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Fannie, Freddie investors undaunted by court loss

By Joseph Lawler | October 7, 2014 | 5:00 am


Investors in the Fannie Mae and Freddie Mac are undaunted in their efforts to challenge the government’s terms of the bailouts for the government-sponsored enterprises, despite a big recent setback.

Tim Pagliara, the executive director of the group representing Fannie and Freddie shareholders, said that having a lawsuit thrown out of federal court wouldn’t set back his efforts, saying “the rule of law needs to be applied. This is a bankruptcy without rules right now.”

The legal campaign against the Treasury’s 2012 decision to sweep all profits from the two businesses into the Treasury failed its first major test last week. Judge Royce Lamberth of the U.S. District Court for the District of Columbia dismissed the case, writing that "the plaintiffs' grievance is really with Congress itself” for writing the 2008 law that set up the bailout of Fannie and Freddie.
The stock market also viewed the ruling as a near-death blow for the investors' legal case, with shares of the two companies dropping by nearly half. While the companies were delisted from major exchanges following their 2008 collapse brought on by the housing bust, shares are still traded off-exchange.

Despite the setback, Pagliara argued that Lamberth’s logic could lead other courts to look at the constitutionality of the 2008 law itself.

“That is what is before Judge [Margaret] Sweeney and the U.S. Court of Federal Claims,” Pagliara said, referring to a case in which investors have been granted a motion to conduct fact-finding to look into the basis of the Treasury’s 2012 decision to take all of the government-sponsored enterprises’ profits.

With a case pending in the Southern District Court in Iowa, the Federal Claims case concerns the “constitutional issues of the unlawful seizure of property,” said Pagliara’s group, Investors Unite. Investors Unite represents many shareholders in the government-sponsored enterprises, from individuals to activist hedge funds.

A representative of Fairholme Funds, one of the activist hedge funds that brought the lawsuits in both the District and Federal Claims courts, told the Washington Examiner that “although litigation is a lengthy process, shareholder-owned Fannie Mae and Freddie Mac remain vitally important and increasingly valuable to all constituents”, adding that “we will vigorously pursue the enforcement of existing contractual claims and our inalienable rights of property ownership as guaranteed by the United States Constitution.”

Fairholme and others are “likely to get a more fair hearing than they did with Judge Lamberth” in the Federal Claims case, said John Berlau, a fellow at the Competitive Enterprise Institute. CEI is one of 17 free-market think tanks that have called on the Treasury to reverse its collection of Fannie and Freddie’s profits in the name of property rights.

“We’ve been arguing for decades that Fannie and Freddie were receiving government subsidies” and distorting the housing market, said Berlau, “but it’s no answer to say that in this special case it’s OK to violate shareholder rights and contracts.”

Unlike Investors Unite, Berlau favors winding down Fannie and Freddie and replacing them with a system of private capital for mortgage insurance. Investors Unite aims to have the companies recapitalized, reformed and returned to the private sector.

Berlau suggested that the investors’ initial loss in court shows how long the route to legal victory would be. “I think it may make some kind of a deal possible” legislatively, Berlau said, “just because these investors now know it may take years going through the courts.”

Pagliara agreed that legislation “may move faster than the courts,” but argued it would take the form of a bill to privatize Fannie and Freddie, not undo them. “It’s a wildcard."

Investors Unite is planning to hold a conference call Tuesday with Richard Epstein, a prominent libertarian professor of law at New York University who has consulted for some of the hedge funds involved in the suits, to lay out the legal path for investors.


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