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Th e M Rep o RT | 59 O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET Department investors File suits Over Fannie, Freddie Profits pershing Square splits its efforts to get what investors say is theirs. F or the second time in as many days, New York-based hedge fund Pershing Square Capi- tal Management sued the U.S. government over the handling of Fannie Mae and Freddie Mac profits. Pershing Square, led by CEO William A. Ackman, and two other plaintiffs came togeth- er to file a lawsuit on August 16 with the U.S. Federal Court of Claims in Washington, D.C., alleging the government is in- fringing on common sharehold- ers' rights, creating a "windfall" for the government while shortchanging GSE shareholders by diverting profits from the na- tion's two largest mortgage com- panies to the U.S. Department of Treasury, a practice started in 2012. The very next day, August 17, Pershing Square filed a second lawsuit against the federal gov- ernment, this time in the U.S. District Court. In the second suit, Pershing Square suggests the billions of dollars of GSE dividends being funneled to Treasury should be divided among the GSEs' common share- holders. The new complaint made by Pershing Square says the com- pany was told GSE stockholders do not have fundamental share- holder rights. According to the complaint, the Federal Housing Finance Agency (FHFA), con- servator for both GSEs since the government's bailout of Fannie Mae and Freddie Mac in 2008, refused to allow Pershing Square to inspect books and records despite written demands to FHFA's board of directors made by Pershing. Pershing Square holds more than 170 million shares and has nearly $700 million invested in both GSEs, making it the larg- est non-governmental owner of Fannie Mae and Freddie Mac common stock by far. Pershing's stake in both GSEs is close to 10 percent. The first lawsuit filed on August 16 alleges that by sweep- ing GSE profits into Treasury, the government is taking private property for public use without "just compensation," which is in violation of the Fifth Amendment of the U.S. Constitution. Joining forces with Pershing Square in the initial suit are Josephine and Stephen Rettien, a married couple who purchased common stock in Fannie Mae approximately 15 years ago, and retired nurse Louise Rafter, who has held common stock in Fannie Mae for more than 25 years. Ackman declined to comment on the lawsuit when reached by phone. Spokespeople for both the Treasury Department and FHFA also declined to comment on either suit. The August lawsuits are the latest among several similar complaints filed in the last 14 months. In July 2013, hedge fund Perry Capital also sued the federal government for its handling of GSE profits. In June 2013, private shareholders filed a suit seeking $41 billion in dam- ages for the same reason. Fannie Forecasts Weaker growth Though the economy is expected to brighten, Fannie's economists are less rosy on housing. a second-quarter rebound com- bined with an upward revision for economic activity in the first quarter has given a boost to Fannie Mae's full-year eco- nomic expectations, according to the August 2014 Economic Outlook put together by the GSE's Economic and Strategic Research Group. The housing market lost momentum in Q2, however, as near-term indicators showed growth slowed from Q1. Residential investment, although expected to contribute to growth in 2014 and 2015, is not expected to be as major a driver of future economic progress as was originally forecasted. "With respect to housing's contribution to growth this year, we have downgraded our outlook following the disappointing housing activity seen during the first half of the year," said Doug Duncan, Fannie Mae's chief economist. "The impact on mort- gage rates from the market's expectation that the Federal Reserve would soon start tapering their securities pur- chases, combined to some de- gree with the weather effect in the first half of 2014, led to very little seasonal growth in housing. In the first six months of the year, total sales have run below last year's pace," Duncan explained. While consumer spending was the primary driver of GDP in Q1, nearly every main component of GDP improved in Q2. Inventories and employment support combined with consumer spending have raised expectations for economic growth by 3 percent, which pushes the overall economic forecast for 2014 up four- tenths to 1.9 percent. "The August outlook supports our expectation that the economy will grow in the second half of the year at slightly above trend and push full-year growth into positive territory, albeit still weak by historical standards," Duncan said. "We expect the forecast will get a boost from consumer spending, which appears positive in the current quarter given the improving trends in personal income and hiring." While consumer spending is expected to be a major driver of overall economic improvement, consumers still seem to be conservative when it comes to "big ticket" purchases such as homes, according to Duncan. "We currently estimate that 2014 will finish lower in total sales figures [for housing] than 2013—and that 2015, while stronger than 2013 and 2014, will not be the breakout year some are expecting," Duncan said.