Perry Capital files suit over GSE shareholder holdings
Hedge fund Perry Capital filed a lawsuit against the Treasury, claiming the government is illegally seizing profits from Fannie Mae and Freddie Mac and simultaneously destroying shareholder holdings.
Acting on behalf of several institutional investment funds, Perry Capital’s suit is challenging the 2012 Third Amendment to the government’s preferred stock purchase agreements that the U.S. Treasury and the Federal Housing Finance Administration agreed upon.
Deemed the "Sweep Amendment," the Third Amendment changed the rules regarding the government’s investment in Fannie and Freddie. Perry Capital wants to stop the Treasury from enforcing the amendment to preferred stock purchase agreements, papers filed yesterday in federal court in Washington revealed.
The hedge fund firm is claiming that Treasury’s action violates the Housing and Economic Recovery Act, which authorizes the government’s 2008 decision to take the firms into conservatorship.
The lawsuit states that, while Treasury's illegal sweep is set to continue indefinitely, the payment to Treasury of $66.3 Billion on June 29, 2013, demonstrates the capacity of Fannie Mae and Freddie Mac to pay back taxpayers with interest.
"It is critically important to our economy and for the future of housing finance in the United States that investors have confidence that the rule of law – not populism or politics – will guide government policy over securities," the parties state in their claim.
Perry Capital and various hedge funds have been lobbying Congress to consider granting Fannie and Freddie independence again.
Up until this year, both GSE’s paid fixed dividends of 10% on the government’s stake until this year. In June of this year, Treasury amended the terms of the bailout, taking all of Fannie and Freddie’s quarterly profits instead.
With the June payments, Fannie Mae has now paid $95 billion of the roughly $116 billion it has received, while Freddie Mac has repaid roughly $37 billion of the $71.3 it received.
Feedback on the complaint is mixed.
"We continue to believe that the Housing and Economic Recovery Act of 2008, the law which provided the authority to place the GSEs into conservatorship, was crafted with incredibly broad discretion in terms of the mechanics of conservatorship as well as the specifics surrounding investments in the GSEs," said Compass Point Research and Trading. "To that end, we believe that legal challenges aimed at actions taken under HERA’s authority face a steep and lengthy climb."
"This lawsuit seeks to uphold the rule of law," said Theodore Olson, partner at Gibson, Dunn & Crutcher and former Solicitor General of the United States. "HERA established very specific rules about the government's limits and obligations under conservatorship. Investors had every right to expect these rules to be followed. If the government wanted to assume the powers of receivership, it could have chosen that course. Instead it chose conservatorship, and with the Sweep Amendment it overreached, exceeding the legal boundaries of the statute and failing to meet obligations of conservatorship mandated by Congress under HERA."
To read the full suit, click here.