WASHINGTON–A federal jury has awarded shareholders of Fannie Mae and Freddie Mac $612 million, saying the Federal Housing Finance Authority (FHFA) acted improperly when it transferred ownership of shares to the United States for the public benefit.
The issue has been a long-running debate in Washington, with plaintiffs arguing in the case that the FHFA “shortchanged them $27 billion” by improperly claiming Fannie Mae and Freddie Mac were in their “death throes” when in fact they were already showing signs of recovering from the 2008 mortgage meltdown, according to the Washington Post.
Second Trial in Case
The trial was the second jury trial on the case. The original jurors could not come to a decision in November, noted the Post. In the new trial, Berkley Insurance Co., et al., vs. the Federal Housing Finance Authority, et al., the plaintiffs sought $1.6 billion in damages, which “they claimed was the drop in value of stocks related to the government-sponsored entities (GSEs).”
According to the report, the jury deliberated for eight hours before delivering its verdict.
The jury determined the Fannie Mae junior preferred shareholders should receive $299.4 million in damages, the Freddie Mac junior preferred shareholders should receive $281.8 million in damages, and the Freddie Mac common stock shareholders should receive $31.2 million, the Post reported.
Roots in Financial Crisis
The case has its roots in the financial crisis of 2008-09 and the collapse of the housing market, when the federal government agreed to bail out Fannie Mae and Freddie Mac.
“But the government couldn’t afford to take its liabilities onto its own balance sheet in a full-blown nationalization, so then-Treasury Secretary Henry Paulson proposed a conservatorship instead,” noted the Post. “The U.S. Treasury Department offered each of them up to $200 billion of capital support in exchange for warrants over 79.9% of common stock together with some preferred stock. Initially, the support carried a 10% cash dividend.
Net Worth Sweep
In August 2012, when the government amended the terms of the bailout. The 10% dividend was canceled, and the companies were now required to hand over all their profits to the Treasury in a so-called ‘net worth sweep’.”
With the companies stripped of the right to retain earnings, the analysis explained that any value left in their legacy junior preferred stock evaporated.
The U.S. Supreme Court declined to hear the case in January 2023. The issue was sent back to the lower court.
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