The Economy

Supreme Court Rejects Fannie Mae, Freddie Mac Investors’ Claims

But the Court said the plaintiffs could seek remedy on the part of their lawsuit that argues the FHFA's structure was unconstitutional.
Vincent RyanJune 23, 2021

Shares of Fannie Mae and Freddie Mac went into a tailspin after the U.S. Supreme Court rejected a major portion of a lawsuit brought by investors challenging the federal government’s pocketing of profits from the government-sponsored enterprises.

The Back Story: The case dates to September 2008, when Fannie Mae and Freddie Mac were placed in federal conservatorship after generating massive losses amid the housing bubble collapse that fueled the Great Recession. The government created the Federal Housing Finance Agency (FHFA) as the regulator for the enterprises, and the agency ordered their stocks to be delisted.

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The FHFA initially created an agreement with the U.S. Department of the Treasury for a $100 billion investment in stock, which the enterprises would pay back. In 2012, the arrangement was changed and the enterprises began handing their profits directly to the Treasury.

Private shareholders in Fannie Mae and Freddie Mac have spent years trying to recoup their investments.

In their lawsuit, they sought to have the FHFA’s structure declared unconstitutional while voiding the 2012 agreement, claiming the government collected more than $300 billion in profits from the enterprises that included $124 billion more than what the original deal with the Treasury would have created.

The Ruling: [The Supreme Court ruled that the FHFA did not exceed its authority under federal law by sweeping profits from the government-sponsored agencies.]

But the Court said plaintiffs could proceed with the claim that FHFA’s structure was unconstitutional. The Supreme Court didn’t dismantle the FHFA, but instead argued its director could be replaced at will by the president. When the agency was created, the director was assured a five-year term with the provision that he could only be fired for cause.

Justice Samuel Alito wrote that the FHFA’s “structure violates the separation of powers, and we remand for further proceedings to determine what remedy, if any, the shareholders are entitled to receive on their constitutional claim.”

Falling Shares, Exiting Director: Common shares of Fannie Mae plummeted as much as 42% and Freddie Mac shares sank 44% — their greatest intraday declines since October 2014, according to Bloomberg — after the justices’ verdict was announced.

The court ruling also draws the curtain on Mark A. Calabria’s role as FHFA director.

Calabria, a Trump administration appointee, was chief economist for Vice President Mike Pence before taking the FHFA leadership position in April 2019 and was scheduled to remain in office for another three years. The Wall Street Journal reported the Biden administration plans to replace Calabria “with an appointee who reflects the administration’s values.”

This story originally appeared on Benzinga. © 2021

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