Fannie and Freddie Shareholders – The Forgotten, Used and Abused, Silenced Constituency

Statement By Ralph Nader
Friday, November 22, 2013

Since the 2008 bailout of Fannie Mae and Freddie Mac, and the beginning of their conservatorship, the stockholders of these two companies, of which I am one, have been stripped of their basic rights as shareholders.

Prior to the financial crisis, shareholders of these government sponsored enterprises (GSEs) had legal rights to challenge management decisions through the courts and through proxy battles, or by offering shareholder resolutions. On September 7, 2008, when the U.S. Treasury and the Federal Housing Finance Agency (FHFA) established a conservatorship for Fannie Mae and Freddie Mac, common shareholders lost their voting rights, dividends on preferred and common stock were suspended, and annual shareholder meetings were canceled.

The legal mandate of the conservatorship is to “conserve and preserve the assets” of the companies taken into conservatorship and “restore them to safe and sound condition.” But neither goal is being advanced by the FHFA. And FHFA, under Ed DeMarco, has acted as a “closet liquidator” of the GSEs, effectively acting to wind down the companies. This explicitly contradicts the legal mandate of the conservatorship. Fannie and Freddie – and their shareholders – are being treated unfairly.

The federal government – the Treasury, FHFA, and Congress – exploited and ignored the GSEs’ shareholders with zombie stock, and stuck them in financial limbo. The GSEs were required to pay above-market 10 percent dividends on Treasury’s investment, while many of the Wall Street banks that were bailed out with TARP money were required to pay dividends half of that rate. The shareholders of their bailed out banks were preserved and given a chance to recover.

The FHFA ordered the Fannie and Freddie boards and executives to suspend communications with shareholders and abolish annual shareholder meetings. And finally, adding insult to injury, in 2010 the FHFA arbitrarily directed Fannie and Freddie to initiate the delisting of their common and preferred stock from the NYSE. This further degraded shareholder value and chased away many institutional investors.

In 2012, as Fannie Mae and Freddie Mac were returning to profitability despite financial and operating restrictions on their activities, the U.S. Treasury changed the terms of its investment in the GSEs to its own benefit. The Treasury replaced the already well-above-market 10 percent dividends that the GSEs were paying to a “sweep” of all of the profits of the companies.

In times when the GSEs were facing mounting losses, the 10 percent dividends were burdening the GSEs with debt, forcing them to borrow from Treasury in order to turn around and pay that borrowed money right back to Treasury, thus compounding their debt and inflating future dividend payments. However, now that the GSEs have returned to profitability, this arrangement has the potential to do great harm. The GSEs are now sending nearly all of their earnings to Treasury, can’t rebuild their capital, and their shareholders remain in a limbo where they are neither eliminated nor given an opportunity to recover. If the enterprises were doing well enough to pay the government a 10 % return on the senior preferred stock, why couldn’t they also pay dividends on the common stock and junior preferred stock?

Regardless of the outcome of deliberations on the structure of the GSEs, Fannie and Freddie shareholders deserve a chance to recover some of the value of their stock. The federal government provided funds to help stabilize AIG and Citigroup, both of whom had investors who were allowed to benefit from the recovery of these companies. It should be no different when it comes to the GSEs’ shareholders, who, in addition, are useful to the U.S. Treasury.

Under the conservatorship, the government received warrants to buy up to 79.9 % of GSE common stock for $0.00001 per share. To avoid putting the liabilities of the two GSEs on the government’s books, the government’s share had to remain just under 80 %. The shareholders, with zombie stock and no rights or remedies, were usefully left to own the other 20 %.

Neither piece of legislation introduced in Congress – the PATH Act (H.R. 2767) in the House, nor the Corker-Warner bill (S. 1217) in the Senate – adequately addresses how to deal with Fannie Mae and Freddie Mac shareholders moving forward. Any serious reform needs to give the GSE shareholders an opportunity to share in the recovery of value that is likely for Fannie and Freddie.

In hearings at the House and the Senate on the future of Fannie Mae and Freddie Mac, many stakeholders and individuals interested in the housing sector have been invited to share their views. Those left without a seat at the table are the shareholders, who were told for years that their investment was the safest one after U.S. Treasury bonds.