A federal jury has awarded shareholders of Fannie Mae and Freddie Mac $612 million saying the Federal Housing Finance Authority (FHFA) acted improperly when it transferred ownership of shares to the United States for the public benefit.
Various shareholders had sued because they claimed the FHFA “shortchanged them $27 billion” by improperly claiming Fannie Mae and Freddie Mac were in their death throes when in fact they were already showing signs of recovering from the 2008 mortgage meltdown, according to a Washington Post column.
The trial was the second jury trial on the case. The original jurors could not come to a decision in November. In this trial, Berkley Insurance Co., et al., vs. the Federal Housing Finance Authority, et al., the plaintiffs sought $1.6 billion in damages, which they claimed was the drop in value of stocks related to the government-sponsored entities (GSEs). According to published reports, the jury deliberated for eight hours at the end of the eight-day trial before delivering its verdict.
The jury determined the Fannie Mae junior preferred shareholders should receive $299.4 million in damages, the Freddie Mac junior preferred shareholders should receive $281.8 million in damages, and the Freddie Mac common stock shareholders should receive $31.2 million.
In a statement, an FHFA spokesperson said, "FHFA, Fannie Mae, and Freddie Mac are disappointed in the verdict. FHFA will review the verdict and determine post-trial options."
The winning attorneys had a different perspective. The plaintiffs’ lead counsel from Boies Schiller Flexner, Hamish Hume, said, "We have long argued that the FHFA’s August 2012 ‘Net Worth Sweep’ was unreasonable and unjust, giving the government over $150 billion in excess value above its already very generous stake in the companies. The government deserved and would have received, without the net worth sweep, a huge profit on its investment. But it was not entitled to 100% of all profits forever. That was not the deal made in September 2008. Private preferred shareholders invested over $32 billion, of which $20 billion was at the behest of government regulators during the housing crisis years of 2007 and 2008. With this verdict, the jury recognized that the government arbitrarily and unreasonably violated the contractual rights and reasonable expectations of those shareholders.”
“We are thankful for the jury’s tremendous public service and grateful for their verdict,” said BLB&G Trial Counsel Robert Kravetz. Bernstein Litowitz Berger & Grossmann acted on behalf of preferred shareholders of both Fannie Mae and Freddie Mac and common shareholders of Freddie Mac, in tandem with co-counsel Boies Schiller Flexner, Kessler Topaz Meltzer & Check, and Grant & Eisenhofer.
According to the Washington Post, two weeks before the collapse of Lehman Brothers, authorities agreed to bail out Fannie Mae and Freddie Mac. But the government couldn’t afford to take its liabilities onto its own balance sheet in a full-blown nationalization, so then-Treasury Secretary Henry Paulson proposed a conservatorship instead. The US Treasury Department offered each of them up to $200 billion of capital support in exchange for warrants over 79.9% of common stock together with some preferred stock. Initially, the support carried a 10% cash dividend.
In August 2012, when the government amended the terms of the bailout. The 10% dividend was canceled, and the companies were now required to hand over all their profits to the Treasury in a so-called “net worth sweep.” With the companies stripped of the right to retain earnings, any value left in their legacy junior preferred stock evaporated. Shareholders were not happy. Hence, the myriad lawsuits.
This case had made its way through appellate courts with initial losses for the shareholders. The U.S. Supreme Court declined to hear the case in January 2023. The issue was sent back to the lower court.
Attorneys for the shareholders could not be reached.
