge Sweeney somehow chooses not to rule on the warrants in the Fairholme case, there will be enough evidence to pass on to the Berman legal team, which is handling the Washington Federal v. USA lawsuit (that Judge Sweeney also happens to preside over), who, BTW, have been attending all of the status conferences. For anyone who hasn’t be following, Berman, aside from seeking and end to the Sweep, also takes direct aim at setting aside the illegal stock “agreements” that handed 79.9% of the preferred and warrants for 79.9% of the common to the Gov’t back in 2008.

Part 3 (Supporting Excerpts From Court Transcript)
Page 29

COURT [Judge Sweeney]: …And one thing that does concern me is that the Government is going to designate the entire universe of documents as protected. And as I understand it, the Government still haven’t reviewed all of those documents yet. So – but I also understand you to say that despite that initial blanket designation, you will go back then and look at each document and make a determination as to whether or not it should be protected.
Mr. SCHWIND: Correct, Your Honor. …
COURT: Has the Government - - are you beginning - - how far along in your review are you?

Page 30

MR. SCHWIND: Well, as we are substantially along. I don’t want to - - U don’t know how to phrase this, but we have started - - we started some time ago, seeks, at least, in reviewing documents for responses and privilege. We are not finished that process yet, but we do expect it to be concluded, I’d say, in the next – within the next month.

P_rt 4 

Pg 42

THE COURT: ...But the whole purpose
of this exercise, what’s before me now, is to allow the
Plaintiffs to have their day in court and for them to have
the opportunity to explore whether or not the United States
Government, whether we’re talking about Treasury or whether
it was -- and I’m just pulling this out of the air -- the
White House, whoever it was, whether they directed the
conservatorships to take certain actions, whether they were
really the guiding force and, so -- and, therefore, they
really were not independent or they really are for -- at
least for purposes of the net worth sweep with the third
amendment, acting at the direction of the United States
If they were taking -- if the conservators
were taking their marching orders from within the United
States Government, regardless of branch, whether you’re
talking about the executive -- so -- or, you know, I can’t
imagine that -- or whether it’s Congress, I just don’t know,
working in conjunction with the White House or Treasury,
whatever it might be, then that information has to brought
Now, if the fact that it would be subject to the
protective order and it wouldn’t be publicly available, you

Pg 43

know, no one can set up a website, click here to find
whatever document, no one leaks it to the press, or to
anyone, then that information has to be provided to the
Plaintiffs because it’s not fair for the United States
Government to say to the Plaintiffs, you know, Freddie
Mac, Fannie Mae are independent, there was no exercise of
And if the Justice Department receives documents
from these two agencies, the conservators, showing in fact
there was control, that’s hiding the -- I mean, I know three
very fine attorneys, people of integrity, but I’m just

saying, if that’s what you -- and you probably haven’t seen
all the documents. But if you’re -- I don’t want
instructions to be given to clients or to these entities that
they don’t have to produce certain documents if, in fact,
it’s going to answer the question, were these entities part
of the United States Government. Were they controlled by
Treasury? If that’s what the documents show, I realize I’m
preaching to the choir saying that, you have to turn it over
to Plaintiffs.
So, if you’re invoking privilege to block the
Plaintiffs’ entryway into the courthouse door, you can’t do
it. I know you know that, but you can go back and tell your
clients I said so, and that might either make their life
easier or more difficult or perhaps both, depending upon

Pg 44

which issue you’re discussing.
But, hopefully, that will help your discussions
with the Plaintiffs -- excuse me, with the United States, and
it -- hopefully, that helps. If it doesn’t, I’ll see


sponsors of 2014 bipartisan-policy-center-2014

JPmorgan chase
Berkshire Hathaway
Wells fargo
and many more....

HMMMMM.. I wonder where they think Fannie's money and business should go?

Expert Says Fannie, Freddie Here to Stay

Expert Says Fannie, Freddie Here to Stay: Onsite Coverage

LAS VEGAS — Since they contributed 6% to the federal government’s income in 2013, that’s one reason why it is highly unlikely that legislation to change Fannie Mae or Freddie Mac will move before 2017.
Tim Rood, chairman of the Washington-based consultancy The Collingwood Group, shared that prediction during a session Tuesday at the American Credit Union Mortgage Association’s annual meeting, which is taking place through Wednesday at the Encore in Las Vegas.
Among the factors that are slowing down the legislative process are upcoming elections, a very crowded legislative calendar for the last few months of this year, and the vastly improved importance both Fannie and Freddie have begun to show, Rood said.
The government-sponsored enterprises are charging some of the highest fees ever on the cleanest book of business they have ever seen and offloading much of the remaining risk, he added.
“I can’t see anyone being really anxious to change that,” Rood said.

Fannie Mae FNMA the long goodbye

The Myth of Fannie Mae, Freddie Mac, Barney Frank, the Housing Bubble and the Recession

Frank aggressively fought reform efforts by the Bush administration. He told The New York Times on Sept. 11, 2003, Fannie Mae and Freddie Mac’s problems were “exaggerated.” Exaggerated? Thanks to Fannie and Freddie the housing market collapsed and we fell into this “great recession.”
That paragraph is 99% meaningless nonsense. Republicans controlled the House in 2003 and Tom The hammer Delay of K-Street infamy was House Majority Leader. The House, unlike the Senate is ruled by simple majority. Delay controlled the agenda and Bush 43 was in the White House. Frank could have set himself on fire and still had absolutely zero effect on any Republican attempts to legislate new regulations or create regulatory reform. Fannie and Freddie did not cause the housing bubble or the Great Recession. The numbers don’t add up. In addition Fannie and Freddie did not have that kind of power. Most of their loans were not subprime.
Start with the most basic fact of all: virtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie. That’s right — most subprime mortgages did not meet Fannie or Freddie’s strict lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower’s income or employment history? All made in the private sector, without any support from Fannie and Freddie.
Look at the numbers. While the credit bubble was peaking from 2003 to 2006, the amount of loans originated by Fannie and Freddie dropped from $2.7 trillion to $1 trillion. Meanwhile, in the private sector, the amount of subprime loans originated jumped to $600 billion from $335 billion and Alt-A loans hit $400 billion from $85 billion in 2003. Fannie and Freddie, which wouldn’t accept crazy floating rate loans, which required income verification and minimum down payments, were left out of the insanity.

But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.
So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.
NOTE: in 2004 after tim howard was removed from fannie by the government, agency(fannie and Freddie) subprime doubled for the next 3 years leading up to the mortgage crisis. Who was at the helm of fannie after Tim left? WHO PUT THEM THERE?
The Office of Federal Housing Enterprise Oversight (OFHEO) was an agency within theDepartment of Housing and Urban Development of the United States of America. It was charged with ensuring the capital adequacy and financial safety and soundness of two government sponsored enterprises—the Federal National Mortgage Association (Fannie Mae) and theFederal Home Loan Mortgage Corporation (Freddie Mac). It was established by the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.
OFHEO was managed by a Director, appointed by the President and ratified by the Senate. The final Director was James B. Lockhart III, assuming the position during a time of crisis as Acting Director April 28, 2006, when nominated, confirmed to the post on June 15, and sworn in June 26, 2006.[1] The previous Director was Armando Falcon, Jr, confirmed September 29, 1999,[2][3] and forced to resign February 4, 2003, over the release of critical oversight reports[4] However, the White House withdrew the nomination of his successor and he served as Director beyond the end of his term as provided by law.
On July 30, 2008, the Housing and Economic Recovery Act of 2008 combined OFHEO and the Federal Housing Finance Board (FHFB) to form the new Federal Housing Finance Agency (FHFA). OHFEO director James B. Lockhart III oversaw the agency at its conception, but departed after less than a year.
OFHEO also published the house price index.

Within three weeks of his appointment in May 2006, Lockhart published a report detailing the numerous missteps by Fannie Mae’s previous management and signed a consent agreement that restated Fannie Mae’s extra 30% capital requirement and capped the growth of its investment portfolios for the first time. In a joint press conference with the SEC Chairman, Chris Cox, Lockhart announced a $400 million fine.[4] Shortly thereafter, he obtained Freddie Mac’s voluntary agreement to likewise cap the growth of their portfolio.

We now know the tale in 2006 and 2004 was a LIE:
General News 

Fannie Mae "Accounting Scandal" Discredited In Court

After eight years of litigation, the plaintiffs came away with nothing. No damages awarded, no trial, nothing other than a summary verdict against them because, the judge ruled, no evidence of any substance had been uncovered and presented.

It was not as if plaintiffs' attorneys had left any stone unturned in their quest for any kind of evidence to prove that three former Fannie Mae executives had committed securities fraud. "The volume of information exchanged in discovery was enormous," wrote  Judge Richard  Leon. "The parties produced nearly 67 million pages of documents, deposed 123 fact witnesses, and engaged 35 expert witnesses." And then, in a gentle swipe at Fannie Mae's regulator, he noted how, "The discovery process was unnecessarily prolonged by OFHEO's repeated and stubborn assertion of privileges that had to be litigated up to the Court of Appeals."

It was kind of pathetic really, hundreds of millions of dollars in legal fees wasted in a fruitless search for something as elusive as the Treasure of Sierra Madre, or Saddam's nuclear weapons lab.  But it was also obvious that the plaintiffs' lawyers, representing pension funds that held Fannie Mae stock in the early 2000s, were deluding themselves. Any competent lawyer could have seen, from the onset, that the case would go nowhere. I figured out in about an hour, after casually perusing some public documents two years ago. 

Fannie's "Accounting Fraud" = Saddam's WMD

"The narrative of plaintiffs' securities fraud claims against [the former Fannie executives] not surprisingly, flows directly from an OFHEO investigation of Fannie Mae," wrote Judge Leon. Apparently the plaintiffs had a hard time believing that the Chairman of the S.E.C., and the Director of the Office of Federal Housing Enterprise Oversight would  deceive the Courts, Congress and the public with their patently bogus allegations of securities fraud.  After all, Fannie Mae settled with the government for $400 million! Former Fannie executives agreed to millions in clawbacks of their bonuses!  Where there's smoke there's fire! There must be something there! 

Except the government's deception was really, really obvious. Remember how, 10 years ago, U.N. inspectors eviscerated U.S. "intelligence," on WMD in Iraq, and the Bush Administration, which refused to consider the substance of the inspectors' findings, kept saying there was WMD and invaded anyway?  The Bush Administration pulled the same kind of stunt when it accused Fannie Mae of committing securities fraud, even after the written record showed that such a fraud was virtually impossible.

Judge Richard Leon's rulings provide full exoneration of former CEO Franklin Raines, former CFO Timothy Howard and former Controller Leanne Spencer. The Judge was not asked to rule on the original charges brought by SEC Chairman Christopher Cox, and OFHEO Director James Lockhart, but it's impossible to read his decisions without making the obvious inference, that the charges brought by the government were a sham, which is why the government stonewalled for years thereafter. It's a felony to lie to or deceive Congress, and the statute of limitations for indicting Cox and Lockhart has probably passed.

Why The Case For Fraud Would Never Hold Up

Which is why it's all but impossible to make a case for fraud if the defendant relies on the company's outside auditor, KPMG, which had reviewed the relevant accounting and knowingly signed off on it. And then the regulator, the OFHEO, reviewed the relevant accounting and knowingly signed off on it, before assuring Fannie's Board that Fannie's accounting is proper. Also,  if the matter is fully disclosed in contemporaneous S.E.C. filings, then the defendant is  pretty much inoculated from charges of fraud. The coup de grace was the release of Fannie Mae's restated financials, which showed that the alleged "$11 billion loss" had disappeared. 

If you looked at the substance of the government's case, or rather, the absence of substance, it was obvious that the allegations of securities fraud had been fabricated out of thin air, that all of the characterizations about financial manipulation were flimsy at best.

Let's go through what a plaintiff needs to prove, and then go through the documents that showed that the allegations by the S.E.C. and OFHEO were bogus. To prevail in a case of securities fraud (what the lawyers call a 10(b)(5) violation) you need to prove six elements:

(1) a material misrepresentation or omission by the defendant; 
(2) "scienter" [or in plain English, that a person knew of, or showed reckless disregard for, the material misrepresentation] ; 
(3) a connection between the misrepresentation or omission and the purchase or sale of a security; 
(4) reliance upon the misrepresentation or omission; 
(5) economic loss; and 
(6) loss causation. 

Smoking Guns That Demolish The Government's Case

Here's a list summarizing the key documents or events, with further explanation below:

1) Rudman Investigation: In February 2006, a year-long independent investigation, led by former Senator Warren Rudman, then a partner at  Paul Weiss Rifkind, virtually inoculated top Fannie executives from any allegation of scienter; 

2) OFHEO Report: A May 2006 OFHEO report, which excoriated Fannie's accounting, also conceded that KPMG had signed off on what was being done. The OFHEO based its claims on its own interpretation of accounting rules, not that of an outside accountant.

3) S.E.C. Complaint: The June 2006 S.E.C. complaint complaint against Fannie Mae alleged securities fraud, but failed to lay out facts establishing all six necessary elements.

4) Cox/Lockhart Testimony: On June 15, 2006 Cox and Lockhart appeared before Congress and alleged that Fannie had "concealed" an "$11 billion loss," and offered testimony that was, to put it charitably, highly misleading, or more bluntly, dishonest.

5) Fannie's Restated Financials: When Fannie Mae released its restated financials in December 2006, it became obvious how the OFHEO and the S.E.C. had divined the so-called "$11 billion reduction in capital," which had always been hiding in plain sight. In order to show the "loss," on the books, accountants had to increase equity by $10.4 billion, so net equity increased by $4 billion. When restated, the financial reports showed that every financial metric--earnings, cash flow, equity--improved.

In an nutshell, any financial analyst of reasonable competence could have figured out what was going on, based on the original financial statements filed under Raines' watch. The FAS 133 adjustments were fully disclosed as adjustments to equity. (See fuller discussion here.)
6) OFHEO Administrative Charges: Afterwards, on December 18, 2006, the OFHEO sued the three former Fannie executives for committing accounting fraud. Since the lawsuits constituted "administrative charges," the adjudication of the matter was, to my knowledge, something unique in Anglo Saxon law. The complaint was signed by OFHEO Director James Lockhart, who was also designated to make the final ruling on the matter.  (The Administrative judge heard evidence, but he merely made a recommendation; Lockhart was the final decider.) From the start, the OFHEO stonewalled about disclosure of any of its relevant records.

7) Frivolous Motions: The private lawsuit, initially filed in 2004, was relentlessly besieged by frivolous motions filed by a non-party, the OFHEO, which insulted everyone's intelligence by its refusal to hand over key documents and its demands to keep everything under seal. These tactics should have been a tipoff of what the OFHEO was trying to hide. See also herehere, and here.

If you read Judge Richard Leon's decisions--herehere, and here--it becomes obvious that nothing drawn from the OFHEO and S.E.C. investigations could withstand scrutiny. What are the chances that the Inspector General of OFHEO's successor agency, the Federal Housing Finance Agency, would ever investigate the waste, fraud and abuse that resulted from the government's attempts to conceal Lockhart's dirty laundry?  I wouldn't bet on it.

One other little detail that may not have much to do with anything. James Lockhart was George W. Bush's buddy at prep school and college.

This report by the New York Federal Reserve also documents the much larger role of private lenders rather than GSEs ( Fannie and Freddie are government sponsored enterprises).
NOTE: The same banks that created the subprime problem are now the ones that OUR GOVERNMENT is trying to give the entire mortgage banking system.

The Facts: Its 1995, and the private securitization market has developed on its own. Fannie Mae looks around, and notices that they are not really all that necessary anymore. Wall Street had become a securitizer of not just mortgages, but student loans, credit card receivables, auto loans.
The Hypothetical Counter-Factual: So the CEO of Fannie announces they were going to sell off their mortgage portfolio, dissolve,, returning their capital to shareholders.
Question: Would the Housing boom and bust have occurred? What about the credit bubble? Derivative crisis? Abdication of lending standards? Leverage increases to Wall Street? Misaligned Compensation packages?
Unless your answer is NO to all of these, than its impossible to blame Fannie Mae for the collapse . . .

Top Dems Break With Treasury Over Fannie, Freddie Losses

Frank writes in his letter to Obama:
The losses suffered by Fannie and Freddie have created great cost for the taxpayers--almost $150 billion to date. These losses largely result from business decisions during the bubble years that were honest but flawed. Taxpayers have continued to suffer anew for poor underwriting by these companies during the bubble years.
However, some of these losses result from deception. Private companies sold Fannie and Freddie loans or securities based on fraudulent documents. These transactions created private profits at public expense, and they should be fought with every tool at the companies' and the agency's disposal. These deals must not be allowed to get lost in the shuffle.
I have been pleased at the steps both the FHFA and the companies have taken so far, but it must continue. The extraordinary measures taken to stabilize the financial system over the last two years were done for the benefit of ordinary Americans. We owe it to them to make every effort to make sure that the money is not diverted instead into the pockets of others. I hope you will continue to keep this in mind as you chart the future of FHFA and these companies.
Again, Freddie and Fannie are caught up in the storm, but it was the private sector that engaged in fraud and deception.

Greenspan steps up criticism of Fannie
May 19, 2005

In Thursday's remarks Greenspan seemed to side Fannie and Freddie's competitors.
"The strong belief of investors in the implicit government backing of the GSEs does not by itself create problems of safety and soundness for the GSEs but it does create systemic risks for the U.S. financial system as the GSEs become very large," he said.
Over the past few years Greenspan has moved from some gentle nudging of Fannie Mae and Freddie Mac to Thursday's outright criticism. In particular, he singled out Fannie's and Freddie's giant portfolios of mortgage-backed securities as being too risky to back up the mortgage finance system in the event of a crisis, and argued that only ultra-safe, ultra-conservative U.S. Treasury bonds would do the trick.
"Indeed, only such highly liquid portfolios would be consistent with (government-sponsored enterprises') mission of providing primary mortgage market liquidity during a crisis, particularly a financial crisis," Greenspan said.
The outcome of this debate has important implications for consumers. In the short-term, if Congress reins in Fannie and Freddie by putting stricter limits on the size of the portfolios they can build, the amount of mortgage financing they can issue, and the kinds of securities they can hold in, this could -- all else being equal -- mean their cost of borrowing would rise and the cost of home mortgage loans could go up, resulting higher mortgage rates for home buyers.
In the longer run, if such a move were to make Fannie's and Freddie's investment base less risky, it could mean that the U.S. financial system would be able to weather storms such as a recession or a big pullback in the housing market without any kind of meltdown.

NOTE: the year is 2005 and Greenspan is firmly behind PLS and not fannie and freddie. He thinks the PLS is the way to go and is angry at fannie for not opening up to more loose standards.

At the same time that Greenspan was speaking, Fannie Mae was deemed "adequately capitalized" as of March 31 by its chief regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), with a projected surplus over its minimum capital requirements sufficient to absorb the uncertain impact of accounting errors on its capital.
OFHEO, which oversees both Fannie Mae (Research) and Freddie Mac (Research), had classified Fannie as "significantly undercapitalized" as of Dec. 31. By law, the regulator classifies Fannie and Freddie as adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized.

Fannie Mae and Freddie Mac were victims, not culprits

Posted by: Aaron Pressman on September 26, 2008