The U.S. Supreme Court dealt a punishing blow to Fannie Mae and Freddie Mac investors in their challenge to the government's collection of more than $100 billion in profits from the government-sponsored enterprises.
The justices threw out a core part of the investors' lawsuit, rejecting claims that the Federal Housing Finance Agency exceeded its authority under federal law. Fannie and Freddie cratered, each plunging the most in intraday trading since 2013.
Investors, the court said, might be able to win damages on a separate claim that some payments under the so-called profit sweep were illegal because the FHFA director was unconstitutionally insulated from being fired by the president. But the justices said they wouldn't use that argument to toss out the entire profit sweep.
The justices sent the case back to the lower-court level, where the investors will have a chance to show they were harmed by the lack of presidential control over FHFA directors who implemented the agreements. But it means shareholders "can't recover the bulk of the overpayments they sought," said Bloomberg Intelligence analyst Elliot Stein.
The decision is a setback for firms including Paulson & Co., Pershing Square Capital Management and Fairholme Funds that have sought for years to persuade the government to release Fannie and Freddie from government control, thereby earning billions of dollars on their shares.
Fannie Mae's common shares slumped as much as 45%, while Freddie Mac tumbled as much as 46%. Trading volumes in both stocks surged; by midday, each had topped more than 10 times its recent full-day average.