In their view, that's not only unfair but also against the law - specifically, the 2008 conservatorship statute, under which, they assert, the federal government's authority to change the "terms and conditions" of its ownership stake expired on Dec. 31, 2009.
The 2012 "third amendment," they argue, used conservatorship to wind down the companies, which is only allowed in a different process, receivership, that FHFA opted not to invoke.
On July 7, the hedge funds filed their complaint in U.S. District Court, accompanied by a high-minded news release in which their attorney, Theodore Olson, fresh from his Supreme Court victory for gay marriage, declared that "this lawsuit seeks to uphold the rule of law."
And, of course, to make a killing.
Nevertheless, the hedge funds' legal arguments are plausible - alarmingly so, I would say.
The 2008 law does indeed say that Treasury's unrestricted authority to buy shares of Fannie or Freddie lapsed at the end of 2009.
Fortunately for the government, however, the same law specifically says that, once Treasury has bought shares, it can exercise its rights as a shareholder indefinitely.
So the case might hinge on this uncomfortably close question: whether the 2012 "sweep agreement" amounted to an additional government stock purchase, as the hedge funds contend, or whether it was merely an exercise of Treasury's existing ownership rights.
Morally, the government's case is a bit clearer.
It takes chutzpah for the hedge funds to run crying to court about their role in the housing entities' recovery when taxpayers contributed far, far more. If not for the massive federal bailout, there wouldn't be any profit-making entities to argue about now.
As for the rule of law, property rights and the rest, I'm not sure what would be worse for the integrity of our loophole-ridden free-market system: brutally cramming down bottom-feeding hedge funds, or rewarding their relatively trivial investment with a gigantic taxpayer-enabled windfall.
One thing is certain: This is the sort of conundrum our society let itself in for by involving government so deeply, and so non-transparently, in the complex business of mortgage securitization.
Government should get out - and this wild card of a court case is one more reason to do so sooner rather than later
Lane is a member of the editorial board of The Washington Post.