FHFA Responds To Perry Capital Regarding Fannie, Freddie

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FHFA Responds To Perry Capital Regarding Fannie, Freddie, see the filing below (check out the Berkowitz fight here). H/T ValuePlays 

In these related actions, plaintiffs, as shareholders of Preferred Stock and Common Stock in Fannie and Freddie, seek to recover damages, and obtain injunctive and declaratory relief, for injuries they sustained when, in August 2012, two arms of the Federal Government—Treasury, as the owner of the Government Stock, and FHFA, as Conservator —made a deal with each other to wipe out the value of the Preferred Stock and Common Stock in Fannie and Freddie, just as those entities had returned to profitability and the housing market had begun to recover.1 The purpose of that deal—embodied in the Third Amendment to the Preferred Stock Purchase Agreements (“PSPAs”), which govern the terms and conditions of the Government Stock—was, as Treasury announced at the time, to “mak[e] sure that every dollar of earnings that Fannie Mae and Freddie Mac generate will be used to benefit taxpayers…,” and to prohibit Fannie and Freddie from “retain[ing] profits, rebuild[ing] capital, [or] return[ing] to the market.” (Consolidated Amended Class Action and Derivative Complaint (“Consol. Compl.”) Arrowood Compl. Fairholme Compl. Perry Compl.).

Four years earlier, in September 2008, Treasury had obtained the Government Stock, along with Warrants for Common Stock, in return for providing financial support to Fannie and Freddie on terms that were designed to and did fully protect Treasury’s interests, including a 10% dividend (the dividend rate would increase to 12% if Fannie and Freddie paid the dividend in additional Government Stock instead of in cash). Fannie and Freddie drew substantial funds from Treasury. But Fannie and Freddie returned to profitability in 2012, as the housing market rebounded. This renewed profitability—indeed, record profitability in 2013—would have provided Fannie and Freddie the ability (very likely in the near term), with Treasury’s consent, to redeem the Government Stock and return to private ownership. That is exactly the result—the Government would get its money back, with interest, and the company would be restored to private ownership—that Treasury has deemed reasonable and a successful result for taxpayers in other high-profile Government rescues of distressed companies, from Chrysler, to General Motors, to AIG.

But here, Treasury, with the complicity of FHFA, decided that was not enough. The Third Amendment replaced the 10% dividend with a “Net Worth Sweep” under which Fannie and Freddie were each obliged, each quarter, to pay a dividend to Treasury equal to its full net worth without reducing the outstanding amount of the Government Stock or its liquidation preference. The impact of the Third Amendment has been breathtaking. According to Fannie and Freddie, with the March 2014 dividend payment, Fannie will have paid $121.1 billion in dividends to Treasury, exceeding by $5.0 billion the $116.1 billion in cumulative draws since 2008, and Freddie will have paid $81.8 billion in dividends to Treasury, exceeding by $10.5 billion the $71.3 billion in cumulative draws since 2008.3 Under the Net Worth Sweep, even though, by March 2014, Treasury will have been paid $202.9 billion in dividends, the full $189.4 billion in Government Stock remains outstanding. Of course, if those payments to Treasury had been treated as redemptions of the Government Stock, essentially no future dividend obligations would accrue at all.

Defendants purport to justify this extraordinary overreach by claiming that the Government acted reasonably in imposing the Net Worth Sweep because it spared Fannie and Freddie from possible future borrowings when they might lack funds to pay the requisite 10% dividend. To bolster that position and avoid conversion of their motions to dismiss to motions for summary judgment requiring discovery, Defendants flout the purpose of judicial notice—to take notice of a “fact that is not subject to reasonable dispute’’ which “can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned,” FED. R. EVID. 201(b)—and request that this Court take judicial notice of the fundamental disputed facts which bear upon whether the Third Amendment was reasonable, or impermissibly arbitrary and capricious.

For example, Defendants try to use the documents which are the subject of their motion for judicial notice to establish, as an indisputable fact, that as holders of Preferred Stock and Common Stock in Fannie and Freddie, Plaintiffs should have recognized, from prior to 2008, that the Federal Government could, through increasing regulation, take away their rights as shareholders; that the PSPAs made Treasury the sole owner of the companies with virtually untrammeled authority; and that as of September 2008, the Preferred Stock and Common Stock had no value. Plaintiffs maintain that they have rights, as stockholders in Fannie and Freddie, which the Federal Government cannot simply take away through regulation or self-dealing contracts. Moreover, the evidence will show that the September 2008 PSPAs left the capital structure of Fannie and Freddie—including Preferred Stock and Common Stock—in place underneath the Government Stock. In fact, as part of the consideration for the PSPAs, Treasury took Warrants for Common Stock, which would only have value if the Preferred Stock was fully paid, thus recognizing that the Preferred Stock and Common Stock had value. Of course, the $203 billion in dividends that the Government has already received undercuts all of the Government’s positions—including the Government’s central position that the Net Worth Sweep was needed to save Fannie and Freddie from insolvency.

What makes the Government’s arguments particularly troubling is that they rely heavily on the purported truth of a raft of statements in corporate documents, press releases, publications by non-parties, and even newspaper articles, and do so in a procedural posture which aggravates the impropriety of the request for judicial notice. The FHFA Defendants have purportedly not moved for summary judgment on Plaintiffs’ claims that FHFA acted beyond its statutory authority; they have only moved to dismiss those claims for lack of jurisdiction, based on 12 U.S.C. § 4617(f). If there were truly a basis for such a motion, it could be made based on the face of the complaints. But the complaints, on their face, unquestionably are sufficient to establish jurisdiction. So, while neither filing an administrative record nor submitting to discovery, the FHFA attempts to use judicial notice to gain acceptance of FHFA’s version of disputed facts, and thus give false credence to the FHFA Defendants’ motion to dismiss.


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