Earlier this month, we finally saw bipartisan action in the ongoing Fannie Mae and Freddie Mac saga when the House Financial Services Committee passed the "Equity in Government Compensation Act of 2015" to cap the salaries of the mortgage giants' CEOs. Congress should now turn this bipartisan scrutiny toward the government’s astonishing secrecy in its legal battle with Fannie and Freddie¹s private shareholders.
Last month, a judge exposed a new tear in the federal government’s shroud of secrecy in its battle for Fannie Mae and Freddie Mac. On July 21, Judge Margaret Sweeney of the United States Court of Federal Claims for the D.C. Circuit granted the hedge fund Fairholme’s motion to use in its court battle “protected information,” which the government had fought to keep secret. This development may very well indicate that Judge Sweeney believes the Feds are talking from both sides of their mouths in the multiple investor suits over their handling of the mortgage giants.
During the financial crisis, Fannie and Freddie joined a long list of distressed financial institutions. Although these two companies had been highly successful in the past and never actually became insolvent in 2008, Congress gave them $187.5 billion in emergency funding and placed them under the conservatorship of the Federal Housing Finance Agency (FHFA).
Fannie and Freddie returned to profitability in 2012 and have generated more than enough cash to repay that government infusion from during the downturn. But instead of fulfilling its fiduciary obligation as conservator to marshal the two companies’ assets for the benefit of shareholders, the FHFA worked with the U.S. Treasury to enact new regulations – without approval from either Congress or the companies’ shareholders – that force the mortgage giants to turn over 100% of their profits to Treasury. Investors have filed more than a dozen lawsuits to challenge the government’s actions.
But the government has fought tooth and nail against the investors’ discovery requests. Incredibly, the Justice Department has asserted presidential privilege to prevent production of certain draft memos, emails, press releases, and other documents created by government officials since 2008. And this is on top of the confidential treatment that Justice has secured for nearly all of the hundreds of thousands of pages of documents that the FHFA and Treasury have submitted.
Treasury and the FHFA argue that releasing this information will destabilize financial markets and the economy at large. But the documents in question were created three to eight years ago – ancient news as far as the markets are concerned.
The government’s behavior is so irregular that the New York Times even filed a motion to intervene in Fairholme Funds in an attempt to obtain greater transparency. The newspaper is seeking to have certain protected testimony released so that the press can report on it. Its filing argues, “[t]he courts have repeatedly recognized that disclosure of discovery is particularly appropriate when a lawsuit sheds light on the performance of governmental agencies and entities – which is precisely the case here.”
Judge Sweeney’s order is a step in the right direction. Although the protected information in Fairholme will nevertheless remain under seal, it permits the plaintiffs to at least use it to defend their interests. Academic spectators like myself will eagerly await to see whether this is a harbinger of future orders that would make the protected information public.
The government is not above the law. This is one of the fundamental principles upon which the United States was founded – particularly concerning matters of transparency. “A popular Government,” James Madison wrote, “without popular information, or the means of acquiring it, is but a Prologue to a Farce or a Tragedy; or, perhaps both.”
It’s time for the government to end this shroud of secrecy before this farce goes any further.
Beirne is a fellow at the Yale Law School Information Society Project and author of Blood of Tyrants: George Washington, the Forging of the Presidency, which won the 2014 William E. Colby Award.