Fannie, Freddie shares dive after U.S. appeals court ruling

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By Nathan Layne and Svea Herbst-Bayliss

<span class="articleLocation”>Shares of Fannie Mae and Freddie Mac tumbled more than 30 percent on Tuesday after a U.S.
appeals court shut down efforts by hedge funds and other
investors to pursue numerous legal claims accusing the U.S.
government of seizing their profits following taxpayer bailouts.

By a 2-1 vote, the U.S. Circuit Court of Appeals for the
District of Columbia said a lower court had correctly barred
claims that the government overstepped its authority in 2012 by
eliminating dividend payouts to various shareholders and
requiring the companies to pay the U.S. Treasury an amount equal
to their quarterly net worth.

“For me, it looks like the end of the road,” Ellis Phifer,
senior market strategist at Raymond James in Memphis, Tennessee,
said of the hedge funds’ claim.

The court said Fannie Mae and Freddie Mac investors could
still pursue some damages claims, including for breach of
contract.

The plaintiffs could also appeal the ruling, possibly
sending the case to the U.S. Supreme Court.

Still, stock traders viewed the decision as a setback. Hedge
fund Perry Capital was among those that sought to challenge the
lower court’s dismissal of lawsuits, arguing the government’s
confiscation of profits was illegal.

In afternoon trading on above-average volume, Fannie Mae
shares were down 33 percent at $2.78, while Freddie Mac fell 36
percent to $2.54. Both stocks are still up by about two-thirds
since Donald Trump won the U.S. presidential election on Nov. 8.
Investors said part of that rally stemmed from comments that
month by then-Treasury Secretary-nominee Steve Mnuchin that both
companies should be privatized.

Mnuchin, however, said in January he was against such a
plan.

In an unusual joint majority decision, Circuit Judges
Patricia Millett and Douglas Ginsburg said the government had
the authority under a 2008 law that laid the groundwork for its
seizure of the two companies.

Both companies have since become profitable under the
conservatorship of the Federal Housing Finance Agency. According
to court papers, they have returned roughly $68 billion more to
the government than they drew down during the financial crisis.

Circuit Judge Janice Rogers Brown dissented, accusing the
FHFA of improperly exercising a “stunningly broad view of its
own power” as a conservator.

Major owners of the companies’ preferred stock include Bruce
Berkowitz’s Fairholme Funds Inc, while William Ackman’s Pershing
Square Capital Management has a large stake in their common
shares.

In January, Ackman told investors that shares of the two
companies could continue to rise. Prior to Tuesday, they had
helped the billionaire investor start 2017 with gains after two
years of losses.

A lawyer for Perry Capital said the fund, which had been a
prominent hedge fund before suffering steep losses and deciding
last year to shut down, would consider an appeal.

“While we disagree with the majority analysis… we are
gratified to have our breach of contract claims go forward as
part of the class action,” said Matthew McGill, an attorney at
Gibson Dunn.

Analysts said the ruling was consistent with others on
FHFA’s guardianship of Fannie and Freddie, making it less likely the Supreme Court would take the case.

“It doesn’t seem to be a constitutional issue,” said Bose
George, an analyst at Keefe, Bruyette & Woods in New York. (Additional reporting by Richard Leong in New York)



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