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Hedge funds that have spent more than five years suing the U.S. government for trying to get some value out of their investments in nationalized mortgage giants Fannie Mae and Freddie Mac received a setback from the Supreme Court on Wednesday.
Participations in Fannie and Freddie fell by more than a third after the ruling, which dismissed some of investors’ claims that the U.S. Treasury had illegally obtained more than $ 100 billion in profits from the two companies.
Fannie and Freddie, who guarantee a large portion of mortgages in the United States, have been under government tutelage since their bailout during the 2008 real estate market crash.
Fannie and Freddie’s preferred shares were further affected by the ruling, most of which traded fell by more than 60%.
Supreme Court judges dismissed claims that the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, had exceeded its authority under federal law by participating in a “profit balance.” in 2012 to recover taxpayer dollars used to rescue the two companies. .
The judges ruled that shareholders could proceed to claim that the structure of the FHFA was unconstitutional as the director of the agency did not respond sufficiently to the chairman.
They referred the constitutional claim to the lower court to decide the appeal, if any, that the shareholders should receive.
The director of the FHFA, who is appointed by the president and confirmed by the Senate, usually serves a five-year term. He can only be removed from office “for cause.”
Hedge fund managers, including Bill Ackman and John Paulson, have been the ones to bet that Fannie and Freddie’s preferred shares and stock will end up having some value if companies were reprivatised, especially if the Treasury can be returned benefits he obtained during the conservatory.
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 court’s decision, we still believe that our investment in [Fannie and Freddie] it is a valuable perpetual choice for its eventual exit from the Conservative because of its widely recognized irreplaceable role in the U.S. housing finance system. “
Additional reports by Eric Platt
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