US Supreme Court deals a blow to Fannie and Freddie shareholders

Hedge funds that have spent more than five years suing the US government for trying to extract some value from their investments in nationalized mortgage giant Fannie Mae and Freddie Mac suffered a setback by the Supreme Court on Wednesday.

Participate in Fanny and Freddy It fell by more than a third after the ruling, which overturned some investor allegations that the US Treasury illegally withdrew more than $100 billion in profits from the two companies.

Fannie and Freddie, who guarantee a large share of mortgages in the United States, have been under government tutelage since they were bailed out during the 2008 housing market crash.

Fannie and Freddie’s preferred stocks were hit hardest by the decision, with the most heavily traded stocks down more than 60 percent.

Supreme Court justices have dismissed the claim that the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, exceeded its authority under federal law by engaging in a “profit sweep” in 2012 to recover taxpayer money used to bail out the two companies.

The judges decided that shareholders could go ahead with the claim that the FHFA’s structure was unconstitutional because the agency’s director was not adequately accountable to the president. They sent the constitutional suit back to the lower court to decide what treatment, if any, the shareholders should get.

Hours after the ruling, US President Joe Biden fired Mark Calabria, the Trump-appointed FHFA director who had been pursuing the privatization of both Fannie and Freddie. Calabria served only two years of a five-year period. *

“I respect the Supreme Court’s decision and the president’s authority to remove the director of the Federal Housing Finance Agency,” Calabria said in a statement.

But he added, “When housing markets experience a major slowdown, Fannie Mae and Freddie Mac will fail at current capital levels. I wish my successor all the best in fixing the remaining flaws in the housing finance system in order to preserve home ownership opportunities for all Americans.”

Hedge fund managers including Bill Ackman and John Paulson have been among those betting that the shares and preferred shares in Fannie and Freddie will eventually have some value if the companies are revitalized, especially if the Treasury can be made to return some of the profits it earned during the trusteeship. .

In his hedge fund’s most recent annual report, Pershing Square, Ackman wrote that the positive Supreme Court ruling would be a “game changer” for his investment.

But he added, “No matter what the court decides, we still believe that our investment in it [Fannie and Freddie] It is a valuable enduring option when they eventually emerge from conservation due to their widely recognized and irreplaceable role in the US housing finance system.”

Additional reporting by Eric Platt

* An earlier version of this article, based on information from the FHFA, incorrectly stated that Calabria had resigned

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