Shares of Fannie and Freddie Tumble Following Court Ruling

On Tuesday, the shares of Freddie Mac and Fannie May plunged by over 30% following a ruling from the US appeals court that put an end to the efforts by investors and hedge funds to go ahead with several legal claims charging the US government of grabbing their gains after taxpayer bailouts.

The shares of Freddie plummeted to $2.47 by 38%, while that of Fannie dropped to $2.71 by 35%.

After President Donald Trump’s election, hopes for reformation of the government-funded enterprises had increased the shares of Freddie and Fannie. Fannie’s shares rose from $1.26 low to $5.00 high, but only to retreat after the ruling on Tuesday.

By a 2-1 poll, the District of Columbia’s U.S. Circuit Court of Appeals revealed a lower court had properly banded claims that the govt. exceeded its authority in the year 2012 by getting rid of dividend payouts to several shareholders and asking the firms to pay a charge equal to their trimestral net worth to the US Treasury.

Douglas H. Ginsburg (Senior Circuit Judge) and Patricia Millett (Circuit Judge) wrote – “We hold that the stockholders’ statutory claims are barred by the Recovery Act’s [the 2009 American Recovery and Reinvestment Act] strict limitation on judicial review. We also reject most of the stockholders’ common-law claims.”

The verdict was an impediment for investors and hedge funds who were challenging the federal government’s decision (Third Amendment) to confiscate the profits of GSE.

An investment bank Compass Point’s analyst Isaac Boltansky said in a research report – “The Perry decision is undeniably a body blow for GSE shareholders, but this ruling does not constitute a knockout, as there are still both legal and administrative avenues for shareholders.

According to the court’s ruling, Freddie Mac and Fannie May investors could even now pursue some claims for damages, including for contract breach.  The complainants could also appeal the verdict, probably sending this case to the Supreme Court of the US.

However, stock traders considered the verdict to be an impediment. Perry Capital, hedge fund was one of those who wanted to challenge the dismissal of litigations of the lower court, debating the confiscation of profits of the government was illegal.

The shares of Fannie Mae in afternoon trading dropped by 33% at $2.78 on above-average volume, whereas that of Freddie Mac sank to $2.54 by 36%.

According to Perry Capital’s lawyer, the fund, which had been a key hedge fund prior to experiencing heavy losses and making a decision to close down last year, would consider appealing.

Analysts feel that the verdict was consistent with the others on guardianship of Freddie and Fannie (FHFA), making it less probable that the Supreme Court would take up the case.


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