Quote: F. The Stock Agreements Improperly Appropriated the Private Property of the Companies’ Preferred and Common Shareholders
1. The Original Stock Agreements
154. At the same time that the Companies were placed in conservatorship, the Director of the FHFA, acting as conservator, and the Secretary of the Treasury entered into the Stock Agreements dated September 7, 2008. The Stock Agreements provided that, in exchange for making available to each company a $100 billion line of credit – which neither company needed or asked for – the Treasury would receive (a) $1 billion in senior preferred stock “for free,” (b) additional senior preferred stock equal to the amount of any credit the Treasury extended to the Companies, (c) preferential rights for the Treasury’s senior preferred stock that placed it ahead of all other stockholders, and (d) warrants to acquire 79.9% of each company’s common stock for one-thousandth of one cent per share, which translated to a total exercise price of approximately $8,000 for each company. The Stock Agreements were amended in May 2009 to increase the line of credit to $200 billion for each company, and in December 2009 to make the maximum line of credit based on a formula designed to cover quarterly deficits in net worth from 2010 to 2012, and then for future years subject to a cap.
155. The Treasury claimed that its authority to enter into the Stock Agreements derived from Section 304(g) of Fannie Mae’s charter and Section 306(l) of Freddie Mac’s charter, substantially identical provisions added when Congress enacted HERA. However, HERA did not provide the Treasury with unilateral authority to enter into the Stock Agreements. The amended charters allowed the Treasury to purchase any obligations and other securities issued by the Companies “on such terms and conditions as the Secretary may determine and in such amounts as the Secretary may determine” if the Treasury determined doing so was necessary (i) to provide stability to the financial markets; (ii) to prevent disruptions in the availability of mortgage finance; and (iii) to protect the taxpayers. And, in order to do so, the Treasury had to obtain the consent of the Companies. As set in paragraphs 81-90 and 137-40, supra, the Treasury never obtained the Companies’ consent; instead, the conservatorships and the Stock Agreements were improperly forced upon them.
156. In addition, when the Treasury purchased securities from the Companies, it was required to take into consideration:
(i) The need for preferences or priorities regarding payments to the government.
(ii) Limits on maturity or disposition of obligations or securities to be purchased.
(iii) The corporation’s plan for the orderly resumption of private market funding or capital access.
(iv) The probability of the corporation fulfilling the terms of any such obligation or other security, including repayment.
(v) The need to maintain the corporation’s status as a private shareholder-owned company.
(vi) Restrictions on the use of corporation resources, including limitations on the payment of dividends and executive compensation and any such other terms and conditions as appropriate for those purposes.
157. The Treasury did not consider most of these factors in imposing the Stock Agreements on the Companies. Instead, it forced them to pay tens of billions of dollars to the Treasury in exchange for capital infusions the Companies did not need or could have obtained from other sources under far less onerous terms. Indeed, since 2010, but for the dividends the Companies were required to pay the Treasury under the Stock Agreements, the Companies would not have needed the Treasury to provide additional capital by purchasing additional stock at all. In its 2011 Form 10-K, Fannie Mae reported that it did “not expect to earn profits in excess of [its] annual dividend obligation to Treasury for the indefinite future.”
158. In addition, despite the fact that the Treasury’s authority to make purchases of the Companies’ stock expired on December 31, 2009, the Treasury unilaterally extended that deadline indefinitely.
159. The terms of the Stock Agreements clearly suggest that the intent of these agreements was to eventually put the Companies out of business. When the conservatorships were first imposed, the FHFA stated that they were not intended to be permanent. Acting Director DeMarco said that “[t]he statutory purpose of conservatorship is to preserve and conserve each Company’s assets and put them in a sound and solvent condition. The goals of conservatorship are to help restore confidence in the companies, enhance their capacity to fulfill their mission, and mitigate the systemic risk that contributed directly to instability in financial markets.” Despite these assurances, the Stock Agreements not only failed to consider how the Companies could return to private corporations, they ensured that the Companies could never again do so. Instead, the Government used the Stock Agreements to ensure that the Companies’ sole continuing purpose would be to pay the Treasury for the “right” to remove toxic assets from the books of other financial institutions by transferring them to the Companies’ books using capital provided by the Treasury. As Secretary Paulson explained on November 18, 2011, “we really need to use Fannie Mae and Freddie Mac to do anything that’s reasonable to provide financial support to the mortgage market.”
160. Despite the Government’s assurances that the conservatorships were not going to be permanent, the Government designed the Stock Agreements to provide a mechanism to wind down the Companies. While this would leave the Companies’ shareholders with nothing, by virtue of the liquidation preferences the Treasury received when it took the Companies’ senior preferred stock, the FHFA’s Office of Inspector General concluded that the Treasury would receive $189.5 billion as a result of the potential liquidation of the Companies.
