Legal woes for Fannie Mae and Freddie Mac

October 1, 2014 05:05 AM

Fannie Mae and Freddie Mac plunged in early trading after investors, including Bruce Berkowitz’s Fairholme Capital Management LLC, lost a legal bid yesterday to force the bailed-out companies to share profits with private shareholders.

Fannie Mae fell 66 percent to 97.5 cents at 8:30 a.m. in New York(NYSE:FNMA). Freddie Mac dropped 64 percent(NYSE:FMCC).

The investors sued for breach of contract over allegedly promised dividends and liquidation preferences and what they called an illegal “taking” under the U.S. Constitution. U.S. District Judge Royce Lamberth rejected their claims, finding that the government is allowed under a 2012 amendment to the companies’ bailout agreements to sweep “nearly all” profits from Fannie Mae and Freddie Mac to the U.S. Treasury.

“Judge Lamberth’s ruling represents a material setback for GSE shareholder claims both in court and on Capitol Hill,” Isaac Boltansky, an analyst at Compass Point Research & Trading LLC, said in a note to investors, using an abbreviation for government-sponsored enterprises.

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