A Chance to Put the Sweep Behind Us and Restore the Rights of Shareholders
- January 18, 2017
With less than 48 hours to go before the start of the Trump Administration, there are reasons for optimism that the Net Worth Sweep, the wall of secrecy and the cavalier attitude toward the rights of private shareholders we have seen for over five years may soon come to an end.
Treasury Secretary-designate Steve Mnuchin in November 2016 said ending the conservatorship of Fannie Mae and Freddie Mac will be a top priority in the Trump Administration. On an Investors Unite teleconference today, scholars indicated the new administration has every reason to end the Net Worth Sweep and drop the Obama Administration’s tenacious bid to block public scrutiny of the deliberations behind the Sweep.
“I think the election makes a big difference here because it gives an incoming president the opportunity to review the constitutional claims of the last presidents and decide whether to change or alter them,” said John Yoo, Heller Professor of Law at the University of California Berkley School of Law. “This provides an opportunity for the Trump Administration to make a stand in favor of greater transparency and accountability and pull away from the Obama Administration’s excessive claims of secrecy.”
The policy of diverting Fannie and Freddie’s revenues to the U.S. Treasury, in place since 2012, has been the subject of shareholder suits for years. The suits challenge whether the policy violated the Housing and Economic Recovery Act of 2008 (HERA) and led to a parallel legal battle over the Obama Administration’s use of Executive Privilege to keep internal deliberations related to the Sweep off limits to the public. A three-judge panel in the U.S. Court of Appeals for the U.S. Circuit Court for the District of Columbia could rule any day on one key case.
Noting U.S. Court of Federal Claims Judge Margaret Sweeney’s sweeping rebuke last fall of all of the Administration’s claims of privilege on 57 specific documents, Professor Sai Prakash, the James Monroe Distinguished Professor of Law at the University of Virginia School of Law, speculated the new Administration could easily say, “Perhaps we just need to turn over these documents now.” He noted the Trump Administration will have the authority to end the Sweep on Day One. If it did, then the court cases would simply be “smaller parts of a bigger puzzle.”
Despite the unfortunate eight-year saga, Fannie and Freddie remain privately-held companies that have been profitable for years. Had they become insolvent, HERA provided for them to be placed into receivership. Of course, that was never the case. Quite the contrary, documents that have been unsealed to date suggest Treasury Department officials saw the revenues as a way to enable additional borrowing by the government. If that is the case, the Sweep was almost certainly a violation of HERA and, in the words of Investors Unite Executive Director Tim Pagliara, “a form of internal embezzlement.”
This could explain why the Obama Administration has gone to extraordinary lengths to hide actions that have drawn rebukes from federal judges and legal scholars. Horace Cooper, a Senior Fellow at the National Center for Public Policy Research, homed in on that point and explained that, if officials knew their actions did not conform with HERA and then insisted their actions did, this would be a “significant breach.” And the courts have never expanded the narrowly-tailored recognition of Executive Privilege to include avoiding the political consequences of policymaking breaches.
The rule of law and public officials’ proper discharge of their duties transcends elections. Cooper pointed out there have been significant concerns in Congress that are not going to simply evaporate at noon on Friday, January 20. He noted that former Senate Banking Committee Chairman Richard Shelby, R-AL, last year requested a formal investigation of how Fannie and Freddie and other financial services entities are operating. Meanwhile, Sen. Ted Cruz, R-TX, could use the Senate Judiciary Committee as a platform to ask hard questions about government secrecy.
President Obama and his team are saying their farewells and a new day is about to dawn. Let’s hope the rays of sunshine penetrate the walls of secrecy and expedite the adoption of housing policies that uphold shareholder rights and the interests of all taxpayers.