Last week Investors Unite founder Tim Pagliara took some time out from a previously planned event to give his take on the controversial Lamberth ruling, but this week the organization hosted New York University School of Law professor Richard Epstein to explain his take on the legal standing of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders. But even though Epstein sides with the shareholders, that doesn’t mean he thinks they are certain to win their case.
“I thought the government brief was particularly poor in terms of its candor and its sense,” said Epstein, later adding that, “If the government does one thing right and you do one thing wrong, they win. If you do something perfect and the government makes a complete set of blunders then you have a fifty percent chance of winning.”
Fannie Mae – Epstein rejects both parts to Lamberth’s ruling
Epstein breaks Judge Lamberth’s ruling down into two parts. The first is a conceptual frame where HERA transfers to FHFA all the rights of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) stockholders, officers, and directors, meaning that no one outside of FHFA, including shareholders, has standing to file suit in the first place. Epstein argues that this interpretation of HERA would violate the Takings Clause and that Judge Lamberth shouldn’t have accepted it.
The second part of the ruling is that HERA doesn’t take away any cognizable property rights, even though the way it’s written it gives FHFA dividends, liquidation, and voting rights, leaving shareholders with nothing but the titles to their stocks.
To explain why this is such a problematic standard, Epstein points out that if the government were to flood valuable real estate as part of a larger project and then say that it doesn’t owe anything to property owners who retained title to their now submerged land, they would clearly get some sort of compensation. Similarly, he doesn’t see how stripping Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) stocks of their interest, liquidation, and control rights and then telling stockholders they should be happy to keep the titles can hold up in court.
Fannie Mae – Discovery in Sweeney’s courtroom could affect other cases
Of course, Epstein acknowledges that the courts tend to give other branches a lot of leeway during court proceedings. He says that the best hope for shareholders now is that clear evidence of collusion is found during discovery in the Sweeney trial, changing the tone of other trials as well. Even if he thinks Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholders have the law on their side, they have a lot of litigation and an uncertain outcome ahead of them.