Tell Me Sweet Little Lies

The Obama Administration’s 2017 Budget states in a section titled “Leveling the Playing Field through Wall Street Reform” page 42:

To finish addressing the weaknesses exposed by the financial crisis, the Government must reform the housing finance system and move forward to wind down the Government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, which have been in conservatorship since September 2008. As part of the 2016 Omnibus, the Congress included a provision that limits the ability to return to the dysfunctional system in effect prior to conservatorship, and reinforces the need to enact comprehensive reform. A bipartisan bill developed in the Senate in the previous session includes many of the Administration’s key housing finance reform principles, including ensuring that private capital is at the center of the housing finance system, and that the new system supports affordable housing through programs such as the Housing Trust and Capital Magnet Funds. The President stands ready to work with Members of Congress in both parties to enact commonsense housing finance legislation that embodies these core principles. (For additional discussion of the GSEs, see the Credit and Insurance chapter in the Analytical Perspectives volume of the Budget.)

This passage makes clear two points, a) the Administration is either confused or disingenuous regarding Fannie and Freddie’s role in the financial crisis and, b) FHFA is not fulfilling its mandate as an independent conservator.

The budget directs the reader to the Analytical Perspectives of the Budget, where on page 312 it states:

HERA provides that as conservator FHFA may take any action that is necessary to put Fannie Mae and Freddie Mac in a sound and solvent condition and to preserve and conserve the assets of each firm. As conservator, FHFA has assumed by operation of law the powers of the Board and shareholders at Fannie Mae and Freddie Mac. FHFA has appointed Directors and CEOs who are responsible for the day-to-day operations of the two firms.

Classic bureaucratic doublespeak…

In the Budget, the Administration discusses winding down the “dysfunctional system” where later in the Analytical Perspectives it boasts of returning Fan and Fred to a “sound and solvent condition” and to “preserve and conserve assets.”

That’s like filling a bathtub with the drain open… a fool’s errand.

Or the Administration is not both simultaneously “winding down” and “building up.”  Rather, it’s doublespeak to purposely confuse people – hopefully not all Federal Judges will buy this malarkey (lambaste of Lamberth…).

More bizarre is the assertion that FHFA has the full power of the Boards, but then states the Boards are responsible for operating the companies.  How can a Board that lacks any power operate a company?

Now that’s dysfunction!  Any time you find one party with authority and a different party with responsibility it usually leads to accountability and competency issues.

The Administration in the Perspectives does state that the “GSEs remain private companies” (p. 124).

More compelling is the admission on page 311 that the 3rd Amendments to the PSPAs where not to prevent circular draws but rather a misuse of power to advance policy:

To accelerate the wind-down of the GSEs’ retained mortgage portfolios, Treasury revised the PSPA terms in August 2012, setting the effective portfolio limitation at $1.1 trillion as of December 31, 2013, and accelerating the reduction in this limitation to 15 percent each year until December 31, 2018, when the combined limitation will be fixed at $500 billion ($250 billion for each company).

OK, so authority to operate Fannie and Freddie is shared three ways — with the Boards, FHFA and Treasury!?  Can you say Clusterficken (used the German pronunciation to keep it G-rated… sorry to my German speaking friends!)?

Over time, it becomes more apparent that the Administration has had a secret agenda evidenced in doublespeak and abuse of executive privilege by hiding 11,000+ government documents in the court cases.

It is also clear that Congress will not enact any reform that will affect Fan and Fred’s ongoing concern/ownership status under this Presidency, while this Administration pulls all stall tactics in the court cases so they can kick the “can”servatorship down the road to the next Administration.

Update from Joshua Angel

From: XXXX
Sent: Tuesday, March 15, 2016 1:14 PM
To: Angel, Joshua J.
Subject: page sent from XXXX

Mr. Angel,

I read with interest your essay titled “Government Perfidy and Mismanagement of the GSEs in Conservatorship” and the related letters to Fannie and Freddie’s boards.

I am a shareholder in both companies and have been tracking all of the various lawsuits.

My question is did you receive adequate responses from the Boards or are you proceeding with litigation? If you are willing/able to answer this question would you mind if I share your response with other like-minded shareholders or would you prefer for me not to share with others? (full disclosure: I have a Fan/Fred blog under a nom de plume).

Thank you for your consideration. Wishing you the best results with your efforts! And thanks on behalf of all shareholders.




Dear Mr. XXXX,

As of the present moment I have not received a single response to my letter from either the GSEs, or their respective B/D members.  In addition, having this day been alerted to Mr. Pagliara’s book inspection complaints against the GSEs I have for now, determined not to proceed with an independent complaint against the companies, or their respective B/D’s (i.e., breach of contract, breach of fiduciary duty, and injunctive relief).  Since the essay was published, I have augmented it with the attached materials which I deem to be quite pertinent.

Having responded to your inquiry, you are of course free to convey my answer to whomever you choose. 

Yours truly,

Joshua Angel

Attachment: Scan – 2016-03-14 15.36.17

Silence Is Not Always Golden

Fannie and Freddie’s boards of directors bear more responsibility than has otherwise been cast upon them regarding the 2008 conservatorships.

How is it possible that a Board with fiduciary responsibly to shareholders would give away their companies in a one-hour meeting (as the Government claims)? The directors would have known better than anyone that their companies did not meet any of the conditions necessary for FHFA to place them into conservatorship.

Under HERA, FHFA was authorized discretionary authority to place Fannie and Freddie into conservatorship if one of the following conditions existed:













The Boards knew none of the above conditions existed. As I have asserted in previous posts Fan and Fred boards did not consent to conservatorship…they merely acquiesced. Which basically means the boards agreed in silence. Acquiescence is not on the above list… and it differs from consent.

Why were the board directors silent over the conservatorships? How could the Government gain their silence?

Perhaps it was presented like this, “If you fight us; we fight you.”

“Agree and we’ll leave you alone. Disagree and we will go after you personally. Agree, and Paulson and Lockhart will proclaim that the problems beset upon Fan and Fred were not the directors’ fault. However, if you want to fight, the Government will not only blame you directors, but we will press charges against you.”

The following passages are FHFA and Treasury announcements about the conservatorships:

James Lockhart’s announcement:

“The Boards of both companies consented yesterday to the conservatorship. I appreciate the cooperation we have received from the boards and the management of both Enterprises. These individuals did not create the inherent conflict and flawed business model embedded in the Enterprises’ structure.” 

Henry Paulson’s announcement:

“I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today’s action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither.”

According to an article in the Washington Post,

“(Fannie Mae CEO Daniel) Mudd and (Freddie Mac CEO Richard) Syron said their companies could weather the downturn, but recently the government, reviewing the companies’ books, disagreed. Last weekend, (FHFA Director) Lockhart and Treasury Secretary Henry M. Paulson Jr. seized Fannie Mae and Freddie Mac and named new chief executives.”

Apparently, of all the directors of both Fan and Fred, Daniel Mudd was the person most against the conservatorships. And Mr. Mudd is the only director that the Government continues to prosecute to this day. Coincidence?

This tweet captures the thought:


Certainly, it appears that the Government selects whom it wants to prosecute…not for legal reasons, rather for political ones.

David Fiderer in a blog post yesterday states Daniel Mudd asserts that “the SEC’s charges are utterly devoid of merit…’”

The following is an example of the instrument that the Government uses to keep people quiet:


Found on SEC’s website.


8. The Respondent agrees not to take any action or to make or permit any public statement through present or future attorneys, employees, agents, or other persons authorized to speak for it (“Related Person”), except in legal proceedings in which the Commission is not a party, denying, directly or indirectly, any aspect of this Agreement or creating the impression that the statements in Exhibit A to this Agreement are without factual basis. This paragraph is not intended to apply to any statement made by an individual in the course of any criminal, civil, or regulatory proceeding initiated by the government or self-regulatory organization against such individual, unless such individual is speaking on behalf of the Respondent.

If it is determined by the Commission that a public statement by the Respondent or any Related Person contradicts in whole or in part this Agreement, at its sole discretion, the Commission may bring an enforcement action in accordance with Paragraphs 15 through 18, but only provided that

Respondent does not cure the statement by promptly making appropriate public statements or court filings satisfactory to the Commission after a reasonable opportunity to do so by the Commission.

9. Prior to issuing any press release concerning this Agreement, the Respondent agrees to have the text of the release approved by the staff of the Division”

The agreement is simple – the Government will not prosecute in return for silence. It seems logical to assume that the Government also entered into similar agreements with senior management, which could help explain the lack of whistleblowers from either company.

Knowing they silenced the most credible witnesses through threat and coercion, the Government argued in their motion to dismiss in the Perry case:

“Since the plaintiffs have not demonstrated, through their pleadings, that FHFA acted in bad faith, Delaware case law under which discretionary dividends will only be compelled in the rare instance of a judicial finding of “fraud or gross abuse of discretion” by the board of directors is inapposite…”

“Unless the plaintiffs can demonstrate that FHFA could not legally impose a conservatorship upon the GSEs at the time of the Third Amendment, allegations of mischievous intentions during a conservatorship do not revive already eliminated cognizable property interests. See id. And here, the class plaintiffs only plead that the Third Amendment was inconsistent with FHFA’s responsibilities as conservator— not that FHFA lacked any legal right to be a conservator on August 17, 2012.”

Further, Josh Rosner has recently been stressing that the current boards may be in breach of their fiduciary responsibilities to shareholders, too.


Josh’s point is FHFA can only exercise those powers of the original boards… nothing more and nothing less. As Josh states, the current boards are still responsible for their decisions…especially ones regarding the Sweep Agreement.

This current sentiment regarding board culpability is based largely on two lawsuits. The 9th District recently ruled in Adams v. Aurora Loan Services that Fan and Fred are still considered private companies despite being in conservatorship under Federal Housing Finance Agency. This 9th District ruling has bearing in the Jacobs v. FHFA where the plaintiffs claim actions violate state laws.

These violations of state law pertain to the dividend payments. However, the PSPAs state that dividends will only be paid if the boards declare them. Therefore, the Boards bare responsibility in violating state laws each time they declare and pay the dividends to Treasury.

Good advice states that when you’re robbed at gunpoint (bazooka), the best action is to hand over your money and don’t fight. Perhaps that best explains what happened with the Boards. Plus, how many directors had the emotional and financial wherewithal to fight the US Government? That effort would put yourself and your family through hell.

Wishing Daniel Mudd the best of luck in his continued struggle with the Government…

I’ll end by quoting Tim Howard as posted on his blog:

“Conventional wisdom is that it will be difficult to successfully challenge Treasury’s decision to take the companies over, because of the deference courts give to regulatory actions during times of crisis. But this instance should be an exception. As we have detailed elsewhere, Treasury’s decision to take Fannie and Freddie over was not a rescue, made amidst the “fog of war;” it was a well-planned and meticulously executed strategy to expropriate the assets of two shareholder-owned companies for policy purposes, including ensuring that banks and other lenders had reliable outlets for their mortgages, and buying time for Treasury to do true rescues (or “bailouts”) on an advantaged basis for the troubled institutions that it favored.

Why had there been a paper about nationalizing Fannie and Freddie circulating at Treasury six months before that happened? Why would both the Fed and the Treasury have declined to use their existing authorities to make secured, riskless loans to the companies, had they ever been needed? Why would Paulson have held a secret meeting with hedge fund managers in July 2008 to tell them Treasury was considering putting Fannie and Freddie in conservatorship and wiping out their shareholders? Why would Treasury have inserted a clause in the GSE reform bill that made Fannie and Freddie directors immune from shareholder lawsuits if they gave in to pressure and let the government take the companies over for no statutory reason? Why would Paulson withhold from the companies’ CEOs and directors the terms of the “rescue” he was insisting they agree to? And what possible reason could there have been for making Fannie and Freddie take non-repayable senior preferred stock to offset even temporary shortfalls in their capital”?


This post continues a review of the circumstances in 2008 regarding the imposition of the conservatorships on Fannie and Freddie.

According to the Financial Crisis Inquiry report:

“…conservatorship was not a foregone conclusion. Paulson, Lockhart, and Bernanke met with Mudd, Syron, and their boards to persuade them to cede control. Essentially the GSEs faced a Hobson’s choice: take the horse offered or none at all.

“They had to voluntarily agree to a consent agreement,” Lockhart told the FCIC. The alternative, a hostile action, invited trouble and “nasty lawsuits,” he noted.

“So we made a . . . very strong case so the board of directors did not have a choice.” Paulson reminded the GSEs that he had authority to inject capital, but he would not do so unless they were in conservatorship.

Mudd was “stunned and angry,” according to Paulson.

Tom Lund, who ran Fannie Mae’s single-family business, told the FCIC that conservatorship came as a surprise to everyone. Levin told the FCIC that he never saw a government seizure coming. He never imagined, he said, that Fannie Mae was or might become insolvent.

Interviewed in 2010, Mudd told the FCIC: “I did not think in any way it was fair for the government to have been in a position of being in the chorus for the company to add capital, and then to inject itself in the capital structure.”

So, how did Paulson and Lockhart convince the Board Members to not fight the conservatorships?

Paulson had the following passage inserted into HERA offering proof that his actions were premeditated (versus attempting to save the world from financial ruin):

‘‘(6) DIRECTORS NOT LIABLE FOR ACQUIESCING IN APPOINTMENT OF CONSERVATOR OR RECEIVER. The members of the board of directors of a regulated entity shall not be liable to the shareholders or creditors of the regulated entity for acquiescing in or consenting in good faith to the appointment of the Agency as conservator or receiver for that regulated entity.”

As I’ve concluded in an earlier post, Fan and Fred’s boards did not explicitly consent to conservatorship. Their bylaws outlined the procedures to call a board meeting, have a necessary quorum, vote taking, etc. My claim is there was no consent.

But it’s curious why Paulson added “acquiesce” into that passage. The definition of acquiesce is “to assent tacitly; submit or comply silently or without protest.”

Paulson would have had to have foresight into a scenario where a board of directors would not have actually consented (voted) for conservatorship but rather not fight against one that was imposed. That scenario seems unlikely unless of course the take-over was being planned when HERA was written. Look again at the title of that section “Directors not liable for acquiescing”… doesn’t mention consent (the more likely scenario). It suggests Paulson was planning a surprise take-over and he had devised a way out for the directors to not fight…which is what their fiduciary duty called for them to do.

Further, shouldn’t “in good faith” be interpreted as not being coerced, intimidated or agreeing under duress?

Why was there no communication from the board of directors to shareholders regarding why they did not protest or fight the conservatorship?  Perhaps because it wasn’t done in good faith (for a legitimate, legal reason)?

I plan a follow-up post that explores further how Paulson got the Boards to remain silent.

In wrapping up this post, however, there is one more passage in HERA to consider:


Require the regulated entity to dismiss from office any director or executive officer who had held office for more than 180 days immediately before the date on which the regulated entity became undercapitalized.”

What’s the big deal here? All of the directors were dismissed, right?


Brenda Gaines has been a Fannie Mae Board Member since 2006 and continues as a director today. This fact proves that Fannie Mae was not undercapitalized on September 6, 2008 …and six months before then.

Why did Ms. Gaines acquiesce?

Guardian Angel?

“For it is written: ‘He will command his Angels concerning you to guard you carefully.’” Luke 4:10

Today marks the day that Joshua Angel requested responses from Fannie and Freddie Boards of Directors.

Mr. Angel wrote:

“I am 80 years old, and these shares — amid recent revelations of Treasury looting — now provide considerable anxiety, emanating in great part from your consistent failure to exercise even a tiny modicum of the fiduciary duty you as directors owe to me, and to the Company.”

“…I have engaged counsel to commence suit against you and the Company for class redress for breach of duty and breach of contract.”

“However, before directing counsel to proceed I am writing to you in the hope that litigation can be avoided by your accepting my urging to seek and obtain clarification from outside counsel regarding your duties and liabilities as members of the Fannie Mae (Freddie Mac) Board of Directors, and to begin taking steps to behave as an informed, active board. I believe that you are a board of directors subject to Delaware (Virginia) law, that you owe a fiduciary duty to the Company and its preferred shareholders, and that you may be held liable for a breach of your statutory obligations as directors and of the duties owed to the Company and its preferred shareholders with respect to the payment of dividends and other matters.”

“I look forward to hearing from you promptly (i.e. by no later than March 10, 2016).”

Mr. Angel’s letters to Fan and Fred’s Boards were follow-up to his essay: “Government Perfidy and Mismanagement of the GSEs in Conservatorship.”

I recommend reading the entire 43-page piece, however the following is Mr. Angel’s conclusion:

“I believe that the GSEs should be responsibly reprivatized, with proceeds being legislatively directed to finance public housing, education, healthcare, and other social programs. The worst option would be to throw the money obtainable from a GSE reprivatization away, and that is exactly what will happen if no action continues to be the government’s chosen path. In the past, the government’s stated reason for liquidating Fannie and Freddie was that they were flawed. Obviously—but keep in mind that more than seven years of conservatorship has now securely validated the GSE model as a worldwide housing finance best.

Prudent owners fix flawed but valuable companies, just as prudent governments make use of the best available engines when the country is in crisis mode. American taxpayers were big-time losers in the financial crisis of 2008. Handled correctly, the responsible reformation and reprivatization of Fannie Mae and Freddie Mac could set the stage for a big come-from-behind American taxpayer win.”

It’s highly doubtful that Mr. Angel will receive adequate responses that would prevent litigation against Fan and Fred Boards…if he receives any response at all.

“I saw the Angel in the marble and carved until I set him free.” ~Michelangelo




Brenda Gaines

How do you feel about Ms. Gaines?

Do you like her; dislike her? Is she a hero… a villainess?

Who is Brenda Gaines, you ask?

The following is a bio of Ms. Gaines on Fannie Mae’s website:


Ms. Gaines is an accomplished financial executive…! Former CEO of Diners Club, Fannie Mae board member since 2006… very impressive!

Ah, wait… Is that right, current Fannie Mae board member since 2006?

We were told that all pre-conservatorship board members were replaced…

On a side note – this part of the Fanniegate conspiracy is brilliant. The Government illegally seized two private, healthy companies and immediately replaced the board members in 2008. Then, in 2012, the Government enters into the Sweep Agreement and soon after churns the board members again. The plan is that no one board member is culpable…they are all different during different stages of the conspiracy. Plus, the statute of limitations protects many of these board members from lawsuits.

Back to the story… Brenda Gaines was a director before conservatorship. Ms. Gaines more than likely knew her main job in 2008 was to represent shareholders’ interests.

Therefore, consider that Brenda was a shareholder-representing director when she awoke the morning of September 6, 2008. As a reminder, September 6 is that day that Hank Paulson and Jim Lockhart claimed the boards of Fannie and Freddie consented to conservatorship.

Did Ms. Gaines actually consent to conservatorship? If she gave consent, why did she do so? If she did not consent, where is the record of her objecting to this Government take-over? It seems logical that if she objected to the conservatorship in 2008, she would not be the sole remaining pre-conservatorship director from both Fan and Fred’s’ boards.

So, she must have been OK with agreeing to the conservatorship, otherwise she would have been removed by FHFA. Also, she must have been OK with the 3rd amendment…or again, she’d be out by now if she objected. Ms. Gaines must also be in support of board directors violating their fiduciary responsibility to shareholders; violating the Const. 5th amendment; violating Delaware corporate law; obstruction of justice; conspiracy to commit fraud, etc. etc….

How is it possible that a pre-conservatorship board member agreed to the Government take-over (either by vote or through non-objection) without knowing the terms of the agreement? Those terms, as we now know, turned into the Government receiving all of Fannie’s profits in perpetuity plus 79.9% ownership of Brenda’s company through exercisable warrants.

Really, Ms. Gaines? You’re OK with that!? No objection!? No resigning in protest on principle!?

Therefore, it seems Ms. Gaines went from being a protector of shareholder rights to a protector of the Government’s illegal take-over.

With all of the recent attention given to the current board’s fiduciary responsibility, one would have to believe that a pre-conservatorship surviving board member would likely be feeling the heat right about now.

Good luck Ms. Gaines. We only wish you of all people lied awake at night worrying what’s best for shareholders…

Those Shoes

Myron Steele, attorney for plaintiffs in the Jacobs v. FHFA case, sent a letter this week to Judge Sleet stating:

“…The Ninth Circuit issued its opinion after the parties completed briefing on the pending Motions to Dismiss. In Adams, the Ninth Circuit held that Fannie Mae and Freddie Mac are private companies, not federal instrumentalities, and that the conservatorship placed the Federal Housing Financing Agency (“FHFA”) “in the shoes of Fannie Mae and Freddie Mac, and gives the FHFA their rights and duties, not the other way around.” Id. at 6 (emphasis in original). This holding is contrary to Defendants’ arguments that federal law, not state law, governs the conservator’s power to implement the Net Worth Sweep as a term of preferred stock, and that FHFA has authority under HERA to act as it sees fit without regard to whether Fannie Mae and Freddie Mac themselves have power under state law to issue preferred stock having the terms of the Net Worth Sweep…” (emphasis added)

Click to access 15-00708-0036.pdf

In November 2014, I kicked off this blog with a rather long piece which started by citing a federal case:

Caroline Herron vs. Fannie Mae, et al

In that case, United States District Judge Rosemary Collyer stated:

“Thus, like FDIC when it serves as a conservator or receiver of a private entity, FHFA when it serves as conservator “step[s] into the shoes” of the private corporation, Fannie Mae.”


“Similarly, Fannie Mae was not converted into a government entity when it was placed into conservatorship; instead, FHFA stepped into the shoes of Fannie Mae. FHFA as conservator for Fannie Mae is not a government actor.”


“As described above, a conservator or receiver steps into the shoes of the private entity — it assumes the private status of the entity.” (emphasis added in all three passages)

The basis and details of both cases are not at all similar, though that is irrelevant to both judges’ rulings. In both cases, these judges ruled that FHFA steps into the shoes of Fannie and Freddie as conservator and thus assumes its roles, duties and responsibilities.

Myron Steele makes the case to Judge Sleet that Fannie and Freddie are governed by their respective state laws, which in this case invalidates or otherwise makes the Net Worth Sweep illegal.

Equally important is the fact that in these two cases the US Government argued different positions in each case.

In Adams, Government lawyers argued that Fannie and Freddie were a part of the federal government while under conservatorship. However, in Herron Government lawyers argued that Fannie and Freddie were not a part of the federal government while under conservatorship.

There seems to be a clear pattern with Government lawyers of consistently trying to have things both ways… however, the 9th Circuit Court and the DC District Court both rule that Fannie and Freddie continue as private companies even while in conservatorship.

If the shoe fits, wear it!