Investors Lose Fight Over Fannie, Freddie Profits

(CN) – The Eighth Circuit ruled Thursday that the federal government’s diversion of Fannie Mae and Freddie Mac profits to the U.S. Treasury Department after the 2008 housing collapse did not illegally shortchange shareholders.

Congress was prompted to take several actions to ward off further economic disaster during the recession and therefore did not act arbitrarily or capriciously when it approved a $188 billion government bailout through the Housing and Economic Recovery Act (HERA), which also gave the U.S. Treasury Department authority to buy shares in Fannie and Freddie under preferred stock purchase agreements, according to the 14-page opinion.

The Eighth Circuit’s decision aligns with four other circuits who have ruled the same on identical arguments.

However, the shareholders who brought the lawsuit disagree. Their attorney, Charles Cooper with Cooper & Kirk PLLC, argued in a hearing in May that his clients were essentially robbed of money due to the flow of Fannie and Freddie profits straight to the Treasury.

“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,” according to the complaint originally filed in 2015.

Fannie and Freddie – whose full names are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp., respectively – buy and guarantee mortgages issued by private banks and bundle the mortgages into securities which are then sold to investors. Amid the financial crisis a decade ago, Fannie Mae and Freddie Mac were placed under a conservatorship by the Federal Housing Finance Agency, or FHFA.

Under its preferred stock purchase agreements authorized by HERA, the Treasury received 1 million shares in each company and warrants to acquire 79.9 percent of the common stock of Fannie and Freddie.

A “net worth sweep” was executed in 2012 by the Treasury Department and FHFA obligating Fannie and Freddie to pay a quarterly dividend to the Treasury equal to their net worth.

Shareholders Thomas Saxton, Ida Saxton and Bradley Paynter sued the FHFA and Treasury Department over the sweep, claiming it amounted to a “massive financial windfall for the government.”

Counsel for FHFA countered that the net worth sweep was intended to benefit all taxpayers.

A federal judge ruled last year that the shareholders’ claims were barred by HERA’s anti-injunction provision and succession clause.

The investors appealed to the Eighth Circuit, but on Thursday a panel comprised of U.S. Circuit Judges Duane Benton, Jane Kelly and David Stras unanimously declined to revive the litigation.

“Congress, intentionally or otherwise, may have created a monster by handing an agency breathtakingly broad powers and insulating the exercise of those powers from judicial review. Even so, clear statutory text dictates the outcome,” Judge Stras wrote in the ruling, concurring with the Fifth, Sixth, Seventh and D.C. Circuits.

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