Crucial Differences Between AIG & GSE Lawsuits

Interesting decision in the AIG lawsuit this week. The judge drew a “Solomonic” line through the arguments to say that the government overreached in its actions in 2008, but that shareholders are not due any recompense because the company would have gone under if the government hadn’t stepped in.  Some commentators, who seem to root against Fannie Mae and Freddie Mac shareholders, have tried to link the legal cases of AIG and the GSEs, but that’s in inapt comparison.

In the AIG case, shareholders protested the terms of the deal set by the government, in which it took 79.9 percent of the equity. Regarding the shareholder lawsuits involving the GSEs, shareholders aren’t contesting the deal struck by the government, but rather the failure of the government to live by the deal it struck. In exchange for loaning Fannie and Freddie money in 2008, the government took senior preferred stock in the companies that was to pay a 10 percent dividend.  It also took 79.9 percent of the common stock. Shareholders aren’t contesting this arrangement – Fannie Mae and Freddie Mac were in dire straits and their likely collapse would have imperiled the country’s financial foundation, so a government rescue and the tough terms the government set were necessary.

But, in 2012, the government unilaterally changed the terms of the preferred stock dividend from 10 percent to a 100 percent sweep of all profits. This was a violation of the Housing and Economic Recovery Act, the statute passed by Congress that governs the conservatorship of these companies.

Politico Pro, always one of the fastest on the scene with breaking news, reached out to Investors Unite Director Tim Pagliara for comment on the case. Here’s what they wrote:

“Tim Pagliara, who is advocating for paybacks to those shareholders as the director of Investors Unite, said investors in the housing-finance firms aren’t contesting their takeover ‘but rather the failure of the government to live by the deal that it struck’ — unlike the AIG case.”

While it’s likely that either side in the AIG case may file an appeal, it’s important to separate that entirely from the two GSE lawsuits (Fairholme Funds and the suit recently filed in the U.S. District Court for Northern Iowa), which will be decided on their own merits, as they are starkly different from the AIG situation.

EDITOR’S NOTE: Following the publication of this post, several Investors Unite members contacted us to express disagreement with our characterization of the GSEs as being in “dire straits” in 2008. Thank you for helping us to correct this mischaracterization. While the health of the institutions promoted concerns amid the global financial crisis, the speed with which the Fannie and Freddie returned the $187 billion they received from Treasury, indicates the GSEs were relatively healthy, especially in comparison to other firms that received assistance during the financial crisis. The enormous repayment that the government has received from Fannie and Freddie further illustrates this point.