Fannie/Freddie Conservatorship Underscores Bankruptcy Benefits

51ba5b3093538.preview-620Recent discovery of the Treasury Department’s looting of private shareholders’ dividends from Fannie Mae and Freddie Mac has triggered a flurry of attention on the two Government-Sponsored Enterprises (GSEs).  They have now repaid the taxpayers, five years receiving a $187.5 billion bailout.  In theory, this is a positive development.  However, shareholders that invested before, during and after the bailout continue to be left in the cold.

This previously underreported confiscation of private assets by the government came into better view last week.  The U.S. Court of Federal Claims issued a ruling allowing for discovery against the Federal government in pending lawsuits seeking justice for the blatant disregard for investor rights and the seizure of these funds by the Federal government. This ruling has the potential to shed light on the unjust nature of its actions toward the American people.

When the housing bubble burst in 2008, the Federal government stepped in to bail out Fannie and Freddie in an effort to maintain the housing industry and keep our economy afloat. The GSEs were placed into conservatorship, a temporary take-over by the Federal Government, and still allowed for private investment in the form of shares. When Fannie and Freddie became profitable again in 2012, the Treasury enacted “Amendment Three” which essentially swept up 100 percent of all dividends into Treasury coffers.  Current lawsuits claim this action was illegal and Judge Margaret Sweeny’s decision is meant to allow further investigation into the interactions between government officials about this process and timing.

As it stands, investors like community banks, pension funds, and individuals, remain unpaid while the Federal government takes all of their profits. In a breathtaking display of confiscatory abuse, the Federal government demanded all profit and it is now known, thanks to the 2010 Treasury memo, that they never intended to repay investors. This is not only a violation of the rule of law but a blatant disregard of marketplace rules established to help facilitate exchanges within the market.

This is not a loose interpretation of the government’s position.  The December 2010 memo to Treasury Secretary Timothy Geithner from Undersecretary Jeffrey Goldstein explicitly mentions a policy that will “make clear the administration’s commitment to ensure existing common equity holders will not have access to any positive earnings from the GSEs in the future.”  There is no nuance here – the shareholders appear to be left out to dry.

The decision by the Federal Claims Court to allow discovery will hopefully bring to light further facts pertaining to the conservatorship and hopefully add pressure to the Treasury to do right by those who acted in good faith with their investments in the GSEs. It is time to restore ownership rights to those who purchased shares in Fannie and Freddie. It also — for the record — supports a transparent and open bankruptcy proceeding in lieu of the government takeover should history ever repeat itself.