Fannie Mae Shareholders Challenge U.S. Takeover in Suit

[dipsydoodle]

Source: Bloomberg News

Fannie Mae and Freddie Mac shareholders sued the U.S., alleging that the 2008 takeover of the housing lending giants was illegal and cost investors billions of dollars.

The takeover of the mortgage companies by the Federal Housing Finance Agency, “while beneficial to the economic welfare of the nation, destroyed the value of Fannie Mae’s and Freddie Mac’s common and preferred stock and trampled the private ownership rights” of shareholders, according to the complaint filed yesterday in the U.S. Court of Federal Claims in Washington.

The shareholders’ complaint seeking $41 billion in damages was filed by the Seattle-based law firm Hagens Berman Sobol Shapiro LLP, a lead counsel in class-action lawsuits including those against Toyota Motor Corp. (7203) over the unexpected sudden acceleration of vehicles.

Investors in Fannie Mae (FNMA) and Freddie Mac have taken a renewed interest in the companies’ future now that they have started posting record profits as the housing market rebounds. Fannie Mae had its best year ever in 2012, reporting net income of $17.2 billion for 2012, outpacing S&P 500 companies such as Wal-Mart Stores Inc. (WMT), General Electric Co. (GE) and Berkshire Hathaway Inc. (BRK/A), according to data compiled by Bloomberg.



Read more: http://www.bloomberg.com/news/2013-06-10/fannie-freddie-shareholder-suit-challenges-u-s-takeover.html

[geek tragedy]

1. Because otherwise Fannie and Freddie were doing just awesome. Nuisance suit, nt

[Yo_Mama]

5. It is not

Preferred stock has a special legal status. I think the takeover was illegal.

Btw, the capital to start Fannie was put up by shareholders, and quite a few of the shareholders who got hit WERE banks. Just small banks. And the real reason Fannie got in such trouble was not because of the loans it made, but because it came under pressure from Congress to buy the junk bonds and loans of a bunch of private companies who were writing junk loans.

So, as the net result of this action (legally protected holders wiped out, which took down some of the smaller banks), the interests of many large banks were protected and it is ensured that no such operation can ever be launched again.

Now the large banks are agitating to get Fannie hamstrung. Once they get that through, a few very large banks will have the next generation of mortgage-seeking individuals by the balls.

Everything isn't the way it looks. What happened to Fannie was really a handover of public capital to a some very private interests, or rather the favoring of Wall Street over Main Street. And it's due to get much, much worse.

Here's a Federal Reserve paper about it, so you can know I'm not just bullshitting:
http://www.federalreserve.gov/pubs/ifdp/2012/1045/ifdp1045.pdf

We focus in this paper on one particular exogenous shock to the health of U.S. banks: the set of losses related to GSE preferred stock holdings. These GSE preferred securities were assigned an Aa3 credit rating and were widely held by banks.
2
Given the advantages of holding these securities, including the relatively high yields and the low perceived risks, investments in the preferred shares were extensive across banks, particularly community banks, and at other financial institutions. Banks were able to hold considerable amounts GSE preferred shares because, even though banks are normally restricted from investing substantially in equity securities, an exemption to the standard limits on permissible equity securities was established for the GSE investments. 3

We have three objectives in this paper. First, we document and describe the losses incurred by community banks as an unintended consequence of the policy decision to take the GSEs into conservatorship.

The reason we have banks that are too big to fail is that we are allowing the big sob's to dictate national policy:


If you want to be Dimon's buttboy, then clamor for Fannie to be shut down. But the moment it is, the big banks get control over the terms of mortgages. THAT MOMENT.

And while Fannie is controlled by the US, it's really controlled by Wall Street, i.e., a few big banks and the NY Fed.

I leave it to you to decide if that is really in the common interest.

[geek tragedy]

6. And had the government not bailed them out, how would those shareholders

have done?

[Yo_Mama]

7. Fannie shareholders weren't bailed out. They were wiped out

The bailouts went to Dimon and the like!

[geek tragedy]

8. Had the GSEs not been bailed out, is what I should have written. nt

[Yo_Mama]

9. That is an interesting question

The preferred shareholders would have been protected. It's probable that some more capital would have been brought in.

As it did turn out, the big banks made a chunk load of money shifting their bad loans onto Fannie and FHA, so they needed them kept alive. But as I wrote before, Fannie got into trouble because it was being used to offset bad private investments, not because of the loans that Fannie bought on its own hook that were originated following its own guidelines.

The big banks are now desperately trying to get Fannie deep-sixed, because Fannie can still come after them for losses if some of the more recent loans fail. The big banks have been fighting right and left with Fannie.

[geek tragedy]

10. Fannie isn't going anywhere in the near term, especially while profitable

and propping up the mortgage lending sector.

[Yo_Mama]

12. The Republicans have been after Fannie for a long time

There are all these initiatives in Congress to "wind down" the GSEs.

Here's a link:
http://articles.washingtonpost.com/2012-02-02/business/35445369_1_market-and-neighborhoods-financial-overhaul-legislation-financial-crisis

Big banks are still controlling the agenda, and now it's not even just the Republicans!

When you read "attract more private money to mortgage markets", you should mentally substitute "give the too-big-to-fail financials control over mortgages".

More reading:
http://articles.latimes.com/2013/mar/04/business/la-fi-mo-fannie-mae-freddie-mac-merge-demarco-housing-20130304
http://thehill.com/blogs/on-the-money/banking-financial-institutions/300531-senators-want-to-move-forward-with-fannie-freddie-reform

[muriel_volestrangler]

11. Your link directly contradicts your claims about the cause of the GSE problems

In the late summer of 2008, the GSEs were facing mounting credit losses, and their ability to
raise capital was impeded by a growing lack of confidence by investors about their financial
condition and an increasing uncertainty over whether the Treasury would move to seize the
companies.
...
Altogether, the GSEs had issued a total of $36 billion in preferred stock in the recent decade.
These issuances are listed in Table 1. The GSEs’ then-regulator, the Office of Federal Housing
Enterprise Oversight (OFHEO) had required capital to be raised following a set of well-known
accounting problems that arose earlier in the decade. In addition, by the end of 2007, the GSEs
were facing losses on their mortgage portfolios, and so their regulator directed them to raise
additional capital. About $22 billion of the securities were issued in 2007 and 2008, with the
bulk of that being issued over a two-week period in late November and early December 2007.

On September 7, 2008, the Treasury Department and the GSEs’ newly created federal regulator,
the Federal Housing Finance Agency (FHFA), jointly announced that the two GSEs could not
continue to operate without intervention. The GSEs were placed into the conservatorship by the
FHFA, while the Treasury entered into senior preferred stock purchase agreement with each of
the GSEs, initially pledging support of up to $100 billion per institution. At this time, the value
of the GSEs’ equity capital was positive, and so both GSEs were technically solvent, but Frame
(2008) makes the compelling case that both were insolvent on an economic basis. The GSEs’
reported fair values of equity were much lower than the book values, and both institutions had
recorded large “deferred tax assets” (DTAs).

This was not some arbitrary move to screw the preferred stock holders; it was a necessary move to preserve the US mortgage system. Stock holders may have to take losses in that case. To say "while Fannie is controlled by the US, it's really controlled by Wall Street" is silly; you may as well say the government should never do anything, because it's really controlled by Wall St.

[Spitfire of ATJ]

2. LOL!!! Let's see FOX "News" spin this as a government failure!

[silvershadow]

3. They've got some nerve. nt

[sakabatou]

4. Fannie is full of shit

[Rebellious Republican]

13. Memories sure are very short, lets stroll down a very short memory lane......

Why is AIG Thinking About Suing the U.S. Government?

Ask countless lawmakers and pundits, and the explanation is pure greed. Massachusetts Democratic Sen. Elizabeth Warren called the lawsuit "outrageous," saying that it would be tantamount to the company "biting the hand that fed them." Two U.S. Democratic representatives, Vermont's Peter Welch and Massachusetts' Michael Capuano, wrote a letter to AIG chairman Robert Miller saying that the company now "seeks to become the poster company for corporate ingratitude and chutzpah."

http://www.usnews.com/news/articles/2013/01/09/why-is-aig-thinking-about-suing-the-us-government