Federal appeals court rules against former Fannie Mae and Freddie Mac shareholders
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Federal appeals court rules against former Fannie Mae and Freddie Mac shareholders

The US Court of Appeals for the Third Circuit on Wednesday ruled against junior shareholders of Fannie Mae and Freddie Mac, who challenged the Treasury Department’s right to all profits in perpetuity after bailing the institutions out during the 2008 financial crisis.

The case dates back to the Housing and Economic Recovery Act of 2008, which, among other things, created the Federal Housing Financing Agency (FHFA) and empowered it to supervise and regulate Fannie and Freddie. The Act afforded broad discretionary powers to the FHFA as conservator, including the ability reorganize and rehabilitate the two quasi-governmental entities. Moreover, the Act guaranteed Fannie and Freddie access to hundreds of billions of dollars from the Treasury, but both entities were required to provide net profits back to the Treasury in perpetuity.

The previous shareholders of both entities, who had invested in the companies prior to the financial crisis with the expectation of receiving dividends as a result of their investment, brought suit against the Treasury since their interests in the entries was effectively elimination upon passage of the Act.

The Third Circuit recognized the plight of the investors. “The challengers are in an unfortunate spot. They invested in Fannie and Freddie, expecting regular dividend payments in return.” However, they were not inclined to rule in favor of the shareholders since any “relief would effectively unwind” and undermine the Federal Housing Finance Agency’s authority. More specifically, the court addressed a number of specific issues they concerned when coming to their decision:

[w]e reject the shareholders’ challenge on all fronts. First, the Recovery Act gave the government broad, discretionary power to enter into the deal. Second, the deal complies with the requirements of the Recovery Act, as well as Delaware and Virginia corporate law. And third, the relief sought would “restrain or affect the exercise of [the government’s] powers” as conservator, which the Recovery Act forbids. 12 USC §4617(f). That relief, even the monetary relief, would unwind the whole deal. So we will affirm the District Court’s dismissal.

As such, the court rejected the the shareholders’ argument and dismissed the suit.