Funds appeal over Fannie and Freddie ...
June 29, 2015 10:16 pm
Perry Capital and Fairholme Funds on Monday fired their latest salvo in a battle with the US government over Fannie Mae and Freddie Mac, appealing against a US district court ruling that the Treasury had the right to seize the mortgage companies’ profits.
The appeal complains of an “expropriation and effective nationalisation of two of America’s largest and most profitable companies — Fannie Mae and Freddie Mac”, which was “unprecedented in American history and blatantly at odds with the governing statute”.
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Perry, a hedge fund led by founder Richard Perry, and Fairholme, an investment firm led by Bruce Berkowitz, own preferred shares in Fannie and Freddie, which guarantee US mortgages and invest in mortgage-backed securities.
Fannie and Freddie were placed in government “conservatorship” in 2008 amid fears they might collapse. In 2012 the government changed the terms of the bailout from a 10 per cent dividend to a “net worth sweep”, where all profits would go to the Treasury.
The two companies had had to borrow from the Treasury to pay the dividend and officials argued that it was possible they could enter a “death spiral” without the changed terms.
However, soon after the decision Fannie and Freddie recorded large profits.
In his ruling last year, Judge Royce Lamberth said the property interests of the shareholders were “extinguished” while the companies were under government conservatorship.
“The plaintiffs’ grievance is really with Congress itself,” Judge Lamberth said. “It was Congress, after all, that parted the legal seas so that [the Federal Housing Finance Agency] and Treasury could effectively do whatever they thought was needed to stabilise and, if necessary, liquidate [Fannie and Freddie].”
The investors argued in their appeal on Monday that the government’s authority stopped well short of being absolute, and the FHFA, the housing regulator and conservator, had neglected its mission to “conserve” the companies by sweeping away all the profits to the Treasury and removing their ability to rebuild capital.
The district court “erased the well-established duties of a conservator and embraced the agencies’ view that a conservator may, if it chooses, run its ward for the government’s exclusive benefit and enrichment, at the expense of all other interested parties and completely shielded from judicial review”, the appeal said. “That decision upends the law of conservatorships, is erroneous, and should be reversed.”
Theodore Olson, a lawyer at Gibson, Dunn & Crutcher, acting for Perry, said: “Congress set the rules of the road for the government’s intervention in Fannie Mae and Freddie Mac in 2008. It did not authorise nationalisation of these two shareholder-owned, private companies. But in 2012, that’s just what the administration did. That blatantly illegal expropriation of private property must be reversed.”
The Treasury declined to comment.