When In Soviet USSA Government Does Not Bail You Out, You Sue

It seems that US investors has become so institutionalized in the new normal world of government bailouts and handouts that when the central planners make a decision that is not instantly accretive to the equity shareholders' bottom-line, the first instinct is to sue them. Following the conservatorship that was forced upon FNM/FRE in 2008, which required the companies to pay a quarterly dividend of 10% on the government's near-80% stake (and obviously implicitly benefited the tag-along bailout riders), the decision in 2012 to change the bailout terms to instead hand over most of their profits to the government (since they moved into profitability - thanks to a Fed-sponsored MBS market). This action "impaired shareholder value" according to Perry Capital - who, Reuters reports, is suing the government, noting "investors had every right to expect these rules to be followed." Indeed, just as the 'rules' have been followed in every bailout that has occurred since 2007.

Via Reuters,

A group of investors led by hedge fund Perry Capital LLC sued the U.S. Treasury in federal court on Sunday to challenge the 2012 changes of the bailout terms set for government-owned mortgage firms Fannie Mae and Freddie Mac.


The lawsuit, filed in U.S. District Court in Washington, alleges that the Treasury and the regulator for Fannie Mae and Freddie Mac violated a 2008 law that put the two mortgage companies into conservatorship as they faced insolvency at the height of the U.S. financial crisis.

The Treasury Department amended the bailout terms last year, forcing Fannie Mae and Freddie Mac to hand over most of their profits to the government, replacing a requirement that the companies pay quarterly dividends of 10 percent on the government's nearly 80 percent stake.


Perry Capital, which began investing in both firms in 2010, claimed in the lawsuit that shareholder value was impaired when the government instituted a "dividend sweep."

The new arrangement prevents the firms from building capital that might have allowed them to redeem the government shares and eventually operate independently to the benefit of private shareholders.


"This lawsuit seeks to uphold the rule of law," Theodore Olson, a partner at the law firm Gibson, Dunn & Crutcher and a former U.S. solicitor general, said in a statement.




Profits at Fannie Mae and Freddie Mac have also led Perry Capital and other hedge funds including Paulson & Co. to push Congress to consider a privatization of the two mortgage financiers to boost the value of preferred shares they have bought.


"Investors had every right to expect these rules to be followed," Olson added.




"What we're seeking is to require Treasury and the FHFA to obey the rules set forth in the Housing and Economic Recovery Act" of 2008, a lawyer involved in the litigation, speaking on condition of anonymity, told reporters on a conference call. "There are no damages being sought."


So it seems its ok if laws are broken, rules changed, and investors hurt for a government bailout - as long as its not an institutional shareholder...