In the latest twist in the saga of the federal government’s involvement with Fannie Mae and Freddie Mac, a federal jury has awarded $612.4 million in damages to shareholders of the two enterprises.
The investors’ win in court represents just a small victory, considering that investors in the two government-sponsored enterprises (GSEs) have been pushing to recoup the government’s collection of more than $100 billion in agency profits over the past several years. But it’s a development that’s both surprising and noteworthy since the case was previously dismissed due to a hung jury, and similar cases also saw dismissals.
The class-action suit was filed in reaction to the federal government’s reconfiguration of a shareholder stock repurchase agreement for the two companies. The roots of the conflict go all the way back to 2008, when the government agreed to bail out Fannie and Freddie by taking them into conservatorship — the conservatorship that continues to this day. The original deal for the conservatorship involved the Department of the Treasury giving the two enterprises a capital infusion of up to $100 billion each in exchange for 79.9% of stock.
The Treasury’s capital infusion originally carried a 10% cash dividend — until 2012, when the government reconfigured the bailout terms. The 10% dividend was replaced with a new mandate for Fannie and Freddie to turn over all profits to the Treasury Department starting in January 2013. Fannie and Freddie investors were incensed as the new decree, in practice, canceled out profits from their ownership shares.
Moreover, the suit argues that by 2012, the Treasury Department and the Federal Housing Finance Agency (FHFA), which oversees the GSEs, “knew that [Fannie and Freddie] were on the verge of generating huge profits.”
A jury in the U.S. District Court for the District of Columbia found that the FHFA acted “arbitrarily or unreasonably” in carrying out the so-called “net worth sweep” that pushed Fannie’s and Freddie’s profits entirely to the Treasury Department. Per the terms of the decision, Fannie Mae will pay $299.4 million to its junior preferred shareholders, while Freddie will pay $281.8 million. An award of $31.4 million was also issued to Freddie’s common shareholders.
“We are thankful for the jury’s tremendous public service and grateful for their verdict,” said Robert Kravetz, trial counsel for Bernstein Litowitz Berger & Grossman, which represented shareholders in the class-action lawsuit.