A group of private shareholders of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac has filed a complaint against the U.S. government on Monday, claiming that when the GSEs were placed into conservatorship in September 2008, it obliterated the value of their common and preferred stock.
The complaint, filed by Hagens Berman Sobol Shapiro LLP and Spector Roseman Kodroff & Willis PC (SRKW) in the U.S. Court of Federal Claims, seeks $41 billion in damages. It claims the government owes shareholders who suffered financial losses as a result of the takeover ‘just compensation under the Fifth Amendment.’
The suit claims the federal government ‘trampled the private ownership rights’ of investors and ‘bullied and coerced’ the boards of directors of Fannie and Freddie into accepting conservatorship.
Meanwhile, Fannie and Freddie continue to post record profits. Fannie Mae reported record operating profit of $8.1 billion in the first quarter and announced in May that it would pay the Treasury a second-quarter dividend of $59.5 billion. Freddie Mac reported first-quarter operating earnings of $4.5 billion and announced a second-quarter dividend of $7 billion, according to a report at The Street.
The two companies returned to profitability in 2012 – and some investors see no reason why they cannot be transitioned back into private companies.
The U.S. Treasury holds $189.4 billion in senior preferred shares of the GSEs. Dividends on all other share classes have been suspended since the September 2008 takeover.
Fannie and Freddie currently hold roughly $5.2 trillion in mortgage loans and mortgage-backed securities. Together, they purchase roughly 90% of all newly originated mortgage loans in the U.S.
After it receives its June dividend payments, the U.S. government will have received about $131.6 billion in dividends on its combined GSE preferred investment, according to The Street. The government used $189.4 billion in taxpayer dollars to bail out the two companies at the height of the housing crisis.
‘The U.S. government paid no heed to the rights and interests of shareholders when it effectively nationalized these two corporations,’ said Robert Roseman, managing partner of SRKW, in a statement. ‘While other major financial institutions were attempting to minimize their losses during a difficult economy, the government essentially forced Fannie Mae and Freddie Mac to do the exact opposite, expanding its exposure to some of the riskiest assets.’
The complaint states that the three amendments to the GSEs' Preferred Stock Purchase Agreements have caused them ‘to completely and fully transfer any remaining economic value from their shareholders to the Treasury, guaranteeing that the shareholders are left with nothing.’
The complaint is expected to result in a long, drawn-out and highly politicized legal battle – however, it could have the effect of forcing the government to decide whether Fannie and Freddie will be transitioned back to the private sector. At this point, there are varying legal opinions as to whether shareholders will ultimately recover any value from the GSEs, whether through legislation or litigation.
