Fairholme Appeals Fannie, Freddie Ruling As Pershing Square Boosts Stakes

Oct 14 2014 | 10:56am ET

A second hedge fund has appealed the dismissal of its lawsuit challenging the federal bailout of Fannie Mae and Freddie Mac, while one whose claims have survived for now is boosting its bet on the mortgage giants.

Fairholme Capital Management on Friday appealed last month’s ruling by a federal judge in Washington, dismissing its claims and those of Perry Capital. Perry filed its appeal earlier this month.

The U.S. Treasury’s move in 2012 to seize all of Fannie and Freddie’s profits “was not authorized by the Housing and Economic Recovery Act of 2008,” Fairholme lawyer Charles Cooper insisted. U.S. District Judge Royce Lamberth found that the law did, in fact, give the government the authority to change the terms of the companies’ $187.5 billion bailout.

That ruling punished hedge funds like Fairholme with big stakes in Fannie and Freddie. Other losers included Claren Road Asset Management, which lost 5% in the first week of October due to the Fannie-Freddie ruling.

Fannie and Freddie shares fell by almost half after Lambert’s ruling. Pershing Square Capital Management saw that drop as an opportunity to boost its bets on the company.

Pershing Square is also suing the government over the bailout, but unlike Fairholme and Perry, its claims are based on the companies’ common, rather than preferred, shares. And the hedge fund said last week that it has boosted its stake in both companies in the wake of the swoon.

It is not clear how large Pershing Square’s stake has become. The firm owned about 10% of each company before it stopped reporting on the size of its stake.

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