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Supreme Court Rejects Appeal in GSE Profits Case

courtroom-justicescalesThis week the United States Supreme Court rejected appeals in a case challenging the federal government’s handling of profits generated by Fannie Mae and Freddie Mac since they came under government control during the 2008 financial crisis. On Tuesday, the Supreme Court justices denied appeals filed by Perry Capital LLC, Fairholme Funds, and other hedge funds and Fannie and Freddie shareholders.

The dispute dates back to the government’s 2012 decision to seize Fannie and Freddie’s earnings in the wake of the financial crisis. Since January 2013, the so-called “net-worth sweep” has allowed the government to recoup the $187.5 billion in taxpayer money it spent to shore up Fannie and Freddie, sending that amount and then some back to the U.S. Treasury. It’s the “and then some” that the plaintiffs in the case take issue with.

As explained by Bloomberg, “Under the original bailout terms, the Treasury received a new class of ‘senior’ preferred shares that paid a 10 percent dividend, along with warrants to acquire nearly 80 percent of the companies’ common stock.” The government revised the terms of the deal in 2012, changing things so that the government would begin receiving nearly all of the profits from the GSEs, but with no payouts when the companies suffered losses. According to the plaintiffs in the case, the government has not only recovered that original bailout amount, but some $130 billion above and beyond it—money they say does not belong to the government.

Perry Capital LLC, Fairholme Funds, and other major GSE investors filed suit over the net-worth sweep in 2013, arguing that the government was dishonest about its reasons for implementing the 2012 profit sweep. In February 2017, a federal appeals court in Washington rejected the investors’ arguments, ruling that the 2008 law that created the Federal Housing Finance Agency and put the GSEs under its conservatorship was “largely insulated from legal claims,” according to Bloomberg. That ruling did allow for the plaintiffs to pursue “some contract-based claims.” With the Supreme Court’s rejection of the case, that appeals court ruling stands.

David Thompson, a Cooper & Kirk attorney who represents Fairholme and other investors, said, “Although we are disappointed by the court’s order today, we remain confident that we will ultimately prevail in reversing the illegal nationalization of Fannie and Freddie.”

In a June 2017 interview with Bloomberg Television, Bruce Berkowitz, Director of Fairholme Funds, Inc., speculated that the legal fight over the GSE profits “could be a 10-year process.”

About David Wharton

David Wharton, Online Editor at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has over 15 years of experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. Wharton and his family currently reside in Arlington, Texas. He can be reached at David.Wharton@DSNews.com.

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