Debate over the government’s decision to confiscate the profits of Fannie Mae and Freddie Mac “is not going to go away with one district court decision,” according to Ralph Nader.
Along with New York University law professor Richard Epstein, Nader participated in a conference call on Tuesday hosted by Investors Unite, a group committed to preserving shareholder rights for investors in the two government-sponsored enterprises (GSE’s).
During the call, Nader and Epstein discussed the ramifications of a recent U.S. District Court decision upholding the government’s right to confiscate 100 percent of the profits earned by Fannie and Freddie. (RELATED: Group Calls on Congress to End Treasury’s ‘Double-Crossing of Shareholders’)
In that case, Judge Royce Lamberth determined that the Treasury Department acted under congressional authority when it decided in 2012 to change the terms of the conservatorship that the GSE’s were placed under as part of a taxpayer bailout in 2008, a decision known as the “Third Amendment Sweep”.
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That ruling is already being appealed, and a number of similar lawsuits from other investment groups are still pending. Epstein spoke optimistically about the prospects for those cases, saying that, “the government case is, in my judgment, utterly meritless, and therefore it has less than a 50% chance.”
Tim Pagliara, Executive Director of Investors Unite, said the Third Amendment Sweep was not based on “projections showing that Fannie and Freddie needed more money, or that the conservatorship fund lacked the money to look over them.” Rather, “it was only after we saw two quarters of profits in 2012 that the government moved to seize those profits.” (RELATED: Fannie and Freddie Raking in ‘Tens of Billions’ of Dollars)
According to Nader, this shows that, “the government really is viewing Fannie and Freddie as a cash cow,” to make deficits appear lower, which he claimed sets “a horrible precedent for any future Treasury Department action for dealing with financial collapse.”
“Before the conservatorship,” Nader said, “the government reassured Fannie and Freddie investors that the two companies were adequately capitalized, implying that there was nothing to worry about.” However, the companies were placed under conservatorship just a few weeks later, causing their stock prices to plunge, and saddling investors with huge losses.
“Nobody is asking for Fannie and Freddie shareholders to be subsidized,” Nader said, “just to be given a chance to exist and recover some of their losses.” Investors in Citigroup and AIG, he noted, were given a chance to recover after those companies were bailed out, which is all that Fannie and Freddie shareholders are asking.
Epstein argued that the government failed in its responsibility to look out for the interests of shareholders, and even exceeded its statutory authority, with the Third Amendment Sweep, saying that, “the bailout was designed to make sure the GSE’s got back on their feet, not to allow the government to liquidate them.”
Although “the government claimed to be looking out for shareholders,” what it ended up doing was to “sign away the entire company,” Epstein said. “Whether Fannie and Freddie are profitable or not, it cannot be in the interests of shareholders to give away everything they have in exchange for nothing in return,” he added. (RELATED: Fannie and Freddie Shareholders Want a Say in Mortgage Finance Reform)
The issue is not solely in the hands of the courts, however; Congress can also take action. Until now, Pagliara said, “the legislative solution to this has been hopelessly deadlocked,” but based on meetings with several members of Congress, “I have a sense that the wild card is that you could see Congress act in a favorable way before the courts finish dealing with this.”
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