Hedge funds step up war over GSEs

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Hedge funds---the likes of Paulson & Co., Fairholme Capital and Perry Capital---have snapped up preferred shares of Fannie Mae and Freddie Mac at very low prices, betting that they'll be able to influence the Washington bureaucracy in ways that will lead to extraordinary gains. There has been a lot of maneuvering as of late, with a lot more to come.

The latest: Perry Capital has filed a federal lawsuit that accuses the government of illegally seizing the profits of the big housing GSEs. The lawsuit, filed in U.S. District Court in Washington, alleges that the Treasury Department and the Federal Housing Finance Agency violated a 2008 law that placed Fannie and Freddie into conservatorship to prevent them from bankruptcy.

"Congress originally authorized Treasury to collect 10 percent dividend payments from Fannie and Freddie every quarter as a condition of the government's $188 billion bailout of the companies. Treasury amended the terms of the agreement last year to make Fannie and Freddie give the government most of their profits, a move known as the "sweep amendment," according to the Washington Post.

"The lawsuit alleges that the dividend sweep was tantamount to a purchase of new securities, which Treasury did not have the authority to do. It also claims that FHFA has failed to conserve the assets of Fannie and Freddie by allowing Treasury to take most of their profits. Perry Capital is not seeking damages but is asking the court to strike down the changes Treasury made, a decision that would benefit its investors."

This has become a rather high stakes battle, given that both GSEs are generating enormous profits as the housing market recovers. The government has benefitted tremendously at a time when revenue has been hard to come by.

As of now, it would appear that the hedge funds are fighting an uphill battle; the mood in Congress remains one favorable to winding down the entities. It will take some hard lobbying to win big. We'll see if the funds can pull it off.

For more:
- here's the article

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