Fannie, Freddie Shareholders Sue Government Over Takeover

by devteam June 11th, 2013 | Share

Freddie Mac and Fannie Mae reportedrnaggregate earnings of about $18.7 billion in FY2012, $12.1 billion ofrnwhich was earned in the fourth quarter of the year. Since the tworngovernment-sponsored enterprises were placed in conservatorship inrn2008 they have drawn support from the U.S. Treasury in the amount ofrn$71.3 billion in the case of Freddie Mac and $116.1 billion in therncase of Fannie Mae.</p

On Friday, September 5, 2008 FanniernMae’s stock closed at $7.04 and Freddie Mac’s at $5.10. On Sundayrnthe two mortgage giants were placed in conservatorship under thernFederal Housing Finance Agency (FHFA). The following Monday theirrnstocks closed at $0.73 and $0.88 respectively. </p

This is the historical backgroundrnagainst which major shareholders in the two companies filed suit inrnFederal Claims Court on Monday, alleging that, while the 2008rntakeover may have been beneficial to the economy, it was illegal,rnunconstitutional, and cost investors billions of dollars. Accordingrnto Bloomberg, plaintiffs inrnthe suite include Washington Federal, a Seattle bank, the City ofrnAustin Texas Police Retirement System, and Michael McCredy Baker,rnidentified as an individual shareholder. </p

Two more sets of facts to add to thernabove context. First, the companies respective stocks, longrnconsidered among the safer bets on Wall Street, had already lost muchrnof their value before the government’s seizure. Fannie’s price onrnJanuary 2 of that year, before most realized the breadth of thernsubprime crisis and the problems of the economy in general, wasrn$40.20, Freddie’s was $34.42. </p

Second, the 2012 revision in the stockrnagreement between the GSEs and the conservator virtually assure thatrnthe corporations can never recover. As of the first quarter of thisrnyear, rather than pay Treasury an annual dividend of 10 percent of its investment (a combined total of $19 billion in 2012) the GSEsrnwill instead pay Treasury all of their positive net worth in excessrnof a $3 billion buffer. That buffer will be reduced by $600 millionrneach year until 2018 when it will no longer exist. </p

While FHFA said this change wasrndesigned to end the cycle of the GSEs borrowing from Treasury inrnorder to pay a dividend to Treasury, neither has borrowed for a yearrnand the change guarantees the companies cannot build any cashrnreserves. In addition, the new agreement will require the GSEs tornreduce their loan portfolios by 15 percent each year, up from 10rnpercent in the original agreement. While the two have paid anrnaggregate of $55 billion in dividends over the course of thernconservatorship, the amount they owe to Treasury has not beenrnreduced. While the government has a claim on all of the GSEs’rnprofits, it does not carry its liabilities on its balance sheets.</p

According to Bloomberg, Thernlawsuit, which seeks $41 billion in damages, alleges that thernfinancial status of the companies did not warrant the actions takenrnby the government. There are 12 conditions and criteria for arntakeover outlined in the Housing and Economic Recovery Act (HERA) ofrn2008, the suit says, and none of these were satisfied. Thernplaintiffs claim that the government has forced the two GSEs torndelist their stocks, terminate shareholder, meetings, assumernadditional subprime assets, and “accept tens of billions of dollarsrnfrom the Treasury.</p

The stock prices of the two companiesrnhave been run up recently in anticipation that the companies might bernrestored to independence. Both stocks, in the $.80 range at thernbeginning of May, have spiked as high as $5 for Fannie and $5.44 forrnFreddie. There has been no indication from the government that theyrnhave any intentions for the GSEs other than an eventual wind down ofrntheir business operations. Several members of the House FinancialrnServices Committee which have some of the oversight over the matter,rnhave urged that the companies be placed in receivership andrnliquidated.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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