Amidst an increasing number of lawsuits against the government, analyst Dick Bove is questioning if stockholder fraud has occurred at Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA), which was placed into government conservatorship in 2008 and will be repaying the remainder of its outstanding government bailout within weeks.
“The government clearly believes that it is above the law because it rescued these two companies from bankruptcy,” Bove, vice president of financial sector research at Rafferty Capital Markets wrote in an investor letter Friday. “The courts may not believe that the government is immune to the laws, however.”
Did FDIC sell on insider information?
In yet another growing list of unseemly issues with management of the Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA), Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) takeover, Bove points to an article by TheStreet.com’s Dan Freed questioning if the Federal Deposit Insurance Corporation traded on inside information from the US Treasury.
At issue is a December 20, 2010 internal government memo, first reported by the New York Times’ Gretchen Morgenson, that stated shareholders in the stock would not receive earnings from Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) in the future. Three months after this memo was written, the FDIC began selling the vast majority of its shares.
The FDIC potentially selling on insider information is one of many issues. Another issue, perhaps most controversial and also raised in the Freed article, is the seizing of private assets without compensation and debate.
“Net worth sweep” sends stock dramatically lower, shakes out retail investors
At issue is an announcement made on August 17, 2012, known as a “net worth sweep.” This amendment to the conservatorship agreement unilaterally gave all future Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) profits to the US government on an indefinite basis. This amendment is at the center of nearly 20 lawsuits, which claim it violates the fifth amendment of the U.S. constitution’s prohibition of the taking of private property for public use without just compensation. After the “net worth sweep” was announced the Fannie and Freddie stock dove nearly 100% in value to near $1 per share.
Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), known to investors as a “safe” and “conservative” stock, had a high percentage of small individual investors, many of whom are said to have sold their ownership rights to hedge funds during the uncertainty.
“Americans have a right to a government which obeys in the law”
Shares are currently trading near $12 per share and Bove had predicted the stock could be worth as much as $18 per share. “Americans have a right to a government which obeys in the law and respects the rights of private property,” Bove said.
