Fairholme Sues Over Fannie, Freddie Bailout

Jul 10 2013 | 1:38pm ET

A second hedge fund firm has sued the U.S. Treasury Department over its move to seize the profits of mortgage lenders Fannie Mae and Freddie Mac.

Fairholme Funds, the mutual-fund arm of Fairholme Capital Management, accuses the Treasury of circumventing "the rules of priority… to expropriate for the government the value of the preferred stock and common stock held by private investors."

At issue is the Treasury's move earlier this year to amend the terms of the lenders' $187.5 billion bailout. Prior to the so-called third amendment, the government was paid a fixed 10% dividend on its stake in Fannie and Freddie. Under the new terms, the Treasury gets all of the companies' quarterly profits until the bailout is paid out.

Fairholme's lawsuit follows a similar one filed by Perry Capital.

Fairholme is seeking "just compensation" for its investors.

The Treasury defended its move, noting 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."

There is currently a bipartisan effort, backed by President Barack Obama, to liquidate both companies, a move that could earn Treasury more than $200 billion in profits over the next 10 years. Perry and other hedge funds, including Paulson & Co., are fighting that effort, urging Congress to allow Fannie and Freddie to become independent once again.

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