Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) investors suffered a major blow. They lost their legal challenge to a change in the mortgage giants’ 2008 bailouts that sent nearly all their profits to the U.S. Treasury.
The U.S. faces almost 20 federal actions brought by investors who claim they’ve been barred from participating in the post-bailout profits earned by the mortgage giants.
Dismissal of two lawsuits
On Tuesday, a judge in the U.S. District Court for the District of Columbia dismissed claims brought against the federal government and U.S. officials by two investors. In the summer of 2013, Perry Capital LLC and Bruce Berkowitz’s Fairholme Funds Inc. filed a case for breach of contract over allegedly promised dividends and liquidation preferences and what they called an illegal “taking” under the U.S. Constitution.
U.S. District Judge Royce Lamberth rejected their claims, stating that Congress had in effect given Fannie Mae’s and Freddie Mac’s regulator and the Treasury Dept. the power to take the companies’ profits as a provision of the Housing and Economic Recovery Act.
In his opinion, he wrote: “It is understandable [for the profit sweep] to raise eyebrows, or even engender a feeling of discomfort.” He added that the act and the language of the companies’ stock certificates compel “the dismissal of all of the plaintiffs’ claims.”
Fannie Mae, Freddie Mac’s bailout terms changed
Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) have paid more in dividends to the government than the $187.5 billion they received from the U.S. Treasury for their 2008 bailouts. In August 2012, the FHFA and Treasury changed the terms of the bailout, eliminating the dividend but requiring that the companies send nearly all of their profits to the U.S. Treasury.
Hedge-fund manager Bill Ackman’s Pershing Square Capital Management LP also filed a separate suit in August in the U.S. Court of Federal Claims in Washington, claiming that the government’s diversion of profits violates the Constitution’s fifth amendment, which prohibits the taking of private property for public use without just compensation. However, Tuesday’s dismissal by the court didn’t cover Pershing Square’s lawsuit.
Earlier this week, Bruce Berkowitz struck a surprisingly positive tone in his recent interview with Consuelo Mack on WealthTrack, predicting that the government and private shareholders would eventually reach a “win-win” agreement that would make everyone happy.
The full court ruling can be found here opinion-perry-injunction-2