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Marc Rubinstein

Did the US Shortchange Investors $27 Billion?

A coming trial will determine whether the government acted in good faith in bailing out Fannie Mae and Freddie Mac.



Photographer: Bloomberg/Bloomberg

Elon Musk’s bid to get out of buying Twitter Inc. for about $44 billion goes to trial Oct. 17 in Delaware. The same day, another multibillion-dollar lawsuit that zeroes in on good faith when parties sign contracts will be heard in US District Court in Washington. The investment firm Fairholme Funds Inc. is leading a group that claims US government agencies shortchanged them $27 billion in the financial engineering that has its roots in the 2008 mortgage meltdown.

Two weeks before the collapse of Lehman Brothers, authorities agreed to bail out Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) that greased the nation’s housing market. But the government couldn’t afford to take their liabilities onto its own balance sheet in a full-blown nationalization, so then-Treasury Secretary Henry Paulson proposed a conservatorship instead. The US Treasury Department offered each of them up to $200 billion of capital support in exchange for warrants over 79.9% of common stock together with some preferred stock. Initially, the support carried a 10% cash dividend.