Traders who looked to the Supreme Court for help in their fight to profit from their positions in government-sponsored mortgage guarantors
has just been pushed back. Now the stocks are in dire straits.
Fannie Mae (FNMA) and Freddie Mac (FMCC) have been under government supervision since the onset of the housing-related financial crisis in 2008.
The FHFA’s decision was a change from the original fixed-rate structure of the Trusteeship Agreement, where Fannie and Freddie were to pay a 10% dividend on preferred shares issued to the Treasury.
Nonetheless, shareholders questioned the merits of the 2012 ruling, pointing out that it came into effect when the U.S. economy was recovering and corporate dividends paid to the Treasury were higher than they were. would have been if the fixed rate policy had remained in place. And although the variable dividend policy has since changed, shareholders have always called on US courts to force the Treasury to repay the difference.
But on Wednesday, the Supreme Court mainly rejected the argument that the FHFA, Fannie and Freddie’s overseer, had overstepped its authority by demanding the payment of variable dividends. The court found that in the 2008 law that created the FHFA, Congress gave the agency broad authority that allowed decisions to be made about dividends that would benefit the public, not just mortgage guarantors and their shareholders.
The move led to sharp drops in equities on above-average trading volumes; stocks are traded over-the-counter and are not listed on a major stock exchange. Fannie Mae stock fell 34% to $ 1.46 around noon, and Freddie Mac stock slipped 32% to $ 1.51.
Equities became favorites for hedge funds as the legal battle dragged on. Bill Ackman’s Pershing Square Capital Management was a significant holder of common stock as of March 31, according to FactSet, while John Paulson’s Paulson & Co has reportedly held significant stakes in the two mortgage giants in recent years. Bruce Berkowitz’s Fairholme Capital Management has also ventured into trading in recent years.
However, Wednesday’s Supreme Court ruling appears to have left an open angle for shareholders to bring in money. In the court’s majority opinion, Judge Samuel Alito wrote that shareholders may have been wronged by an administrative quirk of the FHFA: the law overstepped constitutional limits by limiting the president’s ability to fire the director of the ‘agency.
But rather than awarding damages for it, Alito wrote that the determinations of the extent of the damage caused should be made in a separate argument in a lower court. It could mean more lawsuits and less money than investors had hoped for.
Write to Alexandra Scaggs at [email protected]