Tag Archives: Fairholme

The Taking of Fannie and Freddie 2

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Today, I look at one more complaint filed in response to the federal government’s amendment to its Preferred Stock Purchase Agreements with Fannie and Freddie (the PSPAs).  Cacciapelle et al. v. United States, filed July 10, 2013, is another takings clause case like the one filed by Fairholme the day before. The facts alleged in the complaint should be familiar to readers of REfinblog.com (here, here and here), although this is a class action complaint.

The plaintiffs state that the members of the class “paid valuable consideration to acquire these rights, and in doing so helped provide financial support for Fannie and Freddie, both before and after the conservatorship, by contributing to a viable market for Fannie’s and Freddie’s issued securities. Plaintiffs certainly had a reasonable, investment-backed expectation that the property they acquired could not be appropriated by the Government without payment of just compensation.” (4-5)

Now having read four complaints dealing with the same issue arising from the financial crisis, I am struck by the importance of narrative in litigation. Given that the federal government saved the Fannie and Freddie from certain financial ruin, we may label the Cacciapelle narrative the “Have Your Cake and Eat It Too” storyline.

One can well imagine the government’s version of events in its inevitable motion to dismiss.

Fannie and Freddie were at the brink of ruin.  We swept in, provided unlimited capital and rescued the companies, the housing market, the country and the world from the Second Great Depression.  To have the private preferred shareholders engage in Monday Morning Quarterbacking and focus on the details from the crisis response that harmed them, to have them ignore the competing concerns that were at stake for each of these critical decisions, adds insult to this injurious lawsuit.  Judge, do not succumb to this hindsight bias!

Let’s label this the Corialanus storyline.

These lawsuits have caught reporters’ eyes and will be well-covered in the press. I would look to see which narratives resonate and I wouldn’t be surprised if the dominant narrative finds its way into the judicial opinions that decide these cases.

Fairholme or Foul? Investor Complaint Over Fannie and Freddie Preferred

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I recently reviewed the complaint filed by former Solicitor General Olson in Perry Capital LLC v. Lew and today I review the complaint in a similar lawsuit, Fairholme Funds, Inc. v. United States, filed July 9, 2013.  Fairholme filed another lawsuit the next day, Fairholme Funds, Inc. et al. v. FHFA et al., which I will review tomorrow. Whereas the Perry case alleged violations of the Administrative Procedures Act and the Housing and Economic Recovery Act of 2008 (HERA), the July 9th Fairholme case alleges that the United States must pay just compensations pursuant to the Fifth Amendment of the US Constitution for taking the plaintiffs’ property, by gutting Fannie Mae and Freddie Mac preferred shares of all of their worth.

As with the Perry case, the Fairholme complaint turns on whether an amendment to the government’s preferred stock documents which gave to the government all of Fannie and Freddie’s profits created a new security in violation of HERA.  In particular, the complaint alleges that by “changing the dividend on its Government Stock in this manner, FHFA actually created, and Treasury purchased, an entirely new security.” (5) This, it appears to me, is a highly contested claim.

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Evoking a famous Supreme Court case, the complaint also states that just “as the Federal Government cannot seize the assets of corporations (for example, the nation’s steel mills) for a public purpose without paying just compensation, so too it cannot seize the shares of stock in corporations to accomplish the same end.” (23) This implicit comparison to the Youngstown Steel case does not work as far as I am concerned.  In Youngstown Steel, the Supreme Court struck down President Truman’s exercise of his inherent authority to seize steel mills in order to support the Korean War mobilization.  Here, we have the federal government already knee deep in the affected companies.  Fannie and Freddie are government-sponsored enterprises; were placed in conservatorship; and have the federal government as their majority shareholders.

While the issues here are complex, my first read of the complaint is that the plaintiffs have a tough row to hoe even though the federal government may have upended preferred shareholders’ settled expectations.