Did U.S. steal $300 billion from investors in ‘coercive’ takeover of Fannie Mae, Freddie Mac?

The depressed share prices of Fannie Mae and Freddie Mac have perked up a bit this year, while a legal challenge to the way the U.S. Treasury has collected billions of dollars from the home-loan finance giants under Presidents George W. Bush, Barack Obama, and Donald Trump heads toward a decision in the U.S. Court of Federal Claims.

The lawsuit — by Washington Federal Bank (WaFd) of Seattle and the Austin, Texas, police pension-investments fund — alleges that the September 2008 takeover of Fannie Mae and Freddie Mac during the financial crisis was unnecessary, illegal, and marked by “coercive” tactics more appropriate to a dictatorship.

The allegations are so sensitive that thousands of supporting documents and even part of the amended complaint filed last fall have been blacked out at the government’s request.

If Judge Margaret Sweeney buys the arguments, “the government would owe these companies $300 billion,” or the amount that the federal government has “swept” from Fannie and Freddie into the U.S. Treasury in the 11 years since the takeover, veteran bank analyst Richard X. Bove of Odeon Capital Group wrote to clients last week.

“The government took over Fannie and Freddie because it needed their cash” to “buy bad mortgages” and keep big banks from collapsing, Bove notes. To be sure, the government said it acted “under severe pressure, to avoid a depression.” But if Sweeney agrees the government went "over the top,” the mortgage takeover could end up in the books not as a timely rescue but as a costly case of government overreach.

Whom did the government wrongly coerce — and so what? It’s still mysterious. In another lawsuit seeking to stop the government from continuing to take cash from Fannie and Freddie, the Obama administration in 2011 “convinced Judge Sweeney to place over 11,000 documents related to the seizures of Fannie and Freddie under a Protective Order, claiming that [public exposure] could affect ‘national security’ and might cause another financial crisis," notes Gary Hindes, a onetime investigative reporter and Delaware Democratic Party chief who now heads the Delaware Bay Co., a New York investment fund.

Hindes is also suing over the Fannie-Freddie seizure; he previously won payouts from government agencies for investor losses in the PSFS and Penn Treaty-American takeovers.

Hindes points to Paragraph 88, an especially provocative passage in the WaFd-Austin cops complaint. Its many blacked-out lines end with "The extortionate nature of this ‘script’ is breathtaking.”

Ex-Fannie Mae chief financial officer Tim Howard has also challenged the basis for the government’s takeover, noting the mortgage giants had assets enough to pay their bills — as proven by the profits the government has confiscated.

Other lawsuits against the government focus more modestly on stopping it from “sweeping” cash from Fannie and Freddie, especially now that the economy seems fully recovered.

The 2008 Housing and Economic Recovery Act, passed in a rush by Congress and signed by Bush, allowed the government to take over Fannie and Freddie with the “acquiescence” of their board members, even if the companies weren’t in trouble.

If the takeover is allowed to stand, the seizure of the two companies will have been “the best deal for the taxpayer since the Louisiana Purchase,” writes Hindes: $115 billion in “dividends” that the government has already collected, and warrants for Fannie and Freddie stock currently worth an estimated $150 billion, plus interest.

But if Sweeney finds the 2008 takeovers were illegal, the government might have to give back the money and lose the value of the warrants. And Bush Treasury Secretary Hank Paulson, former New York Fed chief (later Obama treasury secretary) Tim Geithner, and others could be hauled into court to explain “whether or not the government used improper means to coerce the boards” and expose the secret measures.

If the court orders settlement talks, rich Fannie and Freddie shareholders like hedge fund billionaire Bill Ackman “are going to have a seat at the negotiating table," which Hindes expects could speed a settlement. Or, I would argue, outrage taxpayers, who would see Wall Street figures getting paid more, at public expense, even if it is arguably their own money they are recovering. This would add to the Trump era’s record deficits.

Trump (like Obama before him) has promised several times to restore Fannie and Freddie to private status soon. Bankers who wanted to reduce Fannie’s and Freddie’s influence have failed to get their alternative reform proposals through Congress.

According to Hindes, the delay just makes the case worse. As the government keeps taking profits from Fannie and Freddie, and the lawsuits to make it stop drag on, “more evidence has been uncovered; more damning emails have come to light; more outright lies by government officials (of both parties) have been exposed.… More shoes are likely to drop.”

Note: The story has been updated to make clear that it quotes from last year’s amended complaint by WaFd. The original complaint was filed in 2013.