In Forbes, Richard Epstein comments:
My recent post on Forbes.com expressed my deep dissatisfaction with the thunderbolt that Judge Royce Lamberth launched (without argument or discovery no less) in Perry Capital LLC v. Lew against the private shareholders of Fannie Mae and Freddie Mac when he sustained the 2012 full dividend sweep under the Third Amendment to the original 2008 Senior Preferred Stock Purchase Agreement. This morning, Judge Lamberth’s decision received a full-throated defense that reads as if it was published in Revolution Magazine, but which in fact appeared on the normally level-headed editorial page of the Wall Street Journal. Ominously entitled, Godzilla Defeats the Thing, the Journal heaps lavish praise on Judge Lamberth for exposing the shareholder “scam” that in its words “combined dubious legal reasoning with junk economics.”
Really? The gist of the Journal’s argument was that both Fannie and Freddie would have been dead in the water without the $188 billion bailout that they received from the United States Treasury. The real question is what follows next. In the eyes of the Journal, once the original bailout was given, the government could have, and should have, have taken over the entire operation lock, stock and barrel. Yet that was exactly what the Government decided not to do at the time when it opted for a conservatorship that let the Treasury take two pieces out of the Fannie and Freddie pie. The first was its senior preferred that carried with it a 10 percent dividend rate, which increased to 12 percent if Fannie and Freddie deferred payments on their obligations. The second was an option to purchase some 79.9 percent of the common stock for a nominal price of $0.00001 per share.
Most notably, the SPSPA did not contain any provision that said, “In the event that this infusion of cash rescues Fannie and Freddie, the United States Treasury reserves the right to modify this agreement so as to claim all the profits that the business generates at any future time.” It does not take an advanced degree in finance to explain why this provision was conspicuously absent from the 2008 deal. Put it in and all of a sudden the two previous clauses are irrelevant to the terms of the deal. 10/12 percent is no longer the dividend rate, and the warrant to purchase the common stock at a nominal price is equally worthless. Why should the government pay even a dollar to get common stock that with a stroke of the pen it could acquire for free? And why should anyone bother to trade in shares which the government has announced in advance will be worthless to them no matter how valuable the company? . . .