Perry Capital, one of the largest hedge fund managers in the U.S., has filed a lawsuit against the Treasury Department, alleging that the Government’s seizure of Fannie Mae’s and Freddie Mac’s profits is illegal. The lawsuit was filed in a federal court for the District of Columbia, and the full complaint can be found here.
Perry Capital’s complaint is brought under the Administrative Procedure Act. The APA empowers the Court to “hold unlawful and set aside agency action, findings, and conclusions” that are “in excess of statutory jurisdiction, authority, or limitations” or that are “without observance of procedure required by law.”
Specifically, the complaint alleges that amendments made to Fannie and Freddie’s bailout terms were illegal under the APA because they exceeded the statutory authority that was granted to the federal government under the Housing and Economic Recovery Act of 2008. The amendment that is the primary basis of the complaint is the so-called “Sweep” or “Third” Amendment. Passed in 2012, the Third Amendment enabled the Treasury to claim all of Fannie’s and Freddie’s profits as dividends. This action, Perry Capital alleges, illegally deprives Fannie’s and Freddie’s private investors of the dividends they claim that they would be receiving if not for the federal government’s interference.
Under the original agreement, the government was limited to 10% of Fannie’s and Freddie’s profits. The Third Amendment to the bailout agreement enabled the Treasury to take most of the companies’ profits, and thus to rake in large amounts of revenue—enough revenue for the Government to post a budget surplus in April. Furthermore, the Obama administration has estimated that Fannie and Freddie will pay $238 billion into the federal coffers over the next decade under the current agreement.
Perry Capital contends, however, that the federal government was not authorized to seize all of Fannie and Freddie’s profits. According to the complaint, the federal government was only statutorily authorized to act as a conservator for the companies. In this role, the government was supposed to “preserve and protect” Fannie’s and Freddie’s assets. Perry Capital alleges that the Third Amendment is “inherently inconsistent” with these conservatory duties because it prevents the companies from building capital.