Shares of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) had a small rally Monday morning following Friday’s surprise settlement with pre-2008 shareholders who had accused the agency of fraud for misrepresenting its finances. Even though this settlement explicitly relates to pre-conservatorship shareholders, Rafferty Capital Markets VP of equity research Richard Bove sees a connection with other cases winding their way through the courts.
“Fannie Mae’s conservator is implicitly arguing in a number of other lawsuits that the government took over a bankrupt company in 2008 and, therefore, would have no obligation to make payments to any groups of plaintiffs,” Bove writes. “If the company was not bankrupt and it was slated for a return to publically held status; then the company would have an obligation to pay the claimants in other lawsuits.”
Fannie Mae, Freddie Mac – The settlement’s implications for other lawsuits
Bove is addressing one of the core differences between how the US government (FHFA and Treasury in particular) and current Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) shareholders view the conservatorship. Shareholders have argued that Fannie Mae’s supposed insolvency was an accounting choice that assumed a worst case scenario that never came to fruition and that regardless the agencies have returned more to Treasury than they took out. The government’s position seems to be that since the GSEs would have gone under without the bailout, it is entitled to all of their future profits, even though it hasn’t held banks, the auto industry, or AIG to the same standard.
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According to Bove, this settlement opens the door to another settlement with Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) shareholders and the FHFA on the grounds that the government may be ready to admit that the GSEs weren’t really destined for bankruptcy after all.
Fannie Mae, Freddie Mac – A sign of litigation fatigue?
The problem with this view is that the settlement is with shareholders between 2006 – 2008, so the misrepresentations that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) is admitting to aren’t that it was insolvent right at the end, but claims that it was healthy in the run-up to the financial crisis. This settlement actually fits the government’s overall narrative, even if Bove and other shareholder activists continue to reject it.
But there is still some upside to the settlement. Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) had a similar lawsuit dismissed last year, and if Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) had stuck to its guns there’s a good chance that it would have won the suit. If we’re starting to see litigation fatigue there could be more settlement offers in the future as the FHFA tries to move on with its current plans for the GSEs.