Fairholme Funds Sues U.S. Government Over Fannie, Freddie Profits

Posted by Patrick Barnard on July 10, 2013 No Comments
Categories : Required Reading

14056_gavel Fairholme Funds Sues U.S. Government Over Fannie, Freddie Profits A day after hedge fund Perry Capital LLC filed a similar action in federal court, mutual fund Fairholme Funds Inc. on Tuesday filed a lawsuit against the federal government claiming that it expropriated the value of investors' preferred shares of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac when it implemented an amendment to the Housing and Economic Recovery Act in September that changed the rules governing the companies.

As with the Perry Capital suit, Fairholme fingers the U.S. Treasury and Federal Housing Finance Agency. However, the two suits are separate for now.

The third amendment to the Housing Act, also known as the ‘Net Worth Sweep Amendment,’ in effect allowed the U.S. Treasury to collect dividends from the GSEs via preferred stock purchase agreements, thus circumventing investors' ability to profit from the stock, Miami-based Fairholme says in its suit.

"Fannie Mae and Freddie Mac are rapidly repaying the government," said Bruce R. Berkowitz, managing member and chief investment officer of Fairholme Capital Management, in a statement. "Their success should surprise no one, given the value of Fannie and Freddie. Once the government has recouped its investment, the Fairholme fund – on behalf of our shareholders who are predominantly individual Americans with an average investment in the fund of $43,000 – is owed a contractually specified, non-cumulative dividend for its investment in these companies. As solvent, highly profitable companies, Fannie and Freddie should honor all outstanding obligations to their investors."

Fairholme said it is not challenging the government's initial bailout of the GSEs in 2008 but is contesting the third amendment that changed the rules regarding the government's investment in the enterprises.

The case, Fairholme Funds Inc. v. U.S., was filed in the U.S. Court of Federal Claims in Washington, D.C.

"Fairholme's objective is quite simple," Berkowitz added. "The government set the terms of their 2008 investments and should be held to their original deal."

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