Lawsuits filed by funds managed by Bruce Berkowitz and Richard Perry were thrown out today by US District Judge Royce Lamberth. In the lawsuits, both parties claimed illegal actions by the government of getting Fannie Mae and Freddie Mac to pay almost all their profits. With the courts’ decision, investors are back, at least pertaining to common shares.
In early morning trading, Fannie Mae stock increased by 10.2% to $2.49, which means stock value that dropped almost 40% after Judge Lamberth’s decision, is now down only 7% from where it closed prior to the issued ruling.
In the past few days, the US stock market suffered a wide sell-off. However, shares of Fannie Mae increased by 48% within the past week and for Freddie Mac, shares climbed more than 11% in current trading, 9% lower than closing before Judge Lamberth’s ruling.
While both Fannie Mae and Freddie Mac have bounced back, some of the preferred shares of the government-sponsored enterprises have not. Fannie Mae’s popular Series S was up slightly but still less than 1% and even after Judge Lamberth’s ruling, remains over 50% down.
Berkowitz and Perry’s funds are planning to appeal and have bet more on the preferred shares of Fannie Mae and Freddie Mac stock. Because this type of investment is often seen as being less speculative than common shares, Berkowitz’s Fairholme Fund has yet to recover from post-rule sufferings.
In the meantime, William Ackman’s Pershing Square hedge fund that placed a significant bet on Fannie Mae and Freddie Mac common shares fared better. Even so, this hedge fund is also suing the government although not in the same court where cases for Berkowitz and Perry were dismissed.
After the recent decline in stocks, Ackman reportedly added to his position in common shares for Fannie Mae and Freddie Mac.
The bottom line – the Obama Administration wants to shut down mortgage giants operating in conservatorship since getting $188 billion from the Treasury Department during the most recent financial crisis.
The bailout money was paid back by Fannie Mae and Freddie Mac, which are profitable and depended on by the mortgage market. It is from this that investors like Berkowitz, Perry, and Ackman are trying to win big.