Shares of Fannie Mae and Freddie Mac opened down around 38% and 39% respectively after investors lost a suit to change who collected the profits from the two mortgage insurers’ dividends.
Since the financial crisis, the U.S. Treasury has been collecting almost all of Fannie and Freddie’s profits as part of the government’s bailout deal with the companies.
A bunch of top investors — like Pershing Square’s Bill Ackman, Fairholm’s Bruce Berkowitz, and Perry Capital’s Richard Perry — then sued the government for breach of contract and illegally taking profits that, they argued, should have been theirs.
There are around 20 related cases still making their way around the Courts with $US33 billion worth of Fannie and Freddie profits at stake, according to Bloomberg.
But losing this first case does not bode will for the others. That’s why we’re seeing shares selling off in a deluge.
Check out the carnage in the charts below:
The biggest loser here is Ackman’s Pershing Square. The fund held over 63.5 million shares of Freddie and 115 million shares of Fannie according to government filings.
Ackman disclosed his position last November, after Berkowitz went public with his position on the insurers.
Berkowitz said right-out that he and other investors were willing to buy the Fannie and Freddie and recapitalize them as private companies.
That idea was not well-loved in Washington. Former Treasury Secretary Hank Paulson told Business Insider that investors seeking to make a profit from Fannie and Freddie were taking “a calculated, educated risk that the government’s not going to do what needs to be done,” said Paulson.