Hedge fund Perry Capital sues US Treasury

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

Freddie Mac.
The headquarters of Freddie Mac. Photograph: Getty Images.

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.