U.S. District Court for the District of Columbia Judge Royce Lambert dismissed the lawsuit filed by Perry Capital and other investors, including Fairholme Capital, alleging that the government's sweeping of GSE profits into Treasury was illegal. The investors believed that the diversion of GSE profits created a "windfall" for the government while short changing GSE shareholders.
The judge ruled that the government had been given the authority by Congress under the Housing and Recovery Act to sweep GSE profits into Treasury. The government seized control of Fannie Mae and Freddie Mac back in September 2008 at the height of the nation's financial crisis, after which Treasury eventually provided $187.5 billion to bail out the companies. Fannie Mae and Freddie Mac have since become profitable and have returned $218.7 billion in dividends to taxpayers.
While last week's decision by the judge to dismiss the Perry/Fairholme suit dealt a blow to investors hoping to benefit from the profitability of Fannie Mae and Freddie Mac, other litigation regarding the sweeping of GSE profits into Treasury is still pending. Two such suits were filed in mid-August by New York-based hedge fund Pershing Square, which holds close to $700 million shares in the two GSEs combined, making it by far the largest non-government owner of GSE common stock.