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."