A group of shareholders in the government-sponsored enterprises filed a complaint alleging that placing the entities into conservatorship in 2008 was illegal and as a result, investors lost $41 billion of value.
The complaint comes at a time of continued positive headlines for the GSEs. For example, Standard & Poor’s upgraded the United States’ credit outlook due in part to strong profits from Fannie Mae and Freddie Mac.
The plaintiffs include Savings & Loan Washington Federal and the City of Austin Police Retirement System.
Investment bank Compass Point noted in an email, the shareholders claim the actions taken by the government allegedly expropriated shareholder value of their equity in Fannie Mae and Freddie Mac without due process and without just compensation, "thereby constituting an impermissible exaction and/or taking in violation of the Fifth Amendment to the Constitution."
"Our sense following the review of the complaint is that it will facilitate a very detailed examination of the authorities granted by the Housing and Economic Recovery Act of 2008 as well as the actions by Treasury and the Federal Housing Finance Agency since placing the entities into conservatorship," explained analysts for Compass Point.
For instance, the plaintiffs assert that the government did not abide by the requirements for conservatorship established by HERA.
The complaint goes on to argue that the three amendments to the Preferred Stock Purchase Agreements have forced the GSEs "to completely and fully transfer any remaining economic value from their shareholders to the Treasury, guaranteeing that the shareholders are left with nothing."
The point being, such a detailed examination of statute — the process of placing Fannie Mae and Freddie Mac into conservatorship — and the various PSPA amendments is likely to take a considerable amount of time, Compass Point noted.
The complaint requests restitution based upon its claims that GSE shareholders lost more than $41 billion in value from the previous day to the first trading day following the conservatorship.
"In our view, this type of action has been expected for quite some time and should not be viewed as a surprise. The path to realizing value in the junior securities can occur through either legislation or litigation," Compass Point analysts stated.
They added, "We believe the legislative path to realizing value will be extremely difficult to navigate given the politics surrounding the GSEs. We simply do not believe that lawmakers will return the GSEs to the private market or support a receivership framework that allows for significant recoveries on the junior securities."
It would seem exploring litigation is the next sensible step for holders of these securities and should come as no surprise given the renewed interest in the securities.
While the debate regarding the junior GSE securities will continue, Compass Point remains "pessimistic regarding efforts to recover significant value through either legislation or litigation."