Perry Capital Sues U.S. Treasury Over Fannie Mae Takeover
Hedge fund firm Perry Capital LLC sued the U.S. Treasury Department claiming the government’s seizure of all profits from Fannie Mae and Freddie Mac is illegal and has destroyed shareholders’ holdings.
Perry Capital, which seeks to represent investment funds in the litigation, said it wants to stop the U.S. Treasury from enforcing a so-called third amendment to preferred stock purchase agreements, according to papers filed yesterday in federal court in Washington.
Perry Capital and hedge funds including Paulson & Co. have been lobbying Congress to consider allowing Fannie Mae and Freddie Mac to become independent again. Republican and Democratic lawmakers, and President Obama, have called for both mortgage finance companies to be liquidated, with the U.S. Treasury forecasting to collect more than $200 billion of profit from the agencies over the next decade.
“The third amendment fundamentally and unfairly alters the structure and nature of the securities Treasury purchased,” according to the statement of claim. “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.”
Fannie Mae and Freddie Mac paid fixed dividends of 10% on the government’s stake until this year, when Treasury amended the terms of the bailout and began taking all of Fannie Mae and Freddie Mac’s quarterly profits instead.
The Federal Housing Finance Agency, conservator for Fannie Mae and Freddie Mac, which is also named in the lawsuit, didn’t immediately respond to an emailed request for comment sent after regular business hours. The U.S. Treasury Department also didn’t immediately respond to emails seeking comment.
A bipartisan group of senators, led by Tennessee Republican Bob Corker and Virginia Democrat Mark Warner, last month introduced a bill that would dismantle the companies and replace them with a system in which the government would serve as a catastrophic reinsurer of mortgages.
Shareholders behind the government would only recoup losses after taxpayers had been made whole. Fannie Mae and Freddie Mac purchase mortgages and package them into securities on which they guarantee payments of principal and interest.
The Perry Capital lawsuit follows a shareholder claim filed in the U.S. Court of Federal Claims in Washington last month, which sought $41 billion in damages as a result of the takeover.
Perry Capital didn’t ask for monetary damages in its lawsuit. It sought a court declaration that the third amendment isn’t legal, and orders setting it aside and preventing the Treasury and the Federal Housing Finance Agency from implementing it.
The U.S. government seized Fannie Mae and Freddie Mac in 2008 after investments in risky loans pushed them to the brink of bankruptcy. The two companies took $187.5 billion in taxpayer aid before they began reporting record profits this year as the housing market rebounded.
Richard Perry founded his hedge fund firm Perry Capital in November 1988, after previously working at Goldman Sachs Group Inc. A so-called event-driven manager, he trades stocks and debt of companies involved in mergers and spinoffs and those emerging from bankruptcy.
“This lawsuit seeks to uphold the rule of law,” Theodore B. Olson, partner at Gibson, Dunn & Crutcher which represents the plaintiffs, said in a statement yesterday about the new case. “If the government wanted to assume the powers of receivership, it could have chosen that course.”
With the third amendment, taking all profit, the government overreached, and exceeded the legal boundaries of the statute, Olson alleged.
“Treasury’s additional profits from the third amendment are enormous,” Perry Capital said in the court documents.
Fannie Mae and Freddie Mac paid the Treasury the biggest dividend in history of $66.3 billion on June 30, according to the claim. Without the third amendment, Treasury would have collected $4.7 billion, the plaintiffs said.