A status conference for a lawsuit filed by Wall Street investment firm Fairholme Funds against the government over the sweeping of GSE profits into the U.S. Department of Treasury is scheduled for Tuesday, March 31, according to a spokesperson in the chambers of U.S. Court of Federal Claims Judge Margaret Sweeney.
In late January, Sweeney denied the government's attempt to stay court proceedings in the case, ruling that Fairholme could continue to pursue its lawsuit against the government, which was originally filed in 2013. The suit claims that the sweeping of Fannie Mae and Freddie Mac profits into Treasury, a practice authorized by Congress in August 2012, equates to taking private property for public use without "just compensation," which is forbidden by the Fifth Amendment of the U.S. Constitution.
The GSEs have been under conservatorship of the Federal Housing Finance Agency (FHFA) since September 2008, at which time they needed a government bailout totaling $188 billion to stay afloat. They returned to profitability in 2012 and are predicted to earn about $21 billion a year for the foreseeable future, according to Fairholme CEO Bruce Berkowitz on a conference call with investors in early February.
"Today, Washington bureaucrats are unlawfully holding these profitable companies captive in a perpetual conservatorship," Berkowitz wrote in a letter to shareholders in January. "Congress never authorized Treasury to become Fannie and Freddie’s 'overlord' – forcing the companies to spend all their capital on executive branch prerogatives and circumventing the legislature’s appropriations process. Indeed, the power of the purse remains vested in Congress under the Constitution. The Housing and Economic Recovery Act of 2008 does not authorize any federal agency to use these two publicly traded, shareholder-owned companies as a piggy bank. Yet, in an unprecedented abuse of executive power, the bureaucrats have illegally expropriated and de facto nationalized two of the most valuable companies in the world with apparent impunity. Worse still, their actions are now endangering our housing market, making it more difficult for lower- and middle-income Americans to access mortgage credit."
The lawsuit was dismissed by U.S. District Judge Royce Lamberth in September 2014 on the grounds that the government had been given the authority by Congress under the Housing and Economic Recovery Act of 2008 to sweep GSE profits into Treasury.
At the same time he dismissed the Fairholme suit, Lamberth also rejected a similar suit filed against the government by Perry Capital. Fairholme appealed Lamberth's ruling and Sweeney, in the Court of Federal Claims, revived the case four months later. Fairholme has reportedly been gathering information for the case in order to bolster their argument that the Court of Federal Claims, not the U.S. District Court in Washington, D.C., has jurisdiction over the case.
Analyst Peter Chapman noted that there is no record of Fairholme serving any subpoenas for the case to date, and that it has not been revealed for certain who they intend to depose. Chapman said the government's lawyers will likely tell Sweeney that no witness Fairholme could depose at this stage could help determine whether or not the Court of Federal Claims has jurisdiction in the case.
Chapman said the government's lawyers will likely present an argument at the upcoming status conference that Sweeney's court does not have jurisdiction over the case with the claim that "shareholders hold physical shares in Fannie and Freddie in their brokerage accounts. The same shares that held prior to execution of the Third Amendment are still there today, and the speculators who purchased shares following execution of the Third Amendment still own those same shares today. The government’s taken nothing. The losses some shareholders have realized are merely a reflection of reality in owning common stock in insolvent companies, and the shareholders who acquired shares at their absolute bottom and have realized a profit can’t be heard to complain."
A spokesperson from Treasury declined to comment on the case, and an attorney for Fairholme Funds, David Thompson, said they did not have a comment at this time.