More nonsense embedded within Perry v. Mnuchin, the DTAs
A friend suggested that I expand upon some of the issues mentioned in passing in my takedown of the majority opinion in Perry v. Minuchin, which, by the way, was not intended to be comprehensive.
As I noted, the government's justification for the net worth sweep--to avoid a "dividend driven debt spiral"--was absurd on its face. It was also debunked by evidence obtained through discovery in a lawsuit brought in the Court of Claims.
This evidence was made public and submitted to the D.C Circuit Court while it considered an appeal of the lower court's dismissal of the Perry case. The government's supposed concern about a "downward spiral," is at odds with the sworn testimony of Fannie's CFO at the time, Susan McFarland. She said:
I had a meeting with Treasury [on August 9, 2012] whereby we reviewed our forecasts. I had expressed a view that I believed we were now in a sustainable profitability, that we would be able to deliver sustainable profits over time. I even mentioned the possibility that it could get to a point in the not-so-distant future where the factors might exist whereby the allowance on the deferred tax asset would be released. We were not there yet, but, you know, you could see positive things occurring.
And later:
I mean, in general, I [had] put [the deferred tax asset release] on people's radar screens that it's something that could happen in the not-so-distant future. I will say that I believe Mary Miller asked me in this meeting about how large would it be and did I have any idea of when. And I believe my response was around 50 billion, but that could be larger or smaller depending upon when... but I said probably in the $50 billion range and probably sometime mid-2013...
Eight days later, on August 17, 2012, the Third Amendment sweep was publicly announced. McFarland testified:
So when the amendment went into place, part of my reaction was they did that in response to my communication of our forecasts and the implication of those forecasts, that it was probably a desire not to allow capital to build up within the enterprises and not to allow the enterprises to recapitalize themselves.
The Third Amendment sweep was set to commence in fiscal year 2013, in line with what McFarland told Miller. But then Fannie's earnings began to rise more rapidly. In McFarland's judgement, it became necessary to release the $59 billion DTA allowance in the fourth quarter of fiscal 2012. In early 2013, before the company reported any year-end numbers, McFarland went to the SEC to seek permission to release the DTA allowance. Her presentation laid out detailed justifications for release in fiscal year 2012. From the presentation:
- In assessing the valuation allowance as of December 31, 2012, we concluded that the positive evidence of sustainable future taxable income, based upon improvements in our financial results, positive trends in the housing market and the credit quality and expected profitability of our book of business outweigh the negative evidence of future projected charge offs related to current and future delinquent loans and a three year cumulative pre-tax book loss...
- Based on our income forecasts and our sensitivity analysis, we expect future taxable income to achieve realization of all of our DTAs, including the tax attributes prior to their expiration. Therefore, we have concluded that the valuation allowance should be released as of December 31, 2012.
The government refused to release the DTAs in fiscal year 2012, when the Income would have been retained and not swept up to Treasury. As it happened, McFarland announced her retirement from Fannie on February 5, 2013, before the Fannie's 2012 financials were published. She had been with the company less than 20 months. The timing, as the cliche goes, raises serious questions.
When she joined Fannie in July 2011, the
CFO position had been vacant for six months after her predecessor, David
Johnson, left at the end of 2010. He joined the company in November 2008, two
months after the government demanded the resignations of the entire senior
management teams of Fannie and Freddie Mac when they were placed in
conservatorship. Frequent turnover at the top of a large institution is
generally considered a red flag, a sign that something is amiss.