Bill Ackman’s Pershing Square Capital Management LP is suing the US government, claiming revised terms of the 2008 bailout of Fannie Mae and Freddie Mac cheat investors of the profit from the mortgage-financing entities.
The US Federal Housing Finance Agency (FHFA) “purportedly acting as conservator” of Fannie Mae and Freddie Mac, and the US Treasury Department “agreed between themselves to strip all profits from the companies,” depriving shareholders “of any economic value in their shares,” according to the lawsuit, filed yesterday in the US Court of Federal Claims which is in Washington.
The government’s diversion of profits violates the Fifth Amendment of the US Constitution “which prohibits the taking of private property for public use without just compensation,” Lawrence Rosenberg, of Jones Day, an attorney for Pershing Square and other plaintiffs, wrote in the complaint.
Taxpayers rescued Fannie Mae and Freddie Mac with a bailout that grew to US$187.5 billion. While the firms have paid back more than that amount to the US Department of the Treasury, the payment was counted as a return on the US investment rather than full repayment of the aid.
The issue for investors is that the US Treasury decided in 2012 to keep all the companies’ profits. Pershing Square’s complaint is at least the 20th lawsuit challenging the government’s decision to divert Fannie Mae and Freddie Mac profits to the US Treasury.
The case was assigned to Judge Margaret Sweeney, who is overseeing at least nine other bailout lawsuits, including one by Fairholme Funds Inc. Fairholme sued the US last year, claiming it is due compensation because the government expropriated the value of investors’ preferred shares in Fannie Mae and Freddie Mac by seizing the companies’ profits.
Another suit by Fairholme is among at least 10 complaints challenging the bailout being overseen in the US District Court in Washington by Judge Royce Lamberth.
Pershing Square, run by billionaire Ackman, 48, seeks damages, disgorgement and restitution for what it calls an illegal taking of property by the government.
The government’s conduct violates the FHFA’s authority and obligations to conserve Fannie Mae and Freddie Mac’s assets, according to the hedge fund’s complaint.
Pershing Square today filed a second, similar complaint in federal district court in Washington, also naming the FHFA as a defendant. The government’s “self-dealing” sweeps of profits from Fannie Mae and Freddie Mac effectively and illegally coverts the US Treasury’s “special class of preferred shares” into a “new super-senior form of preferred shares,” according to the complaint.
The complaint includes a request for a court order declaring the sweeps illegal and barring them.
Pershing Square, based in New York, is the largest shareholder of both companies, owning about 10 percent of the common stock in each, according to the complaint.
Fannie Mae and Freddie Mac paid fixed dividends of 10 percent on the government’s stock until the Treasury amended the terms of the bailout to take all their earnings.
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