Photo courtesy SupremeCourt.gov.

Shares of Fannie Mae FNMA and Freddie Mac FMCC went into a tailspin after the U.S. Supreme Court rejected a major portion of a lawsuit brought by investors challenging the federal government’s pocketing of profits from the government-sponsored enterprises.

The Back Story: The case dates to September 2008, when Fannie Mae and Freddie Mac were placed in federal conservatorship after generating massive losses amid the housing bubble collapse that fueled the Great Recession. The government created the Federal Housing Finance Agency (FHFA) as the regulator for the enterprises, and the agency ordered their stocks to be delisted.

The FHFA initially created an agreement with the U.S. Department of the Treasury for a $100 billion investment in stock, which the enterprises would payback. In 2012, the arrangement was changed and the enterprises began handing their profits directly to the Treasury.

Private shareholders in Fannie Mae and Freddie Mac have spent years trying to recoup their investments. In their lawsuit, they sought to have the FHFA’s structure declared unconstitutional while void the 2012 agreement, claiming the government collected more than $300 billion in profits from the enterprises that included $124 billion more than what the original deal with the Treasury would have created.

The Court Ruling: In their ruling, the Supreme Court didn't dismantle the FHFA, but instead argued its director could be replaced at will by the president. When the agency was created, the director was assured a five-year term with the provision that he could only be fired for cause.

Justice Samuel Alito wrote the FHFA’s "structure violates the separation of powers, and we remand for further proceedings to determine what remedy, if any, the shareholders are entitled to receive on their constitutional claim."

As for the shareholders’ attempt to claim the $124 billion that went to the government, the justices returned their case to the U.S. Court of Appeals for the Fifth Circuit to "determine what remedy, if any, the shareholders are entitled to receive on their constitutional claim."

Falling Shares, Exiting Director: Common shares of Fannie Mae plummeted as much as 42% and Freddie Mac shares sank 44% -- their greatest intraday declines since October 2014, according to Bloomberg — after the justices’ verdict was announced.

At last check, both Fannie Mae and Freddie Mac were trading under $1.45 a share.

The court ruling also draws the curtain on Mark A. Calabria’s role as FHFA director. Calabria, a Trump administration appointee, was chief economist for Vice President Mike Pence before taking the FHFA leadership position in April 2019 and was scheduled to remain in office for another three years. The Wall Street Journal reported the Biden administration plans to replace Calabria “with an appointee who reflects the administration’s values.”