Hedge funds that have spent more than five years asking the U.S. government to try to snatch some value from their investments in nationalized mortgage giants Fannie Mae and Freddie Mac have been dealt with by the Supreme Court.
Split in Fannie and Freddie sank by more than a third after the ruling, which shattered some of investors ’claims that the U.S. Treasury had illegally pulled more than $ 100 billion in profits from the two companies.
Fannie and Freddie, who guarantee a large portion of mortgages in the United States, have been under government conservatives since their rescue during the 2008 housing market crash.
The preferred shares in Fannie and Freddie were hit even harder by the decision, with the most traded of them falling by more than 60 percent.
Supreme Court judges rejected the claim that the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, had exceeded its authority under federal law by engaging in a “profit sweep.” in 2012 to recover the dollars from taxpayers used to save the two businesses.
The judges ruled that the shareholders could proceed with a claim that the FHFA’s structure was unconstitutional since the agency’s director was not accountable enough to the president.
They referred the constitutional claim to the lower court to decide what remedy, if any, the shareholders would receive.
The director of the FHFA, who is appointed by the president and confirmed by the Senate, usually serves a five-year term. He or she may be fired only from the office “for a reason”.
Hedge fund managers, including Bill Ackman and John Paulson, have been the ones who bet that the shares and preferred shares in Fannie and Freddie will eventually have some value if the companies are repurchased, especially if the Treasury can be made to restores some of the profits he collected during the conservatory.
In the most recent annual report of his hedge fund, Pershing Square, Ackman wrote that a positive Supreme Court decision would be a “game changer” for his investment.
But he added: “Regardless of the court’s decision, we continue to believe that our investment in it [Fannie and Freddie] it is a valuable perpetual option for its eventual exit from the conservatory because of its widely recognized irreplaceable role in the U.S. housing finance system. ”
Additional reports by Eric Platt