NEW YORK (TheStreet) -- Pershing Square Capital Management and three other common shareholders in Fannie Mae (FNMA) and Freddie Mac (FMCC) went public with their lawsuit against the U.S. government and the two government sponsored enterprises, or GSEs, late Thursday, arguing the government unlawfully wiped out the value of their shares in Fannie and Freddie.
The lawsuit, first reported by TheStreet before Thursday's market close, focuses in part on a controversial 2012 third amendment to the government conservatorship of Fannie and Freddie which started in 2008. Under the 2012 amendment, frequently referred to as a "net worth sweep," the Treasury changed the terms of its $189.4 billion preferred stake in the GSEs so that instead of owing a 10% annual dividend to the U.S. Treasury, the GSEs owed all of their profits, minus capital cushions of $3 billion for each GSE. That left nothing for private shareholders such as the plaintiffs, who claim the sweep was a violation of their fifth amendment rights against the seizure of private property for public use without just compensation.
"The government's brazen conduct in establishing the self-dealing Net Worth Sweep Agreements and requiring the ongoing quarterly sweeps . . . is illegal," the lawsuit states.
A high-profile New York-based hedge fund led by Bill Ackman, Pershing Square is by far the largest non-government owner of common shares of GSEs Fannie Mae and Freddie Mac.
Pershing Square owns about 63.58 million common shares of Freddie Mac worth $256 million, about three times as many as the next-largest shareholder, Bruce Berkowitz’s Fairholme Capital Management, according to the latest filings compiled by Bloomberg as of Friday morning. Pershing owns some 115.57 million shares of Fannie Mae worth about $466 million, nearly six times Fairholme’s stake, which again is the next largest. Like many other large investors in Fannie and Freddie, including Perry Capital and The Blackstone Group (BX), Fairholme has a large preferred stake in Fannie and Freddie, though one that is junior to the Treasury's preferred stake. (Pershing Square's holdings are as of the end of the first quarter, while Fairholme's are as of the end of the second quarter.)
In addition to its $189.4 billion senior preferred stake, the U.S. Treasury has warrants to own 79.9% of both Fannie and Freddie common shares. It has not yet exercised the warrants, however.
Treasury spokesman Adam Hodge referred questions to the U.S. Department of Justice, where spokeswoman Nicole Navas declined to comment. Email messages to Steve Murray, a spokesman for Pershing Square at Rubenstein Communications and Andrew Wilson, a Fannie Mae spokesman, were not immediately returned. Freddie Mac spokesman Tom Fitzgerald declined to comment.