Fairholme Funds sues U.S. over Fannie, Freddie bailout agreement

Wed Jul 10, 2013 1:36pm EDT
 
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By Margaret Chadbourn

WASHINGTON (Reuters) - Bruce Berkowitz's Fairholme Funds Inc sued the U.S. government, claiming that changes to the bailout terms set for mortgage financiers Fannie Mae FNMA.OB and Freddie Mac FMCC.OB unlawfully impair shareholder value.

The lawsuit, filed by the mutual fund company in the U.S. Court of Federal Claims late on Tuesday, seeks "just compensation" for the fund's investors, according to the 28-page complaint.

Fairholme said the government is generating significant revenue through changes it made last year to the rescue arrangement for Fannie Mae and Freddie Mac, to the detriment of private shareholders in the two companies.

Those new terms, designed by the U.S. Treasury and the company's regulator, force the two mortgage finance firms to turn over most of their now-sizable profits to the government as a dividend payment. Previously they had to pay a quarterly dividend of 10 percent on the government's nearly 80 percent stake.

"Fannie Mae and Freddie Mac are rapidly repaying the government," Berkowitz said in a news release. "As solvent, highly profitable companies, Fannie and Freddie should honor all outstanding obligations to their investors."

Fannie Mae and Freddie Mac have drawn $187.5 billion in taxpayer aid since they were taken over in 2008 as they teetered on the brink of insolvency. They have since returned to profitability, and by the end of June, they will have paid about $132 billion in dividends to taxpayers.

A group of investors led by hedge fund Perry Capital LLC filed a similar lawsuit in federal court in Washington late on Sunday. Perry Capital says the 2012 change in the bailout agreement to sweep all profits to taxpayers violated the 2008 law that placed Fannie and Freddie into conservatorship.

A Treasury spokesman responded in a statement: "We are reviewing these lawsuits carefully, but it is important to remember that U.S. taxpayers provided over $187 billion in exceptional support to these two entities to maintain their solvency, protect the broader economy and support continued access to mortgage credit for millions of American families."   Continued...

 
A general view of Fannie Mae headquarters in Washington March 30, 2012. REUTERS/Jonathan Ernst