ST. PAUL, Minn. (CN) – The Eighth Circuit heard arguments Tuesday over whether the diversion of Fannie Mae and Freddie Mac’s profits to the U.S. Treasury Department after the 2008 financial crisis illegally stiffed shareholders.
The Federal National Mortgage Association, also called Fannie Mae, and the Federal Home Loan Mortgage Corp., or Freddie Mac, purchase and guarantee mortgages issued by private banks and bundle the mortgages into securities that are sold to investors.
Iowa residents Thomas and Ida Saxton are investors who own shares of Freddie Mac common stock acquired in 2008 before the Federal Housing Finance Agency, abbreviated as FHFA, placed Fannie and Freddie under conservatorship amid the collapse of the housing market.
Bradley Paynter, of Washington State, owns shares of Fannie Mae common stock purchased by his parents for him as a gift in 1996.
In July 2008, Congress passed the Housing and Economic Recovery Act, under which Fannie and Freddie received a $188 billion government bailout.
HERA also gave the U.S. Treasury Department temporary authority to buy stock in Fannie and Freddie under preferred stock purchase agreements.
Under the agreements, the Treasury received 1 million shares in each company and warrants to acquire 79.9 percent of the common stock of Fannie and Freddie.
On Aug. 17, 2012, the Treasury Department and FHFA executed a “net worth sweep” under which Fannie Mae and Freddie Mac became obligated to pay a quarterly dividend to the Treasury equal to their entire net worth.
The Saxtons and Paynter sued the FHFA and Treasury Department in Cedar Rapids, Iowa, federal court in 2015 over the “massive financial windfall for the federal government” via the net worth sweep.
“With the stroke of a pen, the government had nationalized the companies and taken all the value of the companies for itself, thereby depriving the private shareholders of all their economic rights,” the complaint states.
However, a federal judge ruled last year that the investors’ claims were barred by HERA’s anti-injunction provision and succession clause.
The Saxtons and Paynter appealed to the Eighth Circuit, which heard oral arguments in the case Tuesday. The appellate panel was comprised of U.S. Circuit Judges Duane Benton, Jane Kelly and David Stras.
Attorney Charles Cooper with Cooper & Kirk PLLC, representing the investors, argued that the flow of Fannie and Freddie profits to the Treasury essentially robbed his clients of their stock.
FHFA counsel countered that the net worth sweep was meant to “benefit taxpayers.”
Cooper argued before the three-judge panel that the actions taken by the FHFA and Treasury exceed their statutory authority. The attorney said the net worth sweep was meant to prevent Frannie and Freddie from paying down the Treasury’s liquidation preference and to exit conservatorship.
He said the FHFA playing the roles of both conservator and receiver muddies the situation.
But the government argued that the third amendment to the preferred stock purchase agreements effectively neutralized the compensation flow to the Treasury.
One issue that went back and forth between counsel and the panel was the use of the words “may” and “shall” in the relevant law.
Cooper argued that the use of “may” in the statute is permissive and unbinding, adding that the law is “too broad.”
However, in response, Judge Stras said, “The statute uses the word ‘shall’ 142 times. Doesn’t [that] undermine your argument?”
It is unclear when the Eighth Circuit will issue a decision in the case.