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Hedge fund Perry Capital sues US Treasury

Perry Capital challenges amendments made in Fannie Mae and Freddie Mac bailout terms.

Hedge fund Perry Capital LLC has sued the US Treasury, asserting that the August 2012 decision made by the Treasury and Federal Housing Finance Agency to seize all of the profits from Fannie Mae and Freddie Mac violated the government's 2008 bailout terms.

The hedge fund has sought for the amendments made to the bailout terms in August 2012 to be pushed aside.

The lawsuit was filed in the US District Court in Washington DC.

This lawsuit comes a few days after a group of investors filed a suit challenging several aspects of the capture of the two mortgage companies by the government in 2008.

Following the Treasury's amendment of the bailout terms in August 2012, the two government-sponsored mortgage firms Fannie Mae and Freddie Mac had to relinquish most of their profits to the Treasury.

The new terms allegedly also altered a requirement that the firms make a 10 per cent payment of quarterly dividend on the government's almost 80 per cent equity.

The hedge fund alleged that as a consequence, shareholder value suffered.

Although the firm has not sought any damages in the lawsuit, it is likely to benefit if the August 2012 changes are considered not valid by the court.

Perry Capital, which has been investing in both firms since 2010, has not divulged its interest in the preferred shares of the two mortgage firms.

Through a legal procedure known as "conservatorship", control of Fannie and Freddie was taken by the government in 2008 as losses surged in the housing market.

The government pumped in huge capital in order to make the two firms operational and in exchange the Treasury secured senior preferred shares that paid a 10 per cent dividend initially as well as the rights to buy almost 80 per cent of the common stock of the mortgage firms.

However, in August 2012, the Treasury allegedly changed the stock-purchase terms, following which the firms had to pay most of their earnings as dividend to Treasury.

According to the amended terms, when the mortgage firms do not run into profits they do not have to make dividend payments.

Following these changes, the firms allegedly can neither create capital nor redeem any of the senior preferred shares, which currently the Treasury holds.

According to Perry Capital, this dividend sweep plan has upset hedge fund firms' bets.

The lawsuit alleged that now that the two firms are making a profit, the government is ensuring that the Treasury alone benefits from the profits earned by Fannie Mae and Freddie Mac.

Photo: Getty Images
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How can Britain become a nation of homeowners?

David Cameron must unlock the spirit of his postwar predecessors to get the housing market back on track. 

In the 1955 election, Anthony Eden described turning Britain into a “property-owning democracy” as his – and by extension, the Conservative Party’s – overarching mission.

60 years later, what’s changed? Then, as now, an Old Etonian sits in Downing Street. Then, as now, Labour are badly riven between left and right, with their last stay in government widely believed – by their activists at least – to have been a disappointment. Then as now, few commentators seriously believe the Tories will be out of power any time soon.

But as for a property-owning democracy? That’s going less well.

When Eden won in 1955, around a third of people owned their own homes. By the time the Conservative government gave way to Harold Wilson in 1964, 42 per cent of households were owner-occupiers.

That kicked off a long period – from the mid-50s right until the fall of the Berlin Wall – in which home ownership increased, before staying roughly flat at 70 per cent of the population from 1991 to 2001.

But over the course of the next decade, for the first time in over a hundred years, the proportion of owner-occupiers went to into reverse. Just 64 percent of households were owner-occupier in 2011. No-one seriously believes that number will have gone anywhere other than down by the time of the next census in 2021. Most troublingly, in London – which, for the most part, gives us a fairly accurate idea of what the demographics of Britain as a whole will be in 30 years’ time – more than half of households are now renters.

What’s gone wrong?

In short, property prices have shot out of reach of increasing numbers of people. The British housing market increasingly gets a failing grade at “Social Contract 101”: could someone, without a backstop of parental or family capital, entering the workforce today, working full-time, seriously hope to retire in 50 years in their own home with their mortgage paid off?

It’s useful to compare and contrast the policy levers of those two Old Etonians, Eden and Cameron. Cameron, so far, has favoured demand-side solutions: Help to Buy and the new Help to Buy ISA.

To take the second, newer of those two policy innovations first: the Help to Buy ISA. Does it work?

Well, if you are a pre-existing saver – you can’t use the Help to Buy ISA for another tax year. And you have to stop putting money into any existing ISAs. So anyone putting a little aside at the moment – not going to feel the benefit of a Help to Buy ISA.

And anyone solely reliant on a Help to Buy ISA – the most you can benefit from, if you are single, it is an extra three grand from the government. This is not going to shift any houses any time soon.

What it is is a bung for the only working-age demographic to have done well out of the Coalition: dual-earner couples with no children earning above average income.

What about Help to Buy itself? At the margins, Help to Buy is helping some people achieve completions – while driving up the big disincentive to home ownership in the shape of prices – and creating sub-prime style risks for the taxpayer in future.

Eden, in contrast, preferred supply-side policies: his government, like every peacetime government from Baldwin until Thatcher’s it was a housebuilding government.

Why are house prices so high? Because there aren’t enough of them. The sector is over-regulated, underprovided, there isn’t enough housing either for social lets or for buyers. And until today’s Conservatives rediscover the spirit of Eden, that is unlikely to change.

I was at a Conservative party fringe (I was on the far left, both in terms of seating and politics).This is what I said, minus the ums, the ahs, and the moment my screensaver kicked in.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.