MReport April 2017

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TH E M R EP O RT | 63 SECONDARY MARKET THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T "You may have been allowed to do it, but if you breached the contracts with the stockholders, you may still have to pay." —Matthew McGill, attorney for Perry Capital Federal Court Denies Stockholders' Claims Against GSEs The argument hinged on whether the government illegally seized profits from the GSEs after it decided to collect a share of quarterly earnings. A split ruling by a federal appeals court in Wash- ington in late February dashed the hopes of hedge fund stockholders in their legal challenge to U.S. government's capture of billions of dollars in profits generated by Fannie Mae and Freddie Mac after their bailout, which sent the government-spon - sored entities' (GSEs') shares in a downward spiral. Shareholders argued that the government illegally seized profits from the companies after it decided in 2012 to collect a share of earnings every quarter. Today's ruling means that hedge fund stockholders still won't be able to sue the U.S. government over the seizure of profits made by the mortgage loan companies. In February, Fannie Mae said it would pay $5.5 billion in dividends to the U.S. Treasury. With that payment in March, the company has paid a total of $160 billion in dividends to the government. On February 16, Freddie Mac reported Q 4 2016 earnings of $4.8 billion. With the earnings, the GSEs paid the Treasury a combined total of $10 billion in March. In place since January 2013, the net worth sweep allowed the U.S. to recapture all of the $187 billion in taxpayer money it spent to stave off the companies' col - lapse—and more. According to Bloomberg, Perry Capital and Bruce Berkowitz's Fairholme Funds Inc. are among the major owners of Fannie and Freddie's preferred shares, while Bill Ackman's Pershing Square Capital Management is a major owner of the companies' common shares. These and other big investors lost in their effort to overturn a judge's ruling that said they couldn't sue the government over the dividend change, which forced the companies to send almost all their profits to the U.S. Treasury, leaving shareholders with nothing. The appeals panel allowed shareholders with valid contract- based claims to pursue that part of the lawsuit. The revived case likely returns to U.S. District Judge Royce Lamberth, who threw it out in 2014. "The institutional plaintiffs could still benefit from the dam - ages claims brought by the class, assuming they fall within the definition of the class, which they likely do," said Hamish Hume, a lawyer who represented a few of the prevailing shareholders. The hedge funds can also ask for a rehearing by the full appeals court in Washington or ask the U.S. Supreme Court to hear the case. As reported in Business Insider, Gary Cohn, Director of the White House National Economic Council, told the Wall Street Journal in February that the administration planned to direct the Treasury to review the role of Fannie Mae and Freddie Mac. Treasury Secretary Steven Mnuchin said in November, "We've got to get them out of government control." Matthew McGill, a lawyer for Perry, disputes the court's decision that the Federal Housing Finance Agency had the authority to impose the sweep. "We obviously disagree with that," he said. He paraphrased the court's conclusion as, "You may have been allowed to do it, but if you breached the contracts with the stockholders, you may still have to pay."

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