Hedge Fund Sets Bush Attack Dogs On Obama in Fannie, Freddie Lawsuit

NEW YORK (TheStreet) -- Hedge fund Perry Capital has brought out the

big legal guns in a challenge to the Obama administration's 2012

amendment to the Treasury's conservatorship of Fannie Mae (FNMA_) and

Freddie Mac (FMCC_).



Perry has hired Gibson Dunn and Crutcher's Ted Olson, U.S. Solicitor

General from 2001 to 2004 and possibly the highest-profile

conservative litigator in the country. A practiced expert at

invalidating U.S. regulations, Olson has argued 59 cases in the

Supreme Court, according to his bio on Gibson Dunn's Web site,

including the two cases that decided the disputed presidential

election of 2000 in favor of George W. Bush. Working alongside Perry

and Gibson Dunn is Hamilton Place Strategies, a public relations firm

led by former George W. Bush administration staff.



In its lawsuit, filed July 7, Perry argues the 2012 amendment, which

sweeps all the profits of Fannie and Freddie into the Treasury,

violates the terms of the 2008 conservatorship of the Government

Sponsored Enterprises (GSEs). Under the 2008 deal, the Treasury

acquired preferred shares worth $1 billion in the GSEs, paying 10%

annual dividends. The Treasury also got warrants to buy 80% of the

outstanding common stock and agreed to lend up to $100 billion to the

GSEs, a total that was later raised to $200 billion.



Hedge funds began buying preferred shares of Fannie and Freddie prior

to the 2012 amendment on the theory that the GSEs would become

profitable enough to repay their debt to the Treasury with money left

over to restore the dividends. In its lawsuit, Perry Capital disclosed

it began buying GSE preferred shares in 2010. Other big name investors

who have bought Fannie and Freddie preferred shares include Fairholme

Funds and, reportedly, Paulson & Co. and The Carlyle Group's (CG_)

Claren Road Asset Management.



But the 2012 amendment effectively changed the rules in the middle of

the game, Perry's lawsuit argues.



By placing Fannie and Freddie under conservatorship in 2008, their

regulator, the Federal Housing Finance Authority, caused private

investors to "reasonably [expect] that the principles of

conservatorship -- not receivership -- would guide the government's

actions," states a press release from Gibson Dunn which summarizes the

complaint. "As conservator, the statute requires FHFA to preserve the

assets of Fannie Mae and Freddie Mac, not liquidate them. When

changing the rules governing Treasury's investment, Treasury and the

FHFA announced that they were beginning the process of winding down

the companies -- the exact opposite of what the statute explicitly

requires, and depriving private investors of their rights."