Fannie, Freddie Holders Argue Against Government Profit Sweep
April 15 2016 - 6:30PM
Dow Jones News
Lawyers for shareholders of mortgage companies Fannie Mae and
Freddie Mac argued in federal appeals court on Friday that the U.S.
government has illegally seized much of those institutions' profits
during the past three years, effectively bilking them out of
hundreds of billions of dollars.
Shareholders are trying to reverse a federal judge's dismissal
of civil lawsuits they brought against the government in 2013.
The legal battle, which is being waged by hedge fund Perry
Capital LLC and other shareholders, centers on the government's
2012 decision to start collecting nearly all of Fannie's and
Freddie's profits each quarter. To date, Fannie and Freddie have
paid the government $246 billion in dividends.
The arrangement "systematically drained these entities of all
value, leaving in its wake two unsound and insolvent zombies—a
golden goose for the Treasury and utterly worthless for the
individuals and institutions who in good faith invested in them,"
said Gibson, Dunn & Crutcher attorney Theodore B. Olson, who
represented Perry Capital.
It could take several months for the three-judge panel in
Washington, D.C., to issue a decision on the appeal. Although some
shareholders have expressed willingness to discuss a settlement
with the government, thus far the government hasn't been open to
that.
Fannie and Freddie were put into a so-called conservatorship in
2008, under the control of the Federal Housing Finance Agency. The
U.S. Treasury over time injected $187.5 billion into the firms to
keep them afloat and in return received warrants to acquire nearly
80% of the companies' common stock along with a new class of senior
preferred shares that initially paid a 10% dividend.
In August 2012, the Treasury Department and the FHFA changed the
terms. Instead of paying a set rate of 10%, the companies would pay
nearly all of their profit to the Treasury when they made one and
skip the dividend when they reported losses.
At the time of the change, government officials said they needed
to avoid a situation in which the companies would need bailout
funds to pay the Treasury's dividends, a so-called "circular draw"
the government said would quickly drain the remaining bailout
money.
But shortly after the sweep took effect, the companies began to
report substantial profits, as the strengthening housing market
allowed them to release unneeded loss reserves and realize value on
deferred tax assets.
Under the amended agreement, the Treasury also would step in to
provide up to $258 billion in additional bailout funds if
needed.
Investment firms that own shares of the company, including Perry
Capital and Fairholme Funds Inc., sued the government, alleging
officials knew the large profits were coming and took them
illegally.
In his 2014 decision to dismiss the suit, U.S. District Court
Judge Royce Lamberth wrote: "It is understandable [for the profit
sweep] to raise eyebrows, or even engender a feeling of
discomfort," but he also said the law was on the government's side.
He said the government would win the case even assuming the
shareholders' narrative of events was true.
A U.S. Treasury Department spokesman on Friday said, "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 plaintiffs'
claims."
So far, the shareholders' legal bid has been unsuccessful.
However, in U.S. Court of Federal Claims in Washington, D.C., a
judge did allow shareholders to conduct discovery and depositions.
There, the shareholders and government are fighting over whether
the government has improperly asserted executive privilege to
withhold documents relevant to the case. Government lawyers have
sought to keep the vast majority of the evidence under seal.
Earlier this week, the judge in that case unsealed certain
documents and partial depositions so that lawyers could refer to
them in Friday's oral arguments.
Most notably, ex-Fannie Mae chief financial officer Susan
McFarland in a deposition said she had told U.S. Treasury officials
that Fannie might start to report large profits only days before
the Treasury Department initiated the profit sweep.
"When the [profit sweep] went into place, part of my reaction
was they did that in response to my communication of our
forecasts…that it was probably a desire not to allow capital to
build up within the enterprises," Ms. McFarland said.
This week, common shares of Fannie and Freddie have risen more
than 20%, though they were sharply down on Friday.
"At a minimum, more facts are needed to get to the bottom of
what happened and to assess the extent to which [shareholders']
rights were breached and the value of the damages," said Hamish
Hume, an attorney with Boies, Schiller & Flexner, in an
interview after the hearing. Mr. Hume argued the appeal on behalf
of other shareholders.
Write to Joe Light at joe.light@wsj.com
(END) Dow Jones Newswires
April 15, 2016 18:15 ET (22:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
Federal Home Loan Mortgage (QB) (USOTC:FMCC)
Historical Stock Chart
From Aug 2024 to Sep 2024
Federal Home Loan Mortgage (QB) (USOTC:FMCC)
Historical Stock Chart
From Sep 2023 to Sep 2024