By Joe Light
Shareholders of Fannie Mae and Freddie Mac on Tuesday suffered
another blow in their efforts to lay claim to the profits of
mortgage-finance giants, though the more important court battles
could be still to come.
A judge for the U.S. District Court in Iowa dismissed a case
brought against the Federal Housing Finance Agency and the U.S.
Treasury Department over the treatment of the profits of Fannie and
Freddie.
The case had challenged the government's 2012 decision to sweep
nearly all of the companies' profits to the U.S. Treasury and was
one of several brought by Fannie and Freddie shareholders in recent
years.
Last fall, a judge dismissed a similar suit in the U.S. District
Court in Washington, D.C., sending shares of Fannie and Freddie
tumbling. In writing his decision, Judge Robert Pratt, the judge in
the Iowa case, said the D.C. decision was so similar to the Iowa
case, brought by Continental Western Insurance Co., as to warrant
its dismissal.
"The Court concludes that Continental Western cannot establish
that either of the arguments are unique, because they are merely
different bases for arguing the same claims that were already made"
in the earlier-dismissed case, Judge Pratt wrote. The decision in
that earlier case, brought by investors Perry Capital LLC and
Fairholme Funds Inc., is being appealed.
A Treasury Department spokesman and FHFA spokeswoman declined to
comment. A spokeswoman for W.R. Berkley Corp., the parent company
of Continental Western, didn't have immediate comment.
Now, most investor attention is focused on a case being heard by
Judge Margaret Sweeney in the U.S. Court of Federal Claims. Judge
Sweeney last week said the discovery process in her case could
continue despite the dismissal of the U.S. district court case.
Fannie and Freddie were placed into a conservatorship by the
federal government in 2008 after financial-crisis era losses and
ended up receiving $187.5 billion in aid. The government didn't
wipe out shareholders but did receive warrants to acquire up to 80%
of the companies' common stock.
The government also received a new class of "senior preferred"
shares that initially paid a 10% dividend. But in August 2012, the
FHFA and Treasury changed the terms of the agreement, eliminating
the dividend and requiring the companies to send almost all of
their profits to the U.S. Treasury. If the companies have losses,
on the other hand, they don't pay a dividend.
Most of the shareholder lawsuits challenge that change in terms.
Through the end of last year, Fannie and Freddie have paid the
government dividends of $225.4 billion, and the White House budget
estimates that they would pay another $153.3 billion in profits by
the end of the 2025 fiscal year.
In a conference call with investors on Tuesday, Fairholme Funds
manager Bruce Berkowitz reiterated his belief that Fannie and
Freddie shareholders will eventually be compensated. "The companies
are essential. There are no substitutes," Mr. Berkowitz said.
Write to Joe Light at joe.light@wsj.com
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