Here are both sides of the Collins lawsuit over Fannie Mae, Freddie Mac

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The Supreme Court has decided to hear the Collins case lawsuit involving Fannie Mae and Freddie Mac in December. That lawsuit could provide some major breakthroughs for all the litigation involving Fannie Mae and Freddie Mac.

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Odeon Capital hosted a conference call with Brian Barnes of Cooper & Kirk, who was one of the main authors of the brief submitted to the Supreme Court by the plaintiffs in the Collins case. Analyst Dick Bove explained the plaintiffs' and the government's arguments in the case, adding that he believes the lawsuit will be groundbreaking for Fannie Mae and Freddie Mac shareholders.

Government's side in the Fannie Mae, Freddie Mac lawsuit

He said the government claims it has the right to make every decision for the government-sponsored enterprises. The government also argues that the net worth sweep saved the GSEs from a vicious cycle of borrowing more and more money and then paying more and more dividends.

The government also argues that it has met the requirement of maintaining the health and solvency of Fannie Mae and Freddie Mac. Bove and the plaintiffs disagree.

Plaintiffs' side in the Fannie Mae, Freddie Mac lawsuit

The plaintiffs argue that the GSEs were cash flow positive when the government took them over, placing them in conservatorship. They suggest that the acquisition wasn't appropriate. They also argue that they have the right to sue because they have been harmed directly by the loss of their shareholder rights and because the companies' financial stability has been harmed.

The argument also asserts that the law doesn't give conservators free reign to run these companies in ways that harm them. It also claims that the government didn't conserve and preserve the financial stability of Fannie Mae and Freddie Mac.

The plaintiffs' case also points out that Federal Housing Finance Agency Director Mark Calabria himself has said that the net worth sweep was probably illegal. They also say the government's dividend claims are spurious because Fannie and Freddie didn't have to pay cash.

The case also argues that the FHFA is unconstitutional and that the net worth sweep must be eliminated. The net worth sweep has caused all of the GSEs' profits to be swept into the U.S. Treasury, keeping preferred shareholders from receiving their dividends.

Compelling arguments

Bove believes the arguments in the Collins case lawsuit involving Fannie Mae and Freddie Mac are so compelling that if the government has not already begun negotiations with plaintiffs, it will soon. He believes the plaintiffs will win all or most of their claims, which means the preferred shares of Fannie and Freddie are undervalued.

Par value for the preferred shares is $25, and they're currently trading at a fraction of that. Bove has long argued that the preferred shares are the only ones worth buying because they should be worth their par value. Their valuation will depend on the many lawsuits that have been filed over Fannie Mae and Freddie Mac, of which the Collins case is a significant one, especially since it is going before the Supreme Court.

The Collins case will probably have sweeping impacts on the other legislation that has been filed over the GSEs. The hope is that it will eliminate the net worth sweep.

The government is losing

Tim Pagliara of CapWealth Advisors spoke to ValueWalk recently about Fannie Mae and Freddie Mac and the lawsuits that have been filed over them. He said some "hardcore litigation" has been filed, and the government is losing. He added that the situation is "very, very embarrassing" for the government.

The Collins case is a review of the Fifth Circuit Appeals Court's ruling that the FHFA administrator's position is unconstitutional, but that's not the only pending litigation involving the GSEs. He called the lawsuit that was filed over the contractual rights of the preferred shareholders the "big elephant in the rule," adding that the government can't do what it was doing by taking the GSEs' profits in perpetuity.

He also said that the government "committed perjury" in the cases and that it liked about the basis on which the conservatorships were instituted in the first place.