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On Second Thought, Lamberth Agrees GSE Shareholders Can Still Press Claims
Monday, October 1, 2018

Late last week, U.S. District Judge Royce Lamberth, of all jurists, gave shareholders a small boost in the fight against the government’s ongoing seizure of the quarterly profits of Fannie Mae and Freddie Mac.

On September 28, Lamberth agreed that shareholders could not have known the 2012 Net Worth Sweep was a course the government might have adopted based on the terms of the conservatorship set up for the government sponsored enterprises (GSEs) ten years ago. Therefore, more discovery is merited so shareholders can press their claim that the Sweep amounted “the breach of the covenant of good faith and fair dealing.”

The ruling came almost four years to the day when Lamberth dismissed suits by investors who claimed the U.S. Treasury Department and Federal Housing Finance Agency (FHFA) violated the 2008 Housing and Economic Recovery Act’s (HERA) mandate to return the enterprises to a “sound and solvent” condition and that the Sweep amounted to a taking of property without just compensation, in violation of the Fifth Amendment. In that ruling Lamberth conceded the Sweep raised eyebrows but ruled, essentially, the government could do what it wanted.

That spurred investors to fight back and insist on a more complete look at the record. Over a year ago the D.C. Circuit Court concluded that Lamberth had applied the wrong standard to the breach-of-covenant claims and directed him to review. Meanwhile, plaintiffs in a suit by Fairholme Funds pried open a massive trove of documents the government insisted were covered by executive privilege. The more these documents came to light, the more government’s overreach and deception has become evident.

“When investing in companies as closely regulated as the GSEs, plaintiffs should have been aware of the risks that the government may take action affecting their property rights,” Lamberth wrote. “But it does not follow that the plaintiffs could reasonably expect the GSEs themselves — through the FHFA — would give away all of plaintiffs’ residual rights to dividends and liquidation surplus in exchange for no investment and no meaningful consideration at a time when the GSEs were highly profitable.”

While Lamberth’s ruling applies to just one of several claims related to breach of contract, it does mean that shareholders could be entitled to monetary damages, even if the Sweep continues. It also means plaintiffs can move ahead with discovery related to their claims, possibly meaning the government will have to surrender more documents related to the Sweep. Because the Sweep was implemented by GSEs’ conservator, FHFA, rather than the U.S. government. Therefore, claims of executive privilege do not hold up.

To this day, the government maintains that officials conceived and implemented the Sweep to prevent more taxpayer aid to help Fannie and Freddie pay annual 10 percent dividends.  But documents the government was forced to unseal have exposed this as absurd. Far from headed to a “death spiral” of never-ending borrowing and debt, Fannie and Freddie were actually about to soar to new heights of profitability. To date, Fannie and Freddie have paid taxpayers back for the $187.5 billion made available in 2008 and surrendered an additional $100 billion to the government.

Lamberth’s ruling does not mean reimbursement checks are the way.  But it is a reminder that the fight is not over and is worth continuing on all fronts. It is a little late for bipartisan legislation introduced last month to be taken up before the election, and Congress and the Trump Administration can be faulted for letting two more years slip away without an equitable way to end the conservatorship. However, the impasse cannot go on forever. 

Eventually, the Trump Administration will simply use its statutory authority provided for in HERA or invite lawmakers to enact legislation that sets the GSEs on a sustainable course that protects taxpayers and honors the rights of shareholders. Next month’s election could rearrange the political scene enough for a fresh start on many issues, including GSE reform.

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Real Reform for Fannie & Freddie

Current legislation needs to be amended in order for all investors – pensioners, community banks and individuals – to be repaid and create a solid platform for the mortgage market to thrive.

  1. Repayment of Pensioners, Community Banks and Individuals invested in Fannie and Freddie.
  2. Stricter lending standards and oversight of Fannie and Freddie.
  3. Affordable housing goals reinstated and upheld under stricter oversight.

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Investors Unite works to educate Fannie Mae and Freddie Mac shareholders and lawmakers of the importance of reforming the GSEs in a way that will reimburse shareholders what they are contractually and legally owed, but have not been paid.

Issue Background

The United States Congress is considering Government Sponsored Enterprise (GSE) reform that would wipe out Fannie Mae and Freddie Mac shareholders for good. These shareholders include everyday Americans such as public service retirees, teachers, firefighters and police officers. These individuals and pension funds invested in the GSEs before, during, and after the conservatorship and should be made whole under any reform. Taxpayers have been repaid with interest for their 2008 bailout of the GSEs.

Our country’s respect for the rule of law demands that private property rights be protected and Investors Unite gives Fannie Mae and Freddie Mac shareholders a voice in that fight.