Thread by @FnFGateFan

Vincere Aut Mori #Fanniegate Fans!

Cooper & Kirk's [on of Ps reps] motto seems appropriate going into Monday. Let's see what else happened Friday so we're prepared.

Ds call their last witness, Satriano, head of accounting at FHFA for the last 10 years, and worked there and at their predecessor, OFHEO, for the last 19 years. Started his career at GAO [I think DeMarco did too, would be interesting to see if they overlapped there].

Satriano explains that FHFA regulates FnF and the FHLBs, he oversees the accounting office which decides how to record accounting info and reviews the SEC docs to insure transparency.

Ds jump right in with an email from Ugoletti to Satriano and a bunch of FHFA big wigs.

Email is "Close hold / Pre-decision" and attaches a draft of the 3rd amendment to the PSPAs, and Ugoletti has some questions/tasks for various recipients to look into, but Satriano is not one of them. Satriano says he reviewed the document at the time and concluded that there...

...were no accounting issues with it. His primary role in reviewing amendments was to address any going concern issues, and concluded there were no issues in terms of FnF as going concerns.
Ps: Did it help?
Sat: Yes, circular draws were a problem and 3rd stopped that which...

Sat [cont]: was an improvement from a going concern standpoint.
Satriano is familiar with DTAs and briefly explains them. Agrees that FnF had DTAs going into 2008 that were written down soon after Cship and a periodic review process would see if they should be written back up.

FnF management had to assess DTAs every quarter and FnF produced memo on their conclusions that Satriano would review as part of his job. DTA write down/up requires judgement and GAAP requires "more likely than not" that will be able to use, so weight + and - to make decision.

Satriano says each quarter in 2009-2011 FnF concluded more likely than not they wouldn't use DTAs. 1Q2012 same. 2Q2012 ended in June, but they have 45 days to do the analysis and usually come out about 1 month after end of quarter. So late July/early Aug. it came out.

Ds show Satriano the 2Q2012 Valuation Allowance memo which is moved into evidence. Email shows it came out around July 27, 2012. "Significant negative evidence due to recent cumulative losses, uncertainty in exit strategy from Cship, uncertain about long term financial stability"

Sat: This is a list of negative evidence, cumulative losses are a fact so you give that a lot of weight [compared to projections when are speculative].
Ds: Saying not enough evidence to write up?
Sat: Yes

Similar discussion of the Freddie Mac Valuation Allowance Memo.

Memo: "Forecasts become more difficult to use as positive evidence following a cumulative loss, future projections are subjective, requires turnaround plan that has not yet been demonstrated."
Sat: Laying out objective vs. subjective evidence, more weight on objective.

Ds: So they concluded they could not write up the DTAs as of Aug?
Sat: Yes
Ds: Was it readily apparent to you that they would be writing up the DTAs in the future?
Sat: No, as we just saw, no evidence of that
Ds: But they just had multiple quarters of profit?

Sat: But I would describe them as small earnings, "just barely", compared to earlier losses, and even though its a positive factor, when you compare to other evidence it just doesn't get there.
Email from Griffin [Accountant under Satriano] to Satriano, "Meeting w/ Ed went well"

Up one email in chain: "Any discussion of reaching out to auditors? Given changes it should be fine."
Response from Griffin: "There was not, I do not think there would be any going concern issues, there was a question about re-recording DTAs, both boards discussed based on a...

[Email cont]: "...view that they would be profitable going forward."
Ds: Did it surprise you that there was discussion of DTAs?
Sat: Not at all, discussed each quarter, a board member brought up one positive factor but we just did a month long analysis, concluded no write up.

Back to the email: "I do not think that [DTA write up] makes sense, given the amendment was designed to demonstrate wind down"
Ds: What do you understand this to mean?
Ps: Objection, speculation
[Loooong pause, no response from Lamberth who appears to have fallen asleep]

Ds: Is there are ruling on the objection your honor? Would you like a break, this is a good time.
[Break, jury leaves, brief off the record discussion of plan for the rest of the day, comes back to doc]
Ds: What did you understand this to mean at the time?

Sat: At the time I took this to mean he thought there were two things that were inconsistent, 3rd amendment had two components, one was the accelerated reduction (AR) of the retained portfolios, which would reduce earnings.
Ds: Two components, NWS and AR?
Sat: Yes

Ds: Didn't think in mean wind down the companies?
Sat: No, Cship was designed to conserve and preserve (C&P) assets
Ds: C&P the Tsy commitment
Sat: Yes
Ds introduce meeting notes from bi-weekly meeting the Susan McFarland (Fannie CFO) on Aug 23rd week after 3rd amendment

"Impact of changes to Tsy amendment to long term forecasts", "Reduces likelihood of future draws", "Susan noted $62 valuation allowance", "they have started an analysis about when/if any (including a part) of the valuation allowance may be written up"
Sat: Means fut. possibility

Sat: In beginning of the analysis
Ds: Wasn't even clear "if"?
Sat: All the other questions of how much weight to give projections, those still come into play after you have the forecast which they don't even have yet
Ds: Nothing further

Ps cross by Xavier, has a nice cross style, hard to not come across as a jerk in cross, but he and Hamish are the only ones that pulled it off.
Satriano agrees that SEC filings need to be approved by his office before filed, and they might suggest changes

Ps bring up Fannie's 10Q for 2Q2012, filed Aug. 8 and discuss "forward looking statement" with reference to various disclaimers in the document. Satriano agrees the forward looking statements are insulated from liability and are not guaranteed, whereas liable for facts

Satriano agrees there are 58 fwd looking statements protected under safe harbor one of which is Ds favorite,
"Our expectation is we will not generate income above Tsy dividend over the long term"
Satriano agrees that statement is forward looking and protected from liability

Ps review a few more disclaimers so extreme they suggest forward looking statements are practically more likely to be false than true.

Satriano agrees that 2011 10K had similar disclosures and future is uncertain.

Ps turn to a non-forward looking statement: "Actions we have been taking grow a strong new book of business, minimize losses have had a positive impact and we have experienced significant improvement."
Satriano agrees that is a statement of fact, not protected by safe harbor

Another: "Generated positive net worth above the 10% dividend"
Ps: That's a statement of actual results?
Sat: [pause] Yes
Ps: "Expecting significant improvement in 2012", now that is forward looking?
Sat: Yes, although its not in the section...

Ps: "Credit performance improving" that's actual results?
Sat: Yes
Ps: And these actual results are all positive?
Sat: [emphasis] Modestly positive, yes
Ps: Summary Statement says, "significant improvement" that's actual results?
Sat: Yes
Ps: "saw improvement in housing", actual?

Sat: Hard to tell...
Ps: "improvement in book of business" actual?
Sat: Yes
Ps: "benefit rather than provision" actual?
Sat: Yes
Ps: "released ALL" actual?
Sat: Yes
Ps: Resulted in increasing of net worth?
Sat: I don't know if it did that but income was up

Ps: You said modest improvement right?
Sat: Yes
Ps: But this says "significant"?
Sat: Relative to 2011 which was really bad
Ps: "Comp. income of $5.4B" actual?
Sat: Yes
Ps: "Loss in 2011 was 2.9B" actual?
Sat: Yes

Ps: "Comp. income in 1H2012 $8.5B" actual?
Sat: Yes
Ps: "Loss in 1H2012 $9.2B" actual?
Sat: Yes
Ps "Net worth of $2.8B" actual?
Sat: Yes
Ps: "No draw under PSPA" actual?
Sat: Yes
Ps: "May experience period-2-period volatility, do not expect income > div long term" fwd looking?

Sat: This isn't in the section
Ps: I'm asking if it is forward looking
Sat: It's in two sections, yes
Ps bring up Freddie 10Q 2012 filed Aug. 2012 and start to destroy Satriano in the same way
Ds: Objection, cumulative, already in evidence
L: Sustained
Ps go to email w/ draft 3rd

Ps: Nobody asked you if FHFA should agree to the 3rd amendment?
Sat: No on this email
Ps: Did anyone ask you at any time?
Sat: We discussed it from accounting perspective
Ps: DeMarco decided 3rd amendment?
Sat: Yes
Ps: And you didn't decide?
Sat: No

Ps: Current forecast section, Ds didn't ask about this?
Sat: Don't remember
Ps: "Over the 4 yr period 2012-2015 forecasting GAAP income", so profits?
Sat: If income exceeds expenses
Ps: Next sentence says"Cumulative losses peaked in 2011"?
Sat: Yes

Ps: And actual results given more weight than forecast right?
Sat: Yes
Satriano agrees that McFarland was CFO at the time and jury heard actors presenting her deposition testimony and Spohn [FHFA] was at the Fannie FHFA meeting.

Ps: Aware McFarland testified she raised possibility DTAs would be recognized in the not too distant future?
Ds: Objection, if I may be heard on the phone?
[Phone conference]
Ps: Whatever McFarland testified you have no reason to think untrue?
Ds: Same objection
L: Sustained

Ps: You don't dispute some people discussing DTAs?
Sat: I do, I have no evidence
Ps: If there were evidence, you would have no basis to -
Ds: Objection
L: Sustained
Ps: Analysis of DTAs done every quarter?
Sat: Yes
Ps: So what the memo says is not about the next quarter?
Sat: No

Ps: Is the Valuation Allowance memo telling you if DTA will be written up or down next quarter?
Sat: It contains projections...
Ps: And in fact 1Q13 Fannie wrote it up?
Sat: Yes, that was the first time
Ps: And 3Q13 for Freddie?
Sat: Yes

Ps: And if someone predicted that would happen they would have turned out to be right?
Ds: Objection
L: Sustained
Ps try to show a document but Ds object and it is sustained.
Ps: Nothing further.
Ds rest subject to documents and other matters to be dealt with at the end of day.

Next thread Ps will start their rebuttal case with Dharan. Let me say that this was a great cross examination. Satriano looked around a lot and looked guilty. Ds examination was very boring, but Ps were very animated, and just the tone of Xavier's voice sounded like "gotcha"!

The forward looking statements strategy was brilliant b/c you read those crazy disclaimers and it sounds like "only an idiot would believe anything in this section" and that's where the Ds key statement was. And having Satriano confirm all the ACTUAL great news 1-by-1 was brutal