Hedge Fund Sues U.S. Treasury Over Plans To Liquidate Fannie, Freddie

Posted by Patrick Barnard on July 08, 2013 No Comments
Categories : Required Reading

Perry Capital, one of the hedge funds that invested in shares of government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, has reportedly filed a lawsuit against the U.S. Treasury secretary and the head of the Federal Housing Finance Agency (FHFA), as well as the GSEs, arguing that plans to liquidate the companies violate a congressional mandate.

The suit filed in the U.S. District Court in Washington, D.C., asserts that a 2012 amendment to the Housing and Economic Recovery Act illegally changed the rules governing the GSEs, in effect pulling the rug out from under investors, according to a Bloomberg News report.

Perry Capital, along with John Paulson's hedge fund Paulson & Co. and the mutual fund Fairholme Capital Management, have been purchasing preferred shares of the GSEs for the past several years in hopes that they would eventually be transitioned back to the private sector.

The suit alleges that since 2010, the U.S. government has undermined private investors with a series of measures intended to liquidate the GSEs, in particular the third amendment pertaining to preferred stock purchase agreements.

A bipartisan bill introduced last month by Sens. Mark Warner, D-Va., and Bob Corker, R-Tenn., proposes to liquidate Fannie and Freddie over the course of five years.

In its suit, Perry Capital argues that the liquidation process has already been established via the third amendment, which altered the original terms of investing in the agencies after they were placed into conservatorship.

‘The third amendment fundamentally and unfairly alters the structure and nature of the securities Treasury purchased,’ reads Perry Capital's statement of claim, according to the report. ‘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 is not seeking monetary damages in its lawsuit, according to the report. Rather, it seeks a court declaration that the third amendment is illegal and that the Treasury and FHFA should be prohibited from implementing it.

Fannie Mae and Freddie Mac, both of which are now profitable, paid the Treasury a dividend of $66.3 billion on June 30, the biggest since the takeover, according to the claim. Had the third amendment not been in effect, the Treasury would have collected only $4.7 billion, Perry Capital claims in its suit.

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