Hedge funds that have spent more than five years suing the US government to try to wring some value from their investments in the nationalised mortgage giants Fannie Mae and Freddie Mac were dealt a setback by the Supreme Court on Wednesday.
Shares in Fannie and Freddie plunged by more than a third after the ruling, which threw out some of the investors’ claims that the US Treasury had illegally pulled more than $100bn of profits from the two companies.
Fannie and Freddie, which guarantee a large share of mortgages in the US, have been under government conservatorship since their bailout during the housing market crash of 2008.
Preferred shares in Fannie and Freddie were hit even more heavily by the ruling, the most heavily traded of them falling by more than 60 per cent.
The Supreme Court justices 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 reclaim taxpayer dollars used to bail out the two firms.
The justices did rule that the shareholders could proceed with a claim that the FHFA’s structure was unconstitutional since the agency’s director was not sufficiently accountable to the president.
They sent the constitutional claim back to the lower court to decide what, if any, remedy, the shareholders should receive.
The director of the FHFA, who is nominated by the president and confirmed by the Senate, usually serves a five-year term. He or she may only be removed from office “for cause”.
Hedge fund managers including Bill Ackman and John Paulson have been among those betting that shares and preferred stock in Fannie and Freddie will eventually have some value if the companies are reprivatised, especially if the Treasury can be made to give back some of the profits it harvested during the conservatorship.
In the most recent annual report of his hedge fund, Pershing Square, Ackman wrote that a positive Supreme Court ruling would be a “game changer” for his investment.
But he added: “Regardless of the decision by the court, we continue to believe that our investment in [Fannie and Freddie] is a valuable perpetual option on their eventual exit from conservatorship due to their widely acknowledged irreplaceable role in the US housing finance system.”
Additional reporting by Eric Platt
