Supreme Court Sends Mixed Signals on Fannie-Freddie Investor Claims
Supreme Court Sends Mixed Signals on Fannie-Freddie Investor Claims
(Bloomberg) -- Shareholders of Fannie Mae and Freddie Mac got a mixed reception at the U.S. Supreme Court on a lawsuit that seeks billions of dollars and could affect the push to end government control of the mortgage giants.
Hearing arguments by phone Wednesday, the justices considered whether investors can challenge the 2012 agreements that let the federal government collect more than $300 billion in profits from Fannie and Freddie. A ruling in the investors’ favor in the case would give them a chance to collect a massive settlement.
Most justices directed tough questions at lawyers for both sides. Chief Justice John Roberts asked a government attorney to respond to the investors’ contention that “their stock was completely wiped out in a unique way.” But later Roberts told a lawyer for the investors that “this was a lifeline thrown to your client.”
As the argument began Fannie Mae and Freddie Mac’s common shares each jumped more than 20%, the biggest intraday rally for each since Nov. 20, before paring those gains later during the session.
Read more: Fannie, Freddie Shares Soar as Supreme Court Hears Arguments
The case will shape the future of companies that keep the U.S. housing market humming. Fannie and Freddie buy mortgages from lenders and package them into bonds that are sold with guarantees of interest and principal. The suing investors are pressing multiple lines of argument, angling to have at least one survive so the case can move forward.
With the argument over -- and a ruling not likely for several months -- investors will now turn their focus to Treasury Secretary Steven Mnuchin and Federal Housing Finance Agency Director Mark Calabria, who are in talks to amend the companies’ bailout agreements before President-elect Joe Biden’s inauguration.
Some investors said before the argument that a skeptical high court reception for the government could provide political cover for Mnuchin and Calabria to reduce or eliminate the Treasury Department’s preferred equity stake in Fannie and Freddie.
Constitutional Flaw
It’s not clear that the 100-minute argument gave them that cover. The session focused heavily on the investors’ contention that the so-called profit sweep is void because of a constitutional flaw with the structure of the Federal Housing Finance Agency, or FHFA, which oversees Fannie and Freddie. That argument drew pushback even from some of the court’s conservatives.
“Do you think that if a provision of a massive statute is held to be unconstitutional, a person who is not in any way affected by that provision is entitled to relief?” Justice Samuel Alito asked the investors’ lawyer, David Thompson.
The investors say the agency has an unconstitutional level of independence from the president because the director can be fired only for cause. The Supreme Court endorsed a similar argument earlier this year in a case involving the Consumer Financial Protection Bureau, but stopped short of abolishing that agency or invalidating a disputed document demand it issued.
The court spent less time in Wednesday’s argument on what many Fannie and Freddie investors have viewed as the primary thrust of the case, contentions that the FHFA exceeded its authority with the 2008 accords.
The Trump administration, which is defending the profit sweep, contends that the 2008 law that created the FHFA precludes lawsuits that challenge the financial arrangement. Justice Department lawyer Hashim Mooppan also argued that a separate provision in that law eliminated the right of shareholders to sue on behalf of the companies.
Justice Amy Coney Barrett suggested she disagreed with the latter part of that defense, saying a federal law that governs administrative agencies “gives a direct cause of action for someone aggrieved by agency action.”
But Justice Sonia Sotomayor said allowing a challenge to an agency action because it affected a company’s stock price would be a “sea change in how administrative challenges are litigated.”
‘Not Worthless’
And Roberts seemed to reject the investors’ argument that the companies had been “nationalized,” saying he checked the stock prices of Fannie and Freddie the morning of the argument and saw that they were respectively trading at $2.69 and $2.56.
“Your shares are not worthless,” Roberts said. “They’re worth something, presumably largely based on judgments about what the future holds. So doesn’t that render your sort of nationalization rhetoric just that, rhetoric?”
The federal government seized Fannie and Freddie during the 2008 financial crisis and put them into conservatorship under FHFA control. The companies were eventually injected with $187.5 billion in U.S. aid.
As part of the bailout, the Treasury Department received warrants to acquire nearly 80% of the companies’ common stock, as well as a new class of senior preferred stock that paid a 10% dividend.
At the time the Obama administration announced the profit sweep, officials touted it as a way of winding down Fannie and Freddie. Some Republicans argued that it would cement the companies at the center of the housing-finance system.
Fannie and Freddie reported giant profits immediately after the amendment, and hedge funds that had bought legacy shares at a steep discount cried foul, claiming that the earnings should have stayed at the companies. The investors eventually sued in several courts under myriad legal theories.
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