US District Court Judge Bratt made a narrow ruling that focuses attention on the Sweeney court, but ultimately doesn’t change the big picture

Investors in Fannie Mae and Freddie Mac suffered another legal setback today when US District Court Judge Robert Pratt dismissed Continental Western Insurance Company’s case against the Federal Housing Finance Agency (FHFA), FHFA director Mel Watt, and the US Treasury asking the courts to end the net worth sweep and force Treasury to pay back the money it’s already received from the income sweep so far.

“This ruling changes nothing. The judge did not rule on any substantive claims brought by investors. This was simply a procedural ruling about the standing of the plaintiffs in Iowa.  There are other streams of litigation that will continue unaffected by this ruling,” said Investors Unite Executive Director Tim Pagliara in a press release.

Fannie Mae, Freddie Mac Case In Iowa District Court Dismissed

Judge Bratt makes a narrow ruling on Fannie Mae, Freddie Mac

Fannie Mae common stock is down 3.5% following the announcement, Freddie Mac is down 1.8%, but Pagliara is right that this doesn’t change the big picture. Instead of ruling on the authority FHFA has under HERA, whether Treasury had the right to institute the net worth sweep, or any other of the big legal questions in the case, he dismissed it on the principle of issue preclusion: since Continential Western’s parent corporation Berkley is involved in the Perry Capital case now going through appeals, and the case in front of Judge Sweeney in the Court of Federal Claims also covers a lot of the same ground, he decided there was no need to litigate in his court as well.

The decision is still good news for FHFA because it gives them one less lawsuit to spend time on, but it’s not really a setback for Fannie Mae and Freddie Mac shareholders. Despite the dip in prices today, both stocks have been roughly flat since November and will likely remain so until we get another big ruling in one of the other lawsuits.

Berkowitz confident despite not seeing docs during discovery

As we mentioned yesterday, Bruce Berkowitz’s Fairholme Funds has been adding to its controversial position in Fannie Mae and Freddie Mac (in terms of share count, not market value), and today he addressed concerns about those investments during a conference call explaining that the GSEs were among America’s most important companies and he just doesn’t see how they can disappear.

“When it comes to funding our housing market, Fannie and Freddie are mission critical,” said Berkowitz. “Put simply, if you own a home Fannie and Freddie have helped you.”

Berkowitz has covered a lot of this ground before, but it’s worth mentioning where that optimism is coming from (he skates past the prospect of legislative reform helping his cause). He quotes Judge Sweeney as saying: “What I have heard so far tends to suggest that FHFA, I don’t want to say joined at the hip with Treasury, but it doesn’t sound like they’re necessarily an independent entity that has no connection to the government.”

Berkowitz probably hadn’t seen the Iowa decision when he was talking (it broke during the conference call), but he didn’t mention it. The Federal Court of Claims is still the main event.