Pershing Square sues US government on bailout of mortgage firms

Jose Castro – Fourth Estate Cooperative Contributor

Wasington, DC, United States (4E) – In a groundbreaking claim, Pershing Square Capital Management LP has filed a suit against the US Federal Government on the grounds that the terms of the bailout of mortgage firms FNMA (Fannie Mae) and FMCC (Freddie Mac) had cheated the profits receivable by investors from these mortgage firms.

In its suit, Pershing alleged that the Federal Housing Finance Agency, under the guise of conservatorship of Fannie Mae and Freddie Mac as well as the Treasury Department, agreed amongst themselves ‘to strip profits from the companies’ to the injury of the investors and shareholders of these firms. The said complaint was filed in the US Court of Federal Claims in Washington DC.

The suit sought payment of damages, disgorgement and restitution as a result from Pershing called ‘illegal taking of property by the government.’ It further alleged that the conservatorship duties and responsibilities were violated by the conduct of the Federal Government when it allowed the dissipation of the mortgage firms’ assets. This is clearly a violation of the Fifth Amendment of the US Constitution, according to Pershing, as it took private property for public use without just compensation.

As of the latest count, the US government is facing about twenty other lawsuits from investors, such as hedge fund firms and mutual fund companies, to question the validity of the preferred stock option granted to the government when they took over the ailing firms at the height of the recession. These stocks are a form of equity of a higher valuation as against common stock. It also received regular dividends before the bailout was done.

The suit by Pershing Square seeks the protection of the common shareholders of each of the said rehabilitated mortgage entities. For its part, Pershing Square’s holdings are in common stockholdings but they also hold preferred shares. The suit seeksthe payment of just compensation, but did not determine a specific amount for such.

The Treasury Department and the Federal Housing Finance Agency were not available for any comment on the matter.

At the height of the crisis, the US government paid out USD187.5 billion to bail out Fannie Mae and Freddie Mac. The amount received has already been paid back to the National Treasury and more. The overpayments were considered as a return on the investment by the US government rather than repayment of the bailout funds.

The main issue for shareholders is the act of the Treasury Department to retain all the profits of these two firms for the year 2012. This as well as the other suits filed against the government delves precisely on this diversion of profits from the companies themselves directly to government coffers. The common shares of both mortgage firms have increased by more than 1400% by the end of 2012, while the clas of preferred shares have valued by 700%.

Joining Pershing in this suit are three other individuals who have been long time investors of Fannie Mac common shares. Pershing Square Capital Management LLC is owned by billionaire investor William Ackman.

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