Gangster government revisited

Michael Barone dubbed the Obama administration’s casual attitude toward fundamental legal niceties “gangster government.” Based on recently unsealed documents in the shareholder litigation over the government’s appropriation of the profits of Fannie Mae and Freddie Mac, New York Times business columnist Gretchen Morgenson provides one more striking case study:

In August 2012, the federal government abruptly changed the terms of the bailout provided to Fannie Mae and Freddie Mac, the mortgage finance giants that had been devastated by the financial crisis. Instead of continuing to receive payments on the taxpayer assistance, Treasury officials decided to begin seizing all the profits both companies generated every quarter.

It was an unusual move, given that the companies still had public shareholders. But it was necessary, the Treasury said, to protect taxpayers from likely future losses in their operations. Justice Department lawyers have reiterated this view in court, saying that the bailout terms were modified because the companies were in a death spiral.

But newly unsealed documents show that as early as December 2011, high-level Treasury officials knew that Fannie and Freddie would soon become profitable again. The materials also show that government officials involved in the decision to divert the profits knew the change would most likely generate more money for Treasury than the original rescue terms, which required the companies to pay taxpayers 10 percent annually on the bailout assistance they had received.

Morgenson also provides a glimpse of the tactics that proved so useful to the modus operandi of gangster government:

From the outset, the government demanded unusual secrecy in the litigation, withholding more than 11,000 documents and asserting that they were protected by various privileges. In a rare move, the government asserted presidential privilege on 45 documents.

The Obama administration argued that disclosure of the documents would roil the financial markets.

But it has been almost nine years since the government took over Fannie and Freddie in the face of a growing mortgage mess. The companies remain in conservatorship and are essentially the last piece of unfinished business from the crisis.

The document stating that the profit sweep would probably generate more money to the government than the previous arrangement also contradicts court testimony from another housing official, Mario Ugoletti, a former special adviser to the director of the housing finance agency.

Mr. Ugoletti swore in a 2013 declaration that by mid-2012, the amounts owed by Fannie and Freddie under the original rescue had grown so large that “it appeared unlikely that either of the enterprises would be able to meet that amount consistently without drawing additional funds from Treasury.”

The intention of the change “was not to increase compensation to Treasury,” he stated.

Mr. Ugoletti could not be reached for comment for this article.

Morgenson notes that the documents on which her article is based have been a long time coming. Morgenson’s column makes clear why this would be the case.

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