Investment group sues U.S. over Fannie, Freddie bailout terms

Sun Jul 7, 2013 10:13pm EDT
 
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By Margaret Chadbourn

WASHINGTON (Reuters) - A group of investors led by hedge fund Perry Capital LLC sued the U.S. Treasury in federal court on Sunday to challenge the 2012 changes of the bailout terms set for government-owned mortgage firms Fannie Mae and Freddie Mac.

The lawsuit, filed in U.S. District Court in Washington, alleges that the Treasury and the regulator for Fannie Mae and Freddie Mac violated a 2008 law that put the two mortgage companies into conservatorship as they faced insolvency at the height of the U.S. financial crisis.

The Treasury Department amended the bailout terms last year, forcing Fannie Mae and Freddie Mac to hand over most of their profits to the government, replacing a requirement that the companies pay quarterly dividends of 10 percent on the government's nearly 80 percent stake.

The suit names both Treasury and the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac.

Perry Capital, which began investing in both firms in 2010, claimed in the lawsuit that shareholder value was impaired when the government instituted a "dividend sweep."

The new arrangement prevents the firms from building capital that might have allowed them to redeem the government shares and eventually operate independently to the benefit of private shareholders.

The bailout agreement provides no mechanism for Fannie Mae and Freddie Mac to repay the $187.5 billion they owe the government from their 2008 bailout.

The two companies have returned to profitability, and by the end of June, had paid about $132 billion in dividends to taxpayers. Their financial health has prompted investors to snap up the preferred stock of Fannie Mae and Freddie Mac in a bet they will be made private companies in the future.   Continued...

 
A view shows the Fannie Mae logo at its headquarters in Washington March 30, 2012. REUTERS/Jonathan Ernst