Hedge fund firm Perry Capital has sued the US Treasury Department alleging that the 2012 amendments made to the bailout terms set for Fannie Mae and Freddie Mac were illegal and has destroyed shareholders’ holdings.
The lawsuit filed in US District Court in Washington claims the government’s seizure of nearly all profits of the bailed-out mortgage-finance companies left nothing for the shareholders, thus directly violating the government’s 2008 bailout agreement.
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In 2012, the Treasury Department amended the bailout terms forcing Fannie Mae and Freddie Mac to hand over most of their profits to the government, amending a requirement that the companies pay quarterly dividends of 10% on the government’s nearly 80% stake.
"The third amendment fundamentally and unfairly alters the structure and nature of the securities Treasury purchased," according to the court papers. "This blatant overreach by the federal government to seize all of the companies’ profits at the expense of the companies and all of their private investors is unlawful and must be stopped."
Perry Capital didn’t ask for monetary damages in its lawsuit. It sought a court declaration that the third amendment isn’t legal, and orders setting it aside and preventing the Treasury and the Federal Housing Finance Agency from implementing it.
The lawsuit has named the Federal Housing Finance Agency, which regulates Fannie and Freddie, as a defendant in addition to the Treasury.
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By GlobalDataThis year, Fannie Mae and Freddie Mac have paid US$66 billion to the US Treasury as the housing market recovered and their finances improved.
Perry Capital, which manages US$8.5 billion, began purchasing preferred shares of the agencies in 2010 in hopes that they would eventually generate attractive returns.
Other private investors, including John Paulson’s hedge fund Paulson & Co. and the mutual fund Fairholme Capital Management, have done the same.
The Perry Capital lawsuit is not the first filed against the government. A shareholder seeking a claim worth over US$40 billion in damages was also filed last month in the US Court of Federal Claims as a result of the takeover.
