A group of Fannie Mae and Freddie Mac investors who claimed in a lawsuit that the federal government violated the Constitution when it amended the companies' bailout agreements in 2012 to sweep nearly all of their profits to the U.S. Treasury faced a major setback on Tuesday when a federal judge ruled that the government is allowed to do so.
According to Bloomberg News, the suit filed by investors including Bruce Berkowitz, the head of Fairholme Capital Management, is just one of almost 20 actions brought by investors claiming they've been barred from participating in post-bailout profits earned by the government sponsored enterprises (GSEs).
In the suit, the investors said they were not challenging the government's initial bailout of the GSEs in 2008 but rather the 2012 amendment that changed the rules regarding their contributions to the Treasury. The third amendment to the Housing Act, also known as the ‘Net Worth Sweep Amendment,’ in effect allowed the Treasury to collect dividends from the GSEs via preferred stock purchase agreements, thus circumventing investors' ability to profit from the stock.
The face value of preferred shares in Fannie and Freddie is currently at least $33 billion, according to the Bloomberg report; however, it is also potentially worthless in the event the GSEs are liquidated as a result of housing finance reform. Currently, there are several proposals before congress calling for Fannie and Freddie to be either liquidated or transitioned out of conservatorship.
A similar suit has been filed by Perry Capital LLC, which is run by billionaire hedge fund manager Richard Perry.
Meanwhile, the government is defending its $182 billion bailout of American International Group Inc. at a federal trial in Washington. That suit – brought by Maurice ‘Hank’ Greenberg's Starr International Co., which was AIG's biggest shareholder when the financial crisis struck – alleges that the federal government's assumption of 80% of AIG's stock in exchange for an $85 billion bailout amounted to an unconstitutional taking of private property.
For more, check out the Bloomberg News report.