The shareholders of Fannie Mae (OTCBB:FNMA)  and Freddie Mac (OTCBB:FMCC)  filed a lawsuit against the United States government in connection with its action in taking over the mortgage giants  amid the 2008 financial crisis, according to report from Andrew Zajac and Clea Benson of Bloomberg.

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Fannie Mae

According to the shareholders, the action of the United States government was illegal and it cost them billions of dollars.

Lawsuit filed against Fannie Mae, Freddie Mac, Others

In their lawsuit filed with the United States Court of Federal Claims in Washington, the complainants argued that the action of the Federal Housing Finance Agency (FHFA) to take over Fannie Mae (OTCBB:FNMA) and Freddie Mac (OTCBB:FMCC) is beneficial to the nation’s economy, but it destroyed the value of the common and preferred stocks of the mortgage giants. The shareholders also emphasized that the FHFA  trampled their private ownership rights.

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In addition, the shareholders cited their complaint that the government bullied and coerced the board of directors of Fannie Mae (OTCBB:FNMA) and Freddie Mac (OTCBB:FMCC) into consenting with the takeover at the expense of property rights.

Furthermore, the legal counsel of the shareholders argued, “The companies’ willingness to continue providing liquidity to the mortgage markets on a large scale was crucial to the recovery of the devastated home market and the broader economy. The government took control of the companies to make sure this happened on its terms, completely ignoring the loss of rights and economic value it caused to the shareholders.”

Moreover, they argued that Fannie Mae (OTCBB:FNMA)  and Freddie Mac (OTCBB:FMCC) did not guarantee the enforcement of a conservatorship, and both companies did not meet any of the 12 financial and other criteria for a takeover under the Housing and Economic recovery Act of 2008.

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The shareholders through Hagens Berman Sobol Shapiro LLP, a law firm based in Seattle are seeking $41 billion in damages.

The government forced Fannie Mae (OTCBB:FNMA) and Freddie Mac (OTCBB:FMCC) to delist their shares, terminate shareholder meetings, assume additional sub-prime assets and “accept tens of billions of dollars from the Treasury. In exchange, the companies were forced to grant the Treasury unprecedented and usurious cumulative dividends of 10 percent to 12 percent,” according to the lawsuit.

Tim Rood, former executive at Fannie Mae (OTCBB:FNMA)  and currently serving as managing director at Collingwood Group Llc commented that it is reasonable to expect more cases against the government similar to the existing lawsuit because the mortgage giants are now gaining profits.

According to him,  the government’s “conservatorship is really the most unprecedented of unprecedented takeover events. It becomes increasingly difficult and indefensible to reconcile the fact that they have claims on all of the profits but don’t take any of the liabilities on balance sheet.”

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Meanwhile, Senator Bob Corker of Tennessee is pushing to wind down Fannie Mae (OTCBB:FNMA) and Freddie Mac (OTCBB:FMCC) as part of the government sponsored enterprises (GSE) reform.