Hedge fund, Perry Capital, lost a bid to sue the U.S. government over its snagging of billions of dollars in profits generated in the wake of the U.S. bailout of Fannie Mae and Freddie Mac following the 2008 financial crisis.
The Federal Court of Appeals for DC Circuit, in a 2-1 decision Monday, held the shareholders do not have the right to sue over changes in the government dividend terms, known as the “net-worth sweep,” which forced the firms to turn over the majority of their profits to the U.S. Treasury.
Fannie and Freddie came to the brink of collapse when the U.S. economy went into a severe recession in 2007-2008 as a result of a rapid decline in the housing market. The companies were central players in the U.S. housing market, holding mortgage portfolios with a combined value of roughly $5 trillion, about half the national mortgage market.
In a plan to keep the companies afloat the US Treasury, using the Federal Housing Finance Agency, (FHFA), included a bailout of billions of dollars in emergency capital in exchange for preferred shares of their stock. In return, Fannie and Freddie agreed to pay the Treasury a 10 percent quarterly dividend on the total amount of funds drawn. The plan was covered in the Housing and Economic Recovery Act.
Fannie and Freddie were frequently unable to make those payments, which meant they borrowed more cash from the Treasury just to pay the dividends, which increased the future amounts they were obligated to pay.
In 2012, FHFA and the Treasury amended the stock repurchase agreement to replace the 10 percent dividend with a formula that allowed the companies to pay the Treasury an amount equal to their quarterly net worth, however much or little that was, the court said.
The change represents the “net-worth sweep” that left investors out in the cold after the Treasury took its dividends.
“We hold that the stockholders’ statutory claims are barred by the Recovery Act’s strict limitation on judicial review,” Judge Patricia Millett said, joined by Judge Douglas Ginsburg.
The only claims that remain were contract dispute-related claims and must go back to the trial court.
In dissent, Judge Janice Rogers Brown said that FHFA may not do covertly what Congress did not authorize explicitly. She argued FHFA overstepped its powers by ignoring the limits of the law.
Case: Perry Capital v. Mnuchin, No. 14-5243
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