On July 1, 2015, the United States for the District of Columbia sued the estate and trusts of the late Layton P. Stuart – the former owner of One Financial Corporation and its subsidiary One Bank & Trust– and the trust’s beneficiaries, for alleged fraud on the Treasury Department and its Troubled Asset Relief Program (“TARP”). This civil suit is the latest in a growing list of cases brought by the government to recover TARP funds that it alleges were fraudulently procured.
Can shareholders of a government-sponsored enterprise successfully challenge the constitutionality of a government takeover of the entity? Shareholders of Fannie Mae and Freddie Mac will try to do so in a $41 billion class action filed against the United States in the Court of Federal Claims on June 10, 2013. Plaintiffs allege that even though the Federal Housing Finance Authority’s 2008 takeover of the mortgage giants benefited the nation as a whole, it harmed the companies’ shareholders and violated their constitutionally protected private ownership rights.
Congress established Fannie Mae and Freddie Mac to expand the nation’s secondary mortgage market by increasing the availability of funds to finance mortgages and home ownership. The government operated Fannie and Freddie until 1968 and 1989, respectively, when the companies were reorganized as “government-sponsored enterprises,” or federally chartered private corporations. Since then, both companies have operated as shareholder-owned, publicly traded corporations. But in 2008, in the midst of the financial crisis, both companies were placed under the conservatorship of FHFA, pursuant to the Housing and Economic Recovery Act (HERA).
Plaintiffs allege that prior to the 2008 takeover, the government adjusted the companies’ lending standards and capital restraints to encourage the companies to purchase a greater number of risky subprime securities. While this ultimately led to significant weaknesses in the companies’ portfolios, Plaintiffs contend that the companies nonetheless remained adequately capitalized and financially sound, and did not need the conservatorships. According to Plaintiffs, the government improperly bullied the companies’ boards into acquiescing in the takeover. READ MORE
As U.S. Secretary of Treasury Timothy Geithner steps down, Treasury released a January 18, 2012 update on the Troubled Asset Relief Program (“TARP”). This most recent update highlights an often misunderstood reality — Geithner’s signature program was a smashing success. As to the bailout of the too-big-to-fail banks and AIG, the truth is that TARP has generated tens of billions of dollars in profit for American taxpayers.
The hallmark of Treasury’s work during Mr. Geithner’s tenure has been its administration of the TARP. Although created in 2008 under the previous Secretary, Henry Paulson, Mr. Geithner has had responsibility for enlarging and steering TARP since January 2009. TARP came under significant criticism for use of taxpayer funds to bail out banks from diverse constituencies, spawning both the “Occupy” movement and contributing to the 2010 Republican takeover of the House of Representatives. Nevertheless, Mr. Geithner and the Treasury Department argued that TARP ultimately would produce a profit for the government. Four years later, that forecast has proven correct, at least with respect to funds provided to financial institutions, as many TARP investments have generated tens of billions of dollars in profit for American taxpayers.
The Capital Purchase Program (“CPP”) has been the primary driver of federal profits. The CPP made funds available for the Treasury Department to purchase mortgages, mortgage-backed securities, and preferred stock from financial institutions. Treasury disbursed nearly $205 billion under the CPP and, according to the Treasury’s January 18, 2012 TARP update, already has received over $220 billion in total cash back, a return of over 7%. This profit was mainly the result of dividends and gains received through Treasury’s ownership of bank stock and other assets. READ MORE