Fannie Mae and Freddie Mac (together “the GSEs”)
Our positions in Fannie Mae (FNMA, Financial) and Freddie Mac (FMCC, Financial) suffered large mark-to-market declines in the second quarter due to the Supreme Court’s decision in Collins v. Yellen. On June 23, the Court, which had heard oral arguments in December 2020, issued its opinion, largely siding with the government against shareholders.
The Supreme Court ruled that the Third Amendment to the Government’s Preferred Stock Purchase Agreement (“PSPAs”), including the Net Worth Sweep, was authorized under the HERA statute, and that it would not intervene to second-guess FHFA’s exercise of its discretion. The Court also found unconstitutional HERA’s provision that the FHFA director may be removed only for cause. It sent the case back to the Fifth Circuit for further proceedings and a potential award of damages based on whether the for-cause limitation affected the administration of the Third Amendment.
We will continue to closely monitor these ongoing proceedings, as well as another shareholder case in the Federal District Court raising contractual complaints relating to the Third Amendment. Simultaneously, we and other plaintiffs are pursuing constitutional takings claims in the Court of Federal Claims (“CFC”) due to the effective regulatory confiscation of shareholders’ property as a result of the Net Worth Sweep. The Government’s motion to dismiss the takings claims was denied by the CFC. This denial of dismissal is now on appeal to the Court of Appeals for the Federal Circuit.
While we are disappointed by the Collins outcome, we continue to believe the GSEs form the irreplaceable core of the U.S. housing finance system, on which we, as shareholders, own a perpetual option. Under recent amendments to the PSPAs, Fannie and Freddie continue to build capital, becoming better capitalized and more valuable each quarter.
As we have explained before, we do not need a favorable outcome in the courts for this to be a highly successful investment, as we believe the re-privatization of the two GSEs is their ultimate path, and existing shareholders will be beneficiaries of this outcome. That said, a win in the courts would greatly accelerate this outcome.
From Bill Ackman (Trades, Portfolio)'s Pershing Square 2021 semiannual letter.
