Recent Supreme Court Cases May Affect GSE Outcome
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Several recent cases have come before the Supreme Court which may affect the outcome of how investors are treated with regard to Fannie Mae and Freddie Mac. Private investors still own 20.1% of these companies' common stock through shares traded in the public markets.
MATRIXX INITIATIVES v. JAMES SIRACUSANO
Justice Sotomayor delivered the unanimous opinion of the court that this case may proceed as a class action securities fraud lawsuit agains the defendent, Matrixx Initiatives, formerly a publicly traded company. Matrixx made a nasal spray product called Zicam, which is reported to cause a total loss of smell in patients.
To boil it down, investors are claiming that the management withheld information regarding a defective product from investors. In their regulatory filings they "warned of the potential “ ‘material adverse effect’ ”that could result from product liability claims," but "they did not disclose, that two plaintiffs had already sued" the company. Then, they issued a press release to attempt to calm fears with investors. It worked as intended, sending the stock up, but soon thereafter, regulators required the company to stop selling their flagship product, as many more lawsuits were filed.
Interestingly, the Obama Administration sided with investors in this case.
Key Takeaway: This case has not been decided yet, but if the investors win, the rule will be that management can't partially disclose risk in SEC filings while at the same time attempting to dissuade investor concerns with press releases and public statements.
In the beginning of 2008, regulators at OFHEO/FHFA were still raising stock to increase capital at Fannie and Freddie. James Lockhart of OFHEO/FHFA testified in April 2010 that he knew the entities were undercapitalized in 2007 before using the press to help raise additional capital through stock offerings. The Treasury was also in on this act. In Hank Paulson's book, "On The Brink" the former Treasury Secretary admits that shareholders were ambushed by the Treasury's actions. He documented a conversation with President Bush as follows:
“Do they know it’s coming, Hank?” President Bush asked me.
“Mr. President,” I said, “we’re going to move quickly and take them by surprise. The first sound they’ll hear is their heads hitting the floor.”
BLOOMBERG, L.P. v. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
This case went to the Supreme Court as an appeal and the court sided with the lower court. The Federal Reserve must comply with Freedom of Information Act requests. The Federal Reserve is not a government agency. It is technically a private banking institution, with powers given to it by the government.
Key Takeaway: In July 2008, Fed Chairman Ben Bernanke said that Fannie Mae and Freddie Mac were "adequately capitalized" and "in no danger of failing.” The Fed is not immune from FOIA requests and could be asked to provide additional details of their analysis.
Additionally, if the Federal Reserve isn't immune to FOIA requests, then neither are Fannie and Freddie. 79.9% of these companies' common equity is owned by taxpayers.
- MATRIXX INITIATIVES, INC. v. SIRACUSANO
Respondents filed this securities fraud class action, alleging that petitioners (hereinafter Matrixx) violated 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b5 - BLOOMBERG, L.P. v. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM OF THE FEDERAL RESERVE SYSTEM
Bloomberg, L.P., submitted Freedom of Information Act ("FOIA") requests to the Board in April and May 2008. The requests sought (in relevant part) detail about loans that the twelve Federal Reserve Banks made to private banks in April and May 2008.
Paulson stated at the beginning of Conservatorship that the GSEs would be used as support mechanisms for the mortgage market during the downturn. The promise made to shareholders was that the government would preserve and conserve the assets of these entities. Shortly after this, the companies began to record multi-billion dollar write-downs of assets. The instituted programs to restructure mortgages and modified over 1 million home loans.
Multiple experts on housing finance including Ben Bernanke and Barney Frank have suggested that the GSEs become public utilities supporting the market. In some cases, they have suggested that this is already the case based on the actions taken by regulators and the companies.
Related Hubs
- Fractured Committee Debates Housing Finance
- Treasury Will Make Profit on Fannie and Freddie MBS
- Fannie and Freddie, Conservatorship Agreement Transparently Violated
- The Cost of Resolution at Fannie and Freddie
- Recent Supreme Court Cases May Affect GSE Outcome
- Fannie Mae and Freddie Mac Shareholders Organize
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I agree 100% and frankly think this is made worse by the fact that the general public doesn't understand what these companies actually do.
gmonkeylover 14 months ago
the gov cannot be allowed to seize companies under the illusion of conserving assets and operate them to support fiscal stability in the housing markets without compensating the companies. they also should not be holding the companies hostage with the punitive 10% dividend rates, nor should they have emasculated CEO/BOD's under gag orders, nor should the treasury who oversees the FHFA be the conservator due to conflict of interest in competing bond issues.
What's most horrifying is how nobody seems to pay attention to the FCIC report on who drove us into the abyss and why gse's are being unfairly scapegoated for a disproportionate share of the blame. To add insult to injury, they want private markets to dominate the future of the mortgage markets not in any way acknowledging these are the very same reckless unregulated entities that both created these bubbles and profited from them.