The lawsuit filed by the shareholders of mortgage giants Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) against the United States government was inspired by former American International Group Inc (NYSE:AIG) chief, Hank Greenberg’s “Taking Clause” suit against the government, according to Alison Frankel’s On the Case at Thomson Reuters News & Insight.
The shareholders of the mortgage giants are represented by Hagens Berman Sobol Shapiro. The firm filed the case against the government at the Court of Federal Claims on Tuesday.
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The complainant’s lawyer, Steve Berman said, “I have to give (Greenberg) credit for thinking of it. After all the attention his case got, some Fannie and Freddie shareholders got to thinking: Why were they any different from him?”
Greenberg & his firm, Star International, claimed that U.S. government’s takeover of American International Group Inc (NYSE:AIG) in 2008 was unconstitutional, and violated the Fifth Amendment—improper government use of private sector assets.
In his argument, David Boies, legal counsel of Greenberg emphasized that the government’s primary intention in the takeover was to protect the country’s economy, and rescue the financial system. However, he said, “Although this might be a laudable goal, as a matter of basic law, could not and did not justify the unlawful means employed. The government is not empowered to trample shareholder and property rights in the midst of a financial emergency.”
Hagens Berman is using the same Takings Clause argument in its lawsuit for the shareholders of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). The law firm is aware that the situation of the shareholders of the mortgage giants is different from the shareholders of American International Group Inc (NYSE:AIG). which is purely a private enterprise.
Fannie Mae & Freddie Mac Were Placed Under Government Conservatorship
In September 2008, the Bush administration placed Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) under government conservatorship to prevent the collapse of the firms, and infused $188 billion in taxpayer money to keep its business operations running. The mortgage giants are considered public-private enterprise because they were private companies with a mission to serve the public by promoting home ownership through mortgage securitization.
The case filed by Hagens Berman contends that the government controlled the mortgage giants in 2008 even if the firms have enough capital in order to “warehouse much of the nation’s bad mortgage debt and provide unprecedented levels of liquidity to the nation’s mortgage market so that other financial institutions deemed ‘too big to fail’ could survive.”
The lawsuit also cited that the problem with the government’s action was it “destroyed the critical rights of the shareholders” of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), and the “value of their ownership interests in the firm’s securities, effectively nationalizing what were once shareholder-controlled corporations.”
Berman told Frankel that the shareholder ownership rights of public-private enterprise represent cutting-edge legal issues, and he anticipates that the Department of Justice would argue that the shareholders of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) “had no expectations that their property couldn’t be extinguished.” Berman added that if the firms were banks taken over by the Federal Deposit Insurance Corporation (FDIC), the shareholders will not be able to file a Fifth Amendment Takings case.
Furthermore, Berman argued that Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) provided shareholders the same rights as private companies including the right to a share of the corporate assets in the event of dissolution or liquidation even if they have public missions.
He explained that billions of dollars in shareholder value were lost when the mortgage giants giants were placed under conservatorship and de-listed its stock by 2010. Berman emphasized that there were precedents in similar takings claims by savings and loan banks taken over by the U.S. in the 1980s, and the most recent was Greenberg’s lawsuit. According to him, he is monitoring the developments in the case.