| WASHINGTON, July 10
WASHINGTON, July 10 Bruce Berkowitz's Fairholme
Funds Inc sued the U.S. government, claiming that changes to the
bailout terms set for mortgage financiers Fannie Mae
and Freddie Mac unlawfully impair shareholder value.
The lawsuit, filed by the mutual fund company in the U.S.
Court of Federal Claims late on Tuesday, seeks "just
compensation" for the fund's investors, according to the 28-page
Fairholme said the government is generating significant
revenue through changes it made last year to the rescue
arrangement for Fannie Mae and Freddie Mac, to the detriment of
private shareholders in the two companies.
Those new terms, designed by the U.S. Treasury and the
company's regulator, force the two mortgage finance firms to
turn over most of their now-sizable profits to the government as
a dividend payment. Previously they had to pay a quarterly
dividend of 10 percent on the government's nearly 80 percent
"Fannie Mae and Freddie Mac are rapidly repaying the
government," Berkowitz said in a news release. "As solvent,
highly profitable companies, Fannie and Freddie should honor all
outstanding obligations to their investors."
Fannie Mae and Freddie Mac have drawn $187.5 billion in
taxpayer aid since they were taken over in 2008 as they teetered
on the brink of insolvency. They have since returned to
profitability, and by the end of June, they will have paid about
$132 billion in dividends to taxpayers.
A group of investors led by hedge fund Perry Capital LLC
filed a similar lawsuit in federal court in Washington late on
Sunday. Perry Capital says the 2012 change in the bailout
agreement to sweep all profits to taxpayers violated the 2008
law that placed Fannie and Freddie into conservatorship.
A Treasury spokesman responded in a statement: "We are
reviewing these lawsuits carefully, but it is important to
remember that U.S. taxpayers provided over $187 billion in
exceptional support to these two entities to maintain their
solvency, protect the broader economy and support continued
access to mortgage credit for millions of American families."
"We fully believe our actions have been lawful and
appropriate," the spokesman said
Even if the two companies' dividend payments were to exceed
the amounts borrowed from the U.S. government, the companies
would owe money, because the bailout does not have a mechanism
for a buyback of the government-held preferred shares.
The future of Fannie Mae and Freddie Mac is uncertain.
Republicans, Democrats and the Obama administration have said
they want to eventually shut down the two companies, which could
wipe out existing equity.
A bipartisan group of U.S. senators last month introduced a
bill that would liquidate the companies and replace them with a
government reinsurer of mortgage securities that would backstop
private capital in a crisis.
Many hedge funds, investment firms and a number of day
traders have poured into both the common and preferred stock of
Fannie Mae and Freddie Mac in a long shot bet they will
eventually be able to buy their way out of government control.
Fairholme Capital Management said last month that it
acquired a combined $2.4 billion stake in the preferred shares
of Fannie and Freddie.
"The government set the terms of their 2008 investments and
should be held to their original deal," Berkowitz said.
The case is Fairholme Funds Inc. v. U.S., 1:13-cv-00465,
U.S. Court of Federal Claims in Washington.