Fannie Mae-No Politics (FNMA)

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SA Article

The Case For Fannie Mae: Perry's Motion For Supplementation Of Defendant's Administrative Record

12:15 AM ET | by Charlie Harrison | About: FNMA
Summary

Perry Capital, LLC has filed a motion in one of the FNMA suits requesting the court to order the government to add a Blackstone Presentation to the record.
Perry asserts that the omitted Blackstone Presentation supports Perry's motion for summary judgment argument that the government's administrative process for entering into the Sweep Amendment was fatally flawed.
Perry's arguments are damaging, but not a silver bullet to end the case.
In a previous Seeking Alpha article, The Case for Fannie Mae: Unpacking the Motions for Summary Judgment, I gave an analysis of the motions to dismiss and cross motions for summary judgment in one of the consolidated Fannie Mae cases in the Federal District Court for the District of Columbia. A reader alerted me that on Thursday, September 18, 2014, the motion in the title of this article was filed in that litigation and asked what it meant. Hence, this article. Fannie Mae (OTCQB:FNMA) is the common name for the Federal National Mortgage Association.

This article will not cover the background of the litigation or the relevant law except as strictly necessary to understand the Supplementation Motion. Those were covered in the previous article.

On September 18, 2014, Perry Capital, LLC, (Perry) filed a motion in case number 1-13-cv-1025 requesting the Court order both Treasury and FHFA to supplement their records to include all documents considered by Treasury and FHFA in connection with their decision to enter into the Sweep Amendment, including a presentation by Blackstone Partners and Skadden Arps dated June 13, 2011, (Blackstone Presentation), together with other materials referenced by Treasury in internal documents.

Davie Sims, in a Seeking Alpha article dated July 30, 2014, titled Blackstone Plan Proves Value was Taken by Treasury, provides a link to the Blackstone Presentation and copies of the relevant pages. (I ask the reader's indulgence: Davie Sims' article provides the only relevant pages necessary to follow this post. I'm new to online articles; this is only my second. In the future, I'll provide more comprehensive links.)

The Blackstone Presentation purports to be a presentation dated June 13, 2011, by Blackstone and Skadden Arps, as a marketing piece to provide corporate reorganization services. The only indication of the recipient of the Blackstone Presentation is Treasury's seal on the face page and a slide caption on page 4: "We are pleased to have the opportunity to meet with the Department of the Treasury ("Treasury") to discuss our qualifications and potential strategic alternatives regarding FNMA and FMCC."

Background: Federal agencies are required to maintain a record of all documents considered by them in decision making. Treasury has submitted a record to the court. FHFA says it did not compile a record but for purpose of the litigation did submit a "document compilation." Perry argues in its motions for summary judgment that Treasury and FHFA actions in entering into the Sweep Amendment were arbitrary and capricious based on various failures in Treasury and FHFA decision making and failures in complying the record. If an agency action is found by a court to be arbitrary and capricious, that agency action can be invalidated by the court.

Perry alleges that the Blackstone Presentation was not included in either of the Treasury Record or FHFA document compilation but should have been since the Blackstone Presentation was a document before Treasury and FHFA at the time of the decision to enter into the Sweep Amendment. Perry then alleges that the Blackstone Presentation undermines four of Treasury and FHFA's summary judgment arguments. As set out in the Motion, Perry argues:

First: Treasury and FHFA have maintained that they never considered the deferred tax assets held by Fannie in considering Fannie's profitability even though they were recognized immediately after the Sweep Amendment was signed and resulted in a $50B dividend to Treasury. Yet, the Blackstone Presentation suggested that Fannie could increase its equity by ""ncreased capitalization of tax attributes." Thus, Treasury and FHFA knew the value of the deferred tax assets.

Second: Treasury and FHFA argued in their motions to dismiss and motions for summary judgment that the Sweep Amendment was necessary to halt the "downward spiral" of Fannie borrowing from Treasury to pay Treasury a quarterly dividend equally to 10% of advanced bailout funds, increasing the amount of future dividend payments. Perry argues that the Blackstone Presentation, which indicates that Fannie was "showing improved financial performance and stabilized loss reserves" and "Treasury funding for [Fannie] continues to slow" proves that Treasury and FHFA knew that Fannie was recovering financially and that there was no downward spiral.

Third: Treasury and FHFA argued that there were no reasonable alternatives to the Sweep Amendment. Perry argues that the Blackstone Presentation "proposed a variety of methods to restructure … [Fannie] which would not require additional Treasury funding." Moreover, Treasury and FHFA failed to consider any of the Blackstone Presentation suggestions.

Fourth: Perry has argued that FHFA improperly acted at Treasury's direction when entering into the Sweep Amendment. Here, Perry notes that the Blackstone Presentation was only addressed to Treasury, whereas the agency purportedly running Fannie, FHFA was "nowhere to be found." Perry argues this supports its position that FHFA was only acting at Treasury's direction and did not independently analyze the Sweep Amendment, in violation of FHFA's duty as a conservator.

Perry also points out that Treasury and FHFA have been ordered to engage in discovery in the related Fairholme litigation in the Federal Court of Claims. Perry argued in its motion for summary judgment that Treasury's Record had glaring gaps and, in this Supplementation motion, requests the court to order Treasury and FHFA to supplement the Record with the additional documents produced in that litigation. Since the documents are already being produced in the related case, requiring Treasury and FHFA to include them in the record in this litigation will not create a new and undue burden.

Author's View: There are really two issues here: the failure to include the Blackstone Presentation in the record and the impact of the Blackstone Presentation on the government's position.

On the failure to include argument: This does not look good for the government. Judges take a dim view of public servants playing fast and loose with the obligation to compile a record because it undermines the entire process of public accountability. Here, Treasury and FHFA will have to convince a judge that they did not consider a presentation by two premier firms, Blackstone Partners and Skadden Arps, delivered a year before the Sweep Amendment. Not a fun argument to make. Unless the judge buys that argument, Treasury and FHFA must then convince the judge that failure to include the Blackstone Presentation was inadvertent and not deliberate. Again, judges take a very dim view of a failure to produce documents required by law because it undermines the credibility of the system.

On the impact of the Blackstone Presentation on the government's position: Perry's arguments about the impact of the Blackstone Presentation are damaging but not dispositive. The Blackstone Presentation mentions "increased capitalization of tax attributes" on one line of a 52-page PowerPoint deck without any further discussion. The government will argue it was overlooked or forgotten.

The Blackstone Presentation slides, which indicate that Fannie was "showing improved financial performance and stabilized loss reserves" and "Treasury funding for [Fannie] continues to slow" also reflect that while the situation was getting better, Fannie was still at that time showing a loss. In any event, the government will argue these are tiny isolated fragments of information presented a full year before the Sweep Amendment was executed in August 2012, taken out of context in the hundreds of thousands of pages before the government. They were easy to overlook, easy to forget and were not a material part of the decision making process a year later.

All in all, though, I'd prefer to argue Perry's position.

From a litigation resolution perspective, the downside of this motion is that briefing and deciding the motion, and if the court so orders, complying by adding documents produced in related litigation to the record in this case, will delay the ruling on the motions to dismiss and motion for summary judgment now pending. On the upside, if Perry wins this supplementation motion, it makes the eventual motions to dismiss and summary judgment motions more likely to be decided in Perry's favor. This assumes, as does Perry, that new documents will support Perry's contention that the government's administrative decision-making process was fatally flawed.

Scheduling: Under the local rules for the DC Federal District Courts, unless otherwise ordered by the court, a government response in due in 4 days (October 2, 2014), and Perry's reply in 7 days after that (October 9, 2014).

Let me know if there's an interest in a review of the remainder of the briefs.

I am long Fannie common.

Disclosure: The author is long FNMA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.



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