Lawsuits Mount as Investors Claim U.S. Overreached with GSEs

A number of investors have filed suit in two different courts against the U.S. Government over its management of Freddie Mac and Fannie Mae (the GSEs). On Sunday a group led by Perry Capital LLC filed suit in U.S. District Court, charging the government's seizure of all profits from the GSEs violates the original terms of the governments 2008 bailout agreement. Another suit, Fairholme Funds Inc. v. U.S., was filed in the U.S. Court of Federal Claims on Wednesday and charges that changes made last year between the two GSEs and the Department of the Treasury unlawfully impair shareholder value.

This is the second wave of suits filed in the last month. On June 10 Washington Federal Bank, the City of Austin Texas Police Retirement System, and Michael McCredy Baker, identified as an individual shareholder sued claiming that, while the 2008 takeover of Fannie Mae and Freddie Mac by the government may have been beneficial to the economy, it was illegal, unconstitutional, and cost investors billions of dollars. 

In its suit Fairholme Capital Management says that the government is collecting significant revenues because of changes it made last year to the preferred securities agreement wherein it now sweeps all profits above a buffer amount into the U.S. Treasury in lieu of the 10 percent quarterly dividend required under the original agreement. The GSEs are not allowed to build any capital reserves and the amounts paid to Treasury do not count toward paying back the billions of dollars Treasury contributed to shoring up the companies as they rebuilt their businesses.

The Perry suit maintains that the U.S. Treasury could collect more than $200 billion of profit from the two companies. "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," the lawsuit says.

Reuters News Agency quotes Fairholme head Bruce Berkowitz as saying, "Fannie Mae and Freddie Mac are rapidly repaying the government. As solvent, highly profitable companies, Fannie and Freddie should honor all outstanding obligations to their investors."

The Treasury Department said in a statement that it was reviewing the lawsuits carefully, "But it is important to remember that U.S. taxpayers provided over $187 billion in exceptional support to these two entities to maintain their solvency, protect the broader economy and support continued access to mortgage credit for millions of American families."

Reuters also notes that, regardless of what the long term relationship may have been between Fairholme Capital Management and either of the GSEs, the company announced last month that it had acquired a combined $2.4 billion stake in the preferred shares of Freddie and Fannie. Other hedge funds and investment firms have also bought shares recently in a gamble that the GSEs may be able to regain their autonomy.