Investors Sue Government Over Fannie, Freddie Stock

Amid newly energized trading in the stocks of mortgage giants Fannie Mae and Freddie Mac, shareholders filed suit Monday against the federal government, contesting its takeover of the two in 2008.

The City of Austin Police Retirement System in Texas and Seattle-based bank Washington Federal are seeking $41 billion in damages. They charge that the conservatorship of Fannie Mae and Freddie Mac was "unlawful and unwarranted," as is the requirement instituted this year that the two pay the Treasury all of their profits.

"The government has appropriated many billions of dollars' worth of private shareholder property, without providing any compensation for this action," according to the filing.

Fannie Mae reported record profits in the second quarter of this year and has now paid the Treasury $95 billion in dividends, nearing the $116 billion it originally drew. Shareholders believe they should be reaping some of these profits, not the federal government.

Trading among common and preferred shares of both companies has been heavy recently, as hedge funds reportedly make the bet that the government will let the two off the hook once they pay back an equal amount in dividends to what they originally drew.

That is highly unlikely, as the dividend payments do not go to pay back the draws. The government still owns $188 billion worth of senior preferred shares in the two entities.

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"What we found is that under almost all scenarios, the cash flows from the guarantee book would barely cover the principal owed to the U.S. government; as such, we believe little, if any, economic value will be given to non-government securities," according to an analysis by FBR Capital Markets.