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New docs fuel case over Fannie, Freddie bailout

Recently unsealed documents could weaken the government's defense as it goes head to head with a hedge fund in court over the bailout of Fannie Mae and Freddie Mac.

The oral arguments on Friday in the D.C. Court of Appeals are part of an appeal Perry Capital filed in 2014 when it lost a lawsuit that alleged the government was taking profits that belong to shareholders.

Lawyers for Perry Capital told CNBC that they will rely on a July deposition of the former CFO of Fannie Mae, Susan McFarland.

In 2012, McFarland told senior officials at the Treasury and Federal Housing Finance Agency that Fannie and Freddie had become sustainably profitable and expected to remain that way for the forseeable future, according to Matthew McGill, attorney for Perry Capital.

"It was precisely that moment, literally days later, that the government made the decision to take all of the profits for themselves forever," McGill said, referring to the government's decision to modify the terms of its bailout of Fannie and Freddie.

The government had originally argued that depositing the profits into the Treasury would prevent taxpayers from burdensome losses.

Woman walks past Fannie Mae in Washington.
Kevin Lamarque | Reuters
Woman walks past Fannie Mae in Washington.

"In the lower court, the government told a story ... that in 2012 Fannie Mae and Freddie Mac were on death's door, and the only way to keep them alive would be to do this trade, where the government would trade a 10 percent dividend for the net worth sweep," said McGill.

"But what these seven documents show is that that narrative was false from the beginning," McGill said. "The immediate goal is for an order that vacates the Third Amendment and requires FHFA and Treasury to follow the law and act as a conservator."

"The Administration agrees with Judge Lamberth's well-reasoned opinion to dismiss this case. The U.S. Court of Appeals Circuit should affirm the district court's decision to dismiss all of [the] plaintiffs' claims," a Treasury spokesperson told CNBC. U.S. District Judge Royce Lambeth rejected the original suit filed in 2014.

A ruling is expected within one to three months.

— CNBC's David Faber contributed to this report.