In a decision in which five of six conservative U.S. Supreme Court Justices concurred and in which the rest of the Justices concurred in part, the Supremes threw out a challenge launched by investors in Fannie Mae (FNMA) and Freddie Mac (FMCC) who were seeking a share of some $100 billion in the two agencies’ profits. Following the enactment of the Recovery Act following the financial crisis of 2008, Fannie and Freddie were put under conservatorship and have been operating that way ever since.
The suit challenged the conservatorship on both statutory and constitutional grounds. A lower court had dismissed the statutory claim that the Federal Housing Finance Agency (FHFA) had exceeded its authority in how the agency set a new variable dividend formula. That ruling was reversed by the Fifth District which also held that the FHFA’s structure violated the separation of powers and concluded that the remedy for the constitutional violation was not to change the new dividend formula but to give the President the authority to remove the FHFA director only for cause.
The Supreme Court held that the statutory claim “must be dismissed” and that the restriction on the President’s authority to remove the FHFA director was unconstitutional.
The effect of the ruling is to end the claims of some of the country’s largest hedge funds for a share of the $100 billion in profits that the FHFA forced Fannie and Freddie to return to the U.S. Treasury and to give President Biden the authority to fire FHFA director Mark Calabria.
The plan Calabria and former Treasury Secretary Steven Mnuchin had proposed included three parts. First, return Fannie and Freddie to private control after recapitalizing them. Second, create an explicit federal guarantee of the mortgage-backed securities issued by the two GSEs. Third, create more private companies to compete with Fannie and Freddie for mortgage purchases.
Whether or not Biden fires Calabria remains to be seen, but such a move is expected.
The ruling could end a recapitalization plan for Fannie and Freddie that could have been the largest IPO of all time, and that is what current investors are reacting to following the court’s ruling.
Fannie Mae shares have plunged by 37% to trade at $1.41 in a 52-week range of $1.23 to $3.25. The low was posted this morning. Nearly 94 million shares have been traded, some 30x more than the daily average of around 3.2 million.
Freddie Mac stock traded down 36.8% at $1.41 in a 52-week range of $1.21 to $3.08. The low was posted this morning. The stock has traded about 28 million shares so far Wednesday, about 25x its daily average volume.