Judge Lamberth Stops Payment on Perry Capital’s Reality Check

The United States District Court for the District of Columbia rebuffed Perry Capital LLC, dismissing its much publicized lawsuit against The Department of the Treasury and The Federal Housing Finance Agency regarding the manner in which Fannie Mae and Freddie Mac profits are distributed.

Perry Capital’s litigation was doomed from the outset. The boiler plate written into the Housing and Economic Recovery Act contained the following provision: “no Court may take any action to restrain or affect the exercise of powers or functions of the Federal Housing Finance Agency as a conservator or a receiver.”

Perry Capital and other plaintiffs had litigation before the Court—litigation so similar that Judge Lamberth’s Memorandum Opinion addressed all complainants as though the litigation had been a class action, which it was not. Perry Capital has filed an appeal.

Lamberth Faults Congress

Judge Lamberth’s conclusion is not without humor and sympathy for the plaintiffs. The good Judge acknowledges that sweeping 100% of Fannie Mae and Freddie Mac profits into the Treasury’s coffers will “raise eyebrows” but the plaintiffs’ “true gripe” is with the Congress that passed the Third Amendment into law, making such action possible.

Lamberth’s tone is reminiscent of Chief Justice Roberts’ statement about the individual mandate in the Patient Protection and Affordable Care Act of 2010, when he said it is not the job of the Court to protect Americans from their own political decisions.

What Next?

Fannie Mae and Freddie Mac saw their share prices plummet almost 44 percent in the wake of the decision, representing a haircut of around $76.1 million for Fairholme Capital Management and Fairholme Funds, Inc., another litigant falling victim to Judge Lamberth’s ruling. Bill Ackman’s Pershing Square and John Paulson’s Paulson & Co. took a substantial hit as well. In fact, only a couple of hedge funds were on the right side of recent events, one of which is Waterstone Market Neutral Fund which held short positions on the stock.

The current administration wants to wind down Fannie Mae and Freddie Mac and there has been bi-partisan senate legislation introduced to accomplish just that. What will fill the void created is uncertain, as are the consequences for interest rates and the housing market, should Fannie and Freddie vanish.

Jobs Impact

Events have yet to play out with Fannie Mae and Freddie Mac, so no firm jobs assessment is possible as it relates to events related to the appeal. However, short term prospects are bleak for employment in larger hedge funds, particularly those holding substantive long-term positions in Fannie Mae and Freddie Mac. Opportunities are more apt to be concentrated in smaller funds, especially those recently benefiting from short positions in these equities.

Smaller hedge funds generally have greater flexibility with management and performance fees, which enhances their ability to attract investors and, of course, they vastly outnumber the large funds. As a result, smaller firms are frequently in the best position to hire qualified candidates because they are growing their assets under management at a disproportionate rate (as a percentage) compared to their larger counterparts.

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