Perry Capital Suing US Treasury Over Fannie and Freddie Rule Changes

July 9, 2013 James Heinsman Hedge Fund News

Freddie Mac and Fannie MaeAlleging that actions taken by the US Treasury in 2012 harmed the interest of hedge funds, Perry Capital LLC filed a lawsuit in the US District Court in Washington, DC.

In 2008, in a legal action known as “conservatorship” the US government took over control of the mortgage companies Freddie Mac and Fannie Mae due to huge financial loses in the housing market at that time. In order to keep the two firms operational the government poured large amounts of capital into them. In exchange the Treasury acquired senior preferred shares which paid a 10 percent dividend at first. The Treasury also secured the rights to purchase close to 80 percent of Freddie and Fannie’s common stock.

The lawsuit focuses on what happened later, in August 2012. Allegedly the Treasury changed the terms of their stock purchase. At that point the mortgage companies were forced to pay most of their earnings as dividends to the Treasury. However, according to the amended terms, when the firms do not make profits they do not have to make dividend payments.

As a result of these changes, the lawsuit contends, the firms can neither create capital nor redeem any of the senior preferred shares, which the Treasury currently holds. Perry Capital contends that this dividend sweep plan has created havoc with their hedge fund firms’ bets.

Perry Capital filed its complaint only days after another group of investors filed a suit against the government challenging a number of issues related to the way the two mortgage companies, Freddie Mac and Fannie Mae, were seized by the government in 2008.

Perry Capital is not seeking damages in the lawsuit, but if the changes in the bailout terms are nullified then the hedge fund stands to gain. Perry Capital, which has been investing in Fannie and Freddie since 2010, has not released the extent of its interest in the preferred shares of the two firms.

The lawsuit also contends that now that the mortgage firms are making a profit the government is making sure that only the Treasury will benefit from those profits.

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Fannie Mae, Freddie Mac, Perry Capital, US Treasury,

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