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Wednesday, October 19, 2022 8:55:29 PM
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DC Jurors Hear Original Fannie Mae, Freddie Mac Bailout Plan
By Katie Buehler
Law360 (October 19, 2022, 8:36 PM EDT) -- A D.C. federal jury on Wednesday repeatedly heard witnesses read portions of a Federal Housing Finance Agency 2008 FAQ sheet about the government's bailout of Fannie Mae and Freddie Mac as shareholders sought to establish the deal's original intent, which they claim the U.S. Treasury strayed from later by sweeping up the companies' net worth.
Witnesses read jurors the answers to "What is a conservatorship?" and "What are the goals of this conservatorship?," among other questions, several times during the first full day of evidence at trial in a lawsuit brought by three classes of Fannie Mae and Freddie Mac shareholders in the U.S. District Court for the District of Columbia. They are seeking $1.6 billion in damages from the Federal Housing Finance Agency, alleging that it improperly amended stock purchasing agreements to allow the Treasury to absorb the companies' net worth.
The answers were developed by the housing agency at the time the conservatorship began — or when the companies were bailed out following the housing market crash in 2008 — and show how actions taken years later were arbitrary and capricious, the shareholders claim.
James B. Lockhart III, the agency director at the time the conservatorship began, explained in a video deposition played in the courtroom that the agency developed the FAQ sheet "to be as clear as we could about what was happening and why it was happening."
"The object was definitely to restore the companies and, therefore, the mortgage market," he explained.
But that didn't happen, according to the shareholders' lawsuit. They've accused the agency of breach of the implied covenant of good faith and fair dealing in connection with amendments added in 2012 to the conservatorship's governing documents, also known as the senior preferred stock purchase agreements with the Treasury Department.
The stock purchase agreements originally entitled the Treasury Department to liquidation preference and quarterly dividends equal to 10% of its total investment in the companies.
The 2012 amendments, also known as the "net worth sweep," increased the department's dividend amount to 100% of all current and future net worth. Shareholders claim that that move eliminated the prospect of them ever receiving dividends and resulted in the Treasury receiving $130 billion more in dividends than it originally would have under the previous stock purchase agreements.
The FAQ sheet issued in 2008 explained that the conservatorship was not the same as liquidating or dissolving the companies and that it could be ended at any time upon the determination of the director of the fair housing agency. It also said the goals of the deal were to help restore confidence in the companies, stabilize them, enhance their ability to operate and mitigate any systemic risks that contributed to the 2008 housing market and economic crash.
Lockhart testified that the agency didn't have a timeline in mind when the conservatorship began, but that it never planned to nationalize the companies, which he said meant converting them into government agencies.
He conceded, however, that he didn't think the conservatorship would end without Congress taking action to restructure the company's operating systems.
Attorneys for the agency focused on another frequently asked question: "What happens to the company's stock during the conservatorship?" The answer stated that while trading of the stock would continue, shareholders wouldn't receive any dividends until the conservatorship ended.
The agency has argued that Fannie Mae and Freddie Mac shareholders weren't harmed by the 2012 amendments because they hadn't been receiving dividends from the companies for years. Based on evidence presented Wednesday, Fannie Mae shareholders hadn't received dividends for 14 consecutive quarters leading up to the 2012 amendments, and Freddie Mac shareholders hadn't received dividends for 15 consecutive quarters.
Shareholders countered that those time spans were nothing compared to the 78 consecutive quarters ahead of 2008 in which Freddie Mac paid dividends to its shareholders. Fannie Mae paid dividends to its shareholders for 127 consecutive quarters ahead of 2008, according to evidence presented Wednesday.
Jurors also heard from three individual shareholders and a representative for a corporate shareholder whose testimony was limited by pretrial orders. They all testified that they were harmed by the 2012 amendments.
The individual shareholders, named plaintiffs in the class actions, all described themselves as investors, not stock traders, who chose to buy common and preferred shares in Fannie Mae and Freddie Mac because of the dividends the companies paid out.
They all said they were motivated to file suit because of the effects the 2012 amendments had on the companies' stock prices.
Edward Linekin, who oversees international and preferred stock portfolios for commercial insurance company W.R. Berkley Corp., said the housing agency did the opposite of what it promised to do in its FAQ sheet.
"The FHFA didn't do what they said they were going to do," he said. "They took every dollar of profits in perpetuity. That's now what the FAQs said they would do."
The Treasury Department's stock purchase agreements have since been amended several times to allow Fannie Mae and Freddie Mac to keep some profits while the department's first-in-line status if the companies are liquidated grows.
The Treasury Department has invested $191.4 billion in the two companies since 2008. Their combined value is currently $385.3 billion, according to investment data.
The trial, which started Tuesday before Senior U.S. District Judge Royce C. Lamberth, is expected to last two weeks.
The shareholders are represented by Hamish P.M. Hume, Samuel C. Kaplan and Kenya K. Davis of Boies Schiller Flexner LLP; Eric L. Zagar and Lee Rudy of Kessler Topaz Meltzer & Check LLP; Michael J. Barry of Grant & Eisenhofer PA; and Adam Wierzbowski of Bernstein Litowitz Berger & Grossmann LLP.
The Fair Housing Finance Agency is represented by Asim Varma, Howard N. Cayne, David B. Bergman, Ian S. Hoffman, Jonathan L. Stern and Robert Stanton Jones of Arnold & Porter.
The Federal National Mortgage Association is represented by Meaghan VerGow of O'Melveny & Myers LLP.
The Federal Home Loan Mortgage Corp. is represented by Michael J. Ciatti of King & Spalding LLP.
The case is In re: Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigation, case number 1:13-mc-01288, in the U.S. District Court for the District of Columbia.
--Editing by Karin Roberts.
DC Jurors Hear Original Fannie Mae, Freddie Mac Bailout Plan
By Katie Buehler
Law360 (October 19, 2022, 8:36 PM EDT) -- A D.C. federal jury on Wednesday repeatedly heard witnesses read portions of a Federal Housing Finance Agency 2008 FAQ sheet about the government's bailout of Fannie Mae and Freddie Mac as shareholders sought to establish the deal's original intent, which they claim the U.S. Treasury strayed from later by sweeping up the companies' net worth.
Witnesses read jurors the answers to "What is a conservatorship?" and "What are the goals of this conservatorship?," among other questions, several times during the first full day of evidence at trial in a lawsuit brought by three classes of Fannie Mae and Freddie Mac shareholders in the U.S. District Court for the District of Columbia. They are seeking $1.6 billion in damages from the Federal Housing Finance Agency, alleging that it improperly amended stock purchasing agreements to allow the Treasury to absorb the companies' net worth.
The answers were developed by the housing agency at the time the conservatorship began — or when the companies were bailed out following the housing market crash in 2008 — and show how actions taken years later were arbitrary and capricious, the shareholders claim.
James B. Lockhart III, the agency director at the time the conservatorship began, explained in a video deposition played in the courtroom that the agency developed the FAQ sheet "to be as clear as we could about what was happening and why it was happening."
"The object was definitely to restore the companies and, therefore, the mortgage market," he explained.
But that didn't happen, according to the shareholders' lawsuit. They've accused the agency of breach of the implied covenant of good faith and fair dealing in connection with amendments added in 2012 to the conservatorship's governing documents, also known as the senior preferred stock purchase agreements with the Treasury Department.
The stock purchase agreements originally entitled the Treasury Department to liquidation preference and quarterly dividends equal to 10% of its total investment in the companies.
The 2012 amendments, also known as the "net worth sweep," increased the department's dividend amount to 100% of all current and future net worth. Shareholders claim that that move eliminated the prospect of them ever receiving dividends and resulted in the Treasury receiving $130 billion more in dividends than it originally would have under the previous stock purchase agreements.
The FAQ sheet issued in 2008 explained that the conservatorship was not the same as liquidating or dissolving the companies and that it could be ended at any time upon the determination of the director of the fair housing agency. It also said the goals of the deal were to help restore confidence in the companies, stabilize them, enhance their ability to operate and mitigate any systemic risks that contributed to the 2008 housing market and economic crash.
Lockhart testified that the agency didn't have a timeline in mind when the conservatorship began, but that it never planned to nationalize the companies, which he said meant converting them into government agencies.
He conceded, however, that he didn't think the conservatorship would end without Congress taking action to restructure the company's operating systems.
Attorneys for the agency focused on another frequently asked question: "What happens to the company's stock during the conservatorship?" The answer stated that while trading of the stock would continue, shareholders wouldn't receive any dividends until the conservatorship ended.
The agency has argued that Fannie Mae and Freddie Mac shareholders weren't harmed by the 2012 amendments because they hadn't been receiving dividends from the companies for years. Based on evidence presented Wednesday, Fannie Mae shareholders hadn't received dividends for 14 consecutive quarters leading up to the 2012 amendments, and Freddie Mac shareholders hadn't received dividends for 15 consecutive quarters.
Shareholders countered that those time spans were nothing compared to the 78 consecutive quarters ahead of 2008 in which Freddie Mac paid dividends to its shareholders. Fannie Mae paid dividends to its shareholders for 127 consecutive quarters ahead of 2008, according to evidence presented Wednesday.
Jurors also heard from three individual shareholders and a representative for a corporate shareholder whose testimony was limited by pretrial orders. They all testified that they were harmed by the 2012 amendments.
The individual shareholders, named plaintiffs in the class actions, all described themselves as investors, not stock traders, who chose to buy common and preferred shares in Fannie Mae and Freddie Mac because of the dividends the companies paid out.
They all said they were motivated to file suit because of the effects the 2012 amendments had on the companies' stock prices.
Edward Linekin, who oversees international and preferred stock portfolios for commercial insurance company W.R. Berkley Corp., said the housing agency did the opposite of what it promised to do in its FAQ sheet.
"The FHFA didn't do what they said they were going to do," he said. "They took every dollar of profits in perpetuity. That's now what the FAQs said they would do."
The Treasury Department's stock purchase agreements have since been amended several times to allow Fannie Mae and Freddie Mac to keep some profits while the department's first-in-line status if the companies are liquidated grows.
The Treasury Department has invested $191.4 billion in the two companies since 2008. Their combined value is currently $385.3 billion, according to investment data.
The trial, which started Tuesday before Senior U.S. District Judge Royce C. Lamberth, is expected to last two weeks.
The shareholders are represented by Hamish P.M. Hume, Samuel C. Kaplan and Kenya K. Davis of Boies Schiller Flexner LLP; Eric L. Zagar and Lee Rudy of Kessler Topaz Meltzer & Check LLP; Michael J. Barry of Grant & Eisenhofer PA; and Adam Wierzbowski of Bernstein Litowitz Berger & Grossmann LLP.
The Fair Housing Finance Agency is represented by Asim Varma, Howard N. Cayne, David B. Bergman, Ian S. Hoffman, Jonathan L. Stern and Robert Stanton Jones of Arnold & Porter.
The Federal National Mortgage Association is represented by Meaghan VerGow of O'Melveny & Myers LLP.
The Federal Home Loan Mortgage Corp. is represented by Michael J. Ciatti of King & Spalding LLP.
The case is In re: Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigation, case number 1:13-mc-01288, in the U.S. District Court for the District of Columbia.
--Editing by Karin Roberts.
