Judge Cites Unequivocal Language in Dismissing Fannie/Freddie Lawsuit

A lawsuit challenging the manner inrnwhich profits from Fannie Mae and Freddie Mac (the GSEs) have been allocated tornthe U.S. Treasury was dismissed on Tuesday by a U.S. District Court judge.  The suit, brought by institutional investors PerryrnCapital, LLC, Fairholme Funds, Inc. and Arrowood Indemnity Company, contested arnchange in the Senior Preferred Stock Agreement negotiated between the GSEs andrnthe Treasury Department in August 2008 when the GSEs were placed in governmentrnconservatorship.  </p

Thernthree companies originally filed separate lawsuits in July 2013 but it appearsrnthat they may have been combined by the courts into a single action.  The investors maintained that the 2012 changesrnviolated the original terms of the government’s 2008 bailout agreement and thatrnthey unlawfully impair shareholder value.</p

Under the termsrnof the original agreement the GSEs were permitted to make a quarterly draw fromrnthe Treasury to cover net worth deficits up to a cap of $100 billion each,rnlater increased to $200 billion.  Inrnreturn the GSEs gave Treasury senior preferred stock with an initial value ofrn$2 billion which increased dollar-to-dollar with each draw made from thernTreasury.  As of December 2012rnTreasury held senior preferred stock with arnliquidation preference of $189.5 billionrnfor the two GSEs – the originalrn$2 billion plus an aggregate of $187.5 billion in draws to that date. Nornfurther draws have been made since that date. rn</p

The GSEs alsornagreed to provide Treasury with quarterly dividends at an annual rate of 10rnpercent of the liquidation preference.  As a result, even before Treasury provided any funds to thernGSEs, they each owed Treasury dividendrnpayments of $100 million per year. rnThe structure of the agreement meant that the quarterly net deficit ofrneach GSE was increased each quarter by the amount of the required dividend asrnwas the size of the necessary Treasury draw. rn</p

InrnAugust 2012 both GSEs announced they had generated positive quarterly earningsrnand two weeks later Treasury and the Federal Housing Finance Agency (FHFA), thernGSE conservator, announced modifications to the PSPAs in five areas one ofrnwhich was a change to the structure of the dividends.  As of January 1, 2013 the payment would nornlonger be based on a fixed percentage of the liquidation preference but on arnpositive net worth model in which Treasury would simply do a quarterly “sweep”rnof the entire positive net worth of each GSE above a buffer.  The buffer was originally set at $3 billionrnof each GSE and would gradually be reduced to zero over five years.   </p

Atrnthe time it was filed the Fairholme suit argued that The GSEs are not allowedrnto build any capital reserves and the amounts paid to Treasury do not countrntoward paying back the billions of dollars Treasury contributed to shoring uprnthe companies as they rebuilt their businesses. rn  The Perry lawsuit said, “Thisrnblatant overreach by the federal government to seize all of the companies’rnprofits at the expense of the companies and all of their private investors isrnunlawful and must be stopped,”  ThernPerry suit maintained that the U.S. Treasury could collect more than $200rnbillion of profit from the two companies. rn</p

As of the September 2014 dividendrnpayment Fannie Mae will have paid a total of $130.5 billionrnin dividends to Treasuryrnin comparison to $116.1 billion in draw requestsrnsince 2008 and Freddie Mac’s dividends will total $88.2 billionrnagainst $72.3 billion in Treasury support.</p

In dismissing the suits yesterday’ therncourt stated that Treasury and FHFA had been given the power by Congress under thernHousing and Economic Recovery Act (HERA) to take the companies’ profit,rnalthough he said it was understandable for the sweep to “raise eyebrows or evenrnengender a sense of discomfort.”</p

The judge cited the “unambiguous” languagernof HERA’s statutory provisions and the “unequivocal language” of the seniorrnpreferred stock certificates issued under the original agreement.  These, he said, compelled the dismissal ofrnthe plaintiffs’ claims.  He suggested that the investors take up theirrngrievances with Congress.</p

Both Perry and Fairholme are known tornhave invested heavily in the GSEs since they were put in conservatorship.  While the extent of Perry’s holdings are notrnknown, Fairholme had confirmed its acquisition of $2.3 billion in GSE stockrnprior to filing its lawsuit.

All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of MortgageNewsDaily.com is prohibited.