Who Launched the USS Fannie Mac?

Marla Singer at Zero Hedge wrote an important piece regarding the Agencies this weekend. I am sure that she will get a lot of .GOV reads from this. I believe that she might be the first to not only blame the government for the problems at Fannie and Freddie but to make a case that the government might be responsible for some of the consequences. Ms. Singer may be onto something.

There was an interesting court case down in New Orleans last fall. There are numerous appeals out on this case, so no precedent has been set as yet. But we are getting close. There may be some connection to the facts in NOLA and what happened with Fannie and Freddie.

I am not a lawyer, so allow me to spell this out in layman’s language. I will let the lawyers out there pick this apart.

Following the Katrina disaster in New Orleans there were many lawsuits from property owners who had been flooded and lost all that they had. Most of these suits were directed at the Army Corps of Engineers (“ACE”). The argument put forward was that the ACE failed in its responsibilities to protect the property owners in NO, and as a result they were liable for damages. Legally this argument has little merit.

There are statutes and precedents that establish that the Government has substantial immunity from lawsuits. Even if the ACE did screw up, the government is shielded from liability. (The seminal case of Central Green Co. v. United States, 531 U.S. 425 (2001))

But that is not what US District Judge Stanwood Duvall said in his opinion. He found in favor of the plaintiffs. Judge Duvall awarded five victims of hurricane Katrina almost $750,000, ruling that the Army Corps of Engineers helped cause the flooding of their homes and businesses by carelessly maintaining a shipping channel to the Gulf of Mexico.

The following comments were made:

-The Corps had not acted with due care when it botched operation and maintenance of MRGO, (a shipping canal). {MRGO=FNM/FRE??}

-Army Corps of Engineers failed to tell Congress about the channel's environmental and safety problems. {OFHEO??}

On the more difficult issue of whether one can sue the Government, even when they screw up, the Judge made a most interesting (to me) legal argument:

“Would the United States be immune for all damages if a Navy vessel lost control and broke through a levee where the sole cause of the failure of that levee was the Navy vessel’s negligence?”

The Judge relied on this logic when he ruled against the ACE/US Government. I can’t help but make the comparison to the Government’s role with respect to Fannie and Freddie. Both the Executive and Legislative arms of Government misused the Agencies for decades. As a result, the F/F equity holders took a quarter of a trillion dollar shellacking, and damn near everyone in the globe felt some of the pain. The US will pay for it over the next twenty years.

It’s a stretch to compare Judge Duvall’s ruling in NOLA to the circumstances behind F/F. But not that much of a stretch. I have a book of examples. A major turning point in this history took place in 2002. The numbers exploded after that and the die was cast. This from a George Bush speech in 2002.

"Economic security at home is just an important part of -- as homeland security. And owning a home is part of that economic security."

"I called upon the private sector to help us and help the home buyers. I'm proud to report that Fannie Mae has heard the call and, as I understand, it's about $440 billion over a period of time. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital."

In 2002 Bush was consumed with Homeland Security. He used Fannie and Freddie to support his goals. Notice he refers to F/F as the “private sector”. He knew better. His T-Secretaries were warning Congress that the Agencies posed a systemic risk.

Fannie Mae heard the call”. What bunk. Fannie was told what to do by the Administration. For Mr. Bush to have suggested that this was somehow the “underpinnings of good capital” speaks for itself. That statement makes no sense. But, none of this made sense. The audience of mortgage bankers cheered loudly however.

This was the battleship USS Fannie Mac headed for the levee. It just took six years for the crash to happen.

Back in NOLO the lawyers are lining up clients who got flooded. The talk is of a $100b class action lawsuit as a result of Judge Duvall’s ruling. Some experts see as inevitable the creation by Congress of a fund to compensate Katrina victims ala the 911 victims. The results of the lawsuit and the proposal for a settlement has gotten support from Academia:

Professor Oliver Houck of Tulane Law School, "This was our 9/11. There's even more of a rationale here, because the government was largely responsible."

Those that chase Fannie and Freddie stock might do well to follow the appeals of Judge Duvall’s ruling. Those that chase ambulances might do well to follow it too. There is a case here somewhere.