Bill Ackman's Pershing Square Capital Management LP sued the U.S. government claiming revised terms of the 2008 bailout of Fannie Mae and Freddie Mac cheat investors of the profit from the mortgage-financing entities.
The Federal Housing Finance Agency "purportedly acting as conservator" of Fannie Mae and Freddie Mac, and the Treasury Department "agreed between themselves to strip all profits from the companies," depriving shareholders "of any economic value in their shares," according to the complaint filed yesterday in the U.S. Court of Federal Claims in Washington.
Taxpayers rescued Fannie Mae and Freddie Mac with a bailout that swelled to $187.5 billion. While the firms have sent more than that amount back to the Treasury, funds were counted as a return on the U.S. investment rather than full repayment of the aid.
The issue for investors is that the Treasury Department decided in 2012 to keep all the companies' profits. Pershing Square's complaint is at least the 20th lawsuit challenging the government's decision to divert Fannie Mae and Freddie Mac profits to the Treasury.
Pershing Square, run by billionaire Ackman, 48, seeks damages, disgorgement and restitution for what it calls an illegal taking of property by the government.
The government's conduct violates the FHFA's authority and obligations to conserve Fannie Mae and Freddie Mac's assets, according to the hedge fund's complaint.
Pershing Square, based in New York, is the largest shareholder of both companies, owning about 10 percent of the common stock of each, according to the complaint.
Andrew Wilson, a spokesman for Fannie Mae, and Freddie Mac spokesman Brad German declined to comment on the lawsuit. The Treasury and Kevin Lewis, a Justice Department spokesman, also declined to immediately comment on it.
Ackman's lawsuit over the Fannie Mae and Freddie Mac bailout follows others including one by Fairholme Funds Inc., headed by Bruce Berkowitz. Fairholme sued the U.S. last year, claiming it's due compensation because the government expropriated the value of investors' preferred shares in Fannie Mae and Freddie Mac by seizing the companies' profits.
Fannie Mae and Freddie Mac paid fixed dividends of 10 percent on the government's stock until the Treasury amended the terms of the bailout to take all their earnings.
The result was to "circumvent the rules of priority and to expropriate for the government the value of the preferred stock and common stock held by private investors," Fairholme said in its complaint.
The agreements and dividend payments to the Treasury make it impossible for stockholders to realize future value of their ownership interest in the entities, Pershing Square said in its complaint.
Fannie Mae, created by Congress during the Great Depression of the 1930s, and Freddie Mac, established in 1970 to compete with its older sister, keep money flowing through the U.S. home- loan machine by guaranteeing securities that lenders sell for the cash they can use to make more loans.
For decades, "the agencies" existed as hybrids: part publicly held companies, part extensions of government policy. They operated as private companies, selling shares to the public.
Because of investor speculation that the firms would have the support of the U.S. government if they ever got into trouble, their borrowing costs were lower than those of other financial companies. After the pair almost collapsed in September 2008 as defaults of the mortgages they guaranteed surged, the implicit government support became explicit.
Ackman is also waging campaigns against Herbalife Ltd. and Allergan Inc. He's seeking to raise money in a public share sale this year to give him more firepower to invest.
The initial public offering of a fund would enable $15 billion Pershing Square to raise permanent capital, according to an investor letter obtained by Bloomberg News. The money raised through an IPO could be fully invested and not at the risk of investor redemptions. Pershing Square itself wouldn't go public.
The case is Rafter v. U.S., U.S. Court of Federal Claims (Washington).