A split ruling by a federal appeals court in Washington on Tuesday dashed the hopes of hedge funds in their legal challenge to the U.S. government’s capture of billions of dollars in profits generated by Fannie Mae and Freddie Mac after their bailout, which sent GSE shares in a downward spiral.
As a result, Fannie Mae fell 35 percent to $2.71 in New York trading, while Freddie Mac shares were down 38 percent to $2.47. Some classes of Fannie’s preferred shares were down more than 30 percent.
Shareholders argued that the government illegally seized profits from the companies after it decided in 2012 to collect a share of earnings every quarter. Today’s ruling means that hedge funds still won't be able to sue the US government over seizing profits made by the mortgage-loan companies.
Fannie Mae said it would pay $5.5 billion in dividends to the U.S. Treasury on February 17. With that payment, to be made in March, the company will have paid a total of $160 billion in dividends to the government. On February 16, Freddie Mac reported Q4 2016 earnings of $4.8 billion. With the earnings, the GSEs are expected to pay the Treasury a combined total of $10 billion in March.
In place since January 2013, the net worth sweep allowed the U.S. to recapture all of the $187 billion in taxpayer money it spent to stave off the companies’ collapse—and more.
According to Bloomberg [1], Perry Capital and Bruce Berkowitz’s Fairholme Funds Inc. are among the major owners of Fannie’s and Freddie’s preferred shares, while Bill Ackman’s Pershing Square Capital Management is a major owner of the companies’ common shares.
These and other big investors lost in their effort to overturn a judge’s ruling that said they can’t sue the government over the dividend change, which forced the companies to send almost all their profits to the U.S. Treasury, leaving shareholders with nothing.
The appeals panel allowed shareholders with valid contract-based claims to pursue that part of the lawsuit. The revived case likely returns to U.S. District Judge Royce Lamberth, who threw it out in 2014.
“The institutional plaintiffs could still benefit from the damages claims brought by the class, assuming they fall within the definition of the class, which they likely do,” said Hamish Hume, a lawyer who represented a few of the prevailing shareholders.
The hedge funds can also ask for a rehearing by the full appeals court in Washington, or ask the U.S. Supreme Court to hear the case.
As reported in Business Insider [2], Gary Cohn, director of the White House National Economic Council, told The Wall Street Journal earlier this month that the administration planned to direct the Treasury to review the role of Fannie Mae and Freddie Mac. Treasury Secretary Steven Mnuchin said in November, "We've got to get them out of government control."
Matthew McGill, a lawyer for Perry, disputes the court’s decision that the FHFA had the authority to impose the sweep. “We obviously disagree with that,” he said. He paraphrased the court’s conclusion as, “You may have been allowed to do it, but if you breached the contracts with the stockholders, you may still have to pay.”
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