The seemingly endless crusade to reincarnate the GSEs - Fannie and Freddie - and to restore some value for their equity shareholders after the two companies collapsed in the early days of the Global Financial Crisis appears to have come to a crashing end moments ago when the Supreme Court gave Fannie Mae and Freddie Mac investors a mixed ruling in their challenge to the government’s collection of more than $100 billion in profits from the government-sponsored enterprises.
According to Bloomberg, justices threw out claims that the Federal Housing Finance Agency exceeded its authority under federal law, effectively crippling the key argument of GSE bulls in their decade-long quest to recover value in the two pennystocks. However, the court also left some hope to investors, saying they might be able to win damages on a separate claim that the so-called profit sweep was illegal because the FHFA director was unconstitutionally insulated from being fired by the president.
The second part of the ruling could mean President Joe Biden will be able to oust Mark Calabria, the FHFA director and an advocate for releasing the mortgage giants from government control.
The justices also sent the case back to the lower-court level, where the investors will have a chance to show they were harmed by the lack of presidential control over FHFA directors who implemented the agreements.
The decision is crippling firms like Paulson, Pershing Square and Fairholme Funds that have sought for over a decade to persuade the government to release Fannie and Freddie from government control, thereby earning billions of dollars on their shares.
Instead, the hedge funds are nursing hundreds of millions in losses, with shares of Fannie Mae slumped as much as 42% and those of Freddie Mac plunged 44%, their biggest drop since Sept 2008...
... and hardly the outcome bullish hedge fund holders had been expecting.