This week marks the 5-year anniversary of the U.S Government placing Fannie Mae and Freddie Mac into conservatorship. Bruce Berkowitz, Fairholme Capital Management, reveals why he believes shares of Fannie and Freddie should be returned to the private sector.
Bruce Berkowitz rare interview below
thanks very much, carl. you know, this week marks the fifth an verse writ of the placing of fannie mae and freddie mac into conservatorship by the u.s. government. today the gses are making billions and seeing deliver more money to the u.s. treasury than received in aid. the question now, what happens to the mortgage giants. my next guest has taken a large position and preferred shares of both fannie and freddie to the belief they should be rufrd to the investor. bruce berkowitz is joining me now. nice to see you. nice to see you. let’s talk fannie and freddie. here you are decided to buy the preferred shares of the two gses even though under some plans in congress, it could be worthless. why? i have a somewhat different viewpoint if preferred is a contract to pay a dividend. that’s what we’re entitled to. and the companies together make about $40 billion a year. earnings power. they can more than afford to give a big win to the government, taxpayers, and to make everybody whole in the ownership structure. i like the preferred because the market does proceed both fannie and freddie to be near death and that makes no sense to me. and you can buy the preferred at such discounts you get unbelievable promised yields. so i expect those prefers to pay the dividends again. dividends from profits. and then go back to par, essentially, if they — if that were to occur. most of them should go to par. and make an enormous amount of money as well as other hedge funds that own the preferred shares. 200,000 tax paying shareholders want me to do. i know, but, but, nobody else in government is talking about at being a possibility. even the likes of senator corker, for example, or any of the plans that we’ve seen at this point for reforming the gses, figging out what we’re going to go, include returning these preferreds or turning back on the dividend. here’s what i think. we’ve done it with aig, bank of america, invested in goldman sachs, morgan stanley, cit after the 2008 real residential real estate debacle. so we, you know, fair home, we buy companies, essential, critical, systematically important companies that look like they’re down and out. absolutely essential to the economy. and they’re going to stay. it’s no different with fannie and freddie. we own the craft. the government made an investment 2008, brilliant investment. excellent. the government is unbelievable hedge fund. they do extremely well. t.a.r.p. has done well. you can’t argue with what happened in 2008. you can with 2012 when they made this decision to not pay the dividend but swept all the profits to the u.s. treasury. third amendment. suing on that. that’s what’s going on right now. i don’t understand the 2012 amendment, the sweep amendment. the 2012 amendment is based as if we were still in 2008. i really don’t understand it. and the lawsuits about protecting our property. for all i know there could be a typo in the third amendment. i really don’t understand this — the common sense of it makes no sense to me that you can just snap your fingers and take everything. that has not played out. the lawsuits for fair home capital, we stand alone, is just, you know, we’re property owners. this is america. so what’s going to happen here, bruce? i guess the common sense construct in my mind. the housing, the residential mortgage market is incredibly important in this country. 30% of family’s net worth. 20 something percent of gdp that creates employment. yohave to have it. fannie and freddie, very valuable franchises. 12,000 plus talented employees of both of these firms. they’re actually essential to the running of our mortgage market. now, because fannie and freddie have a public mission funded by private capital from fairholme and others, they have a very unique place. for example, in the last five or six years the company has lost about $500 billion. but that’s their mission. when everybody else runs in time of crisis, fannie and freddie stand up and keep the mortgage markets running even if it’s unprofitable to do so. 90% of the mortgage market. they are the mtgage market. until private capital starts — the only private capital right now is fannie and freddie. they are the private capital market. they have been. there’s always been a debate about them. so there’s no middle class housing. there’s no american dream. there’s no cornerstone of the american dream and housing. there’s no 30-year mixed mortgage without fannie and freddie and no alternative. fannie and freddie, they are the system. you are relying on the u.s. government, particularly the congress, perhaps, to act r rationally, some would say. that is a big bet. common sense was not prevail in washington, d.c. very often these days. a lot of investors here counting on you, counting on something that doesn’t happen. right now when i look at the bloomberg machine i do not — and the ownership list, i do not see the u.s. government. they have the right to make — 79.9% in war rans. they could make an enormous amount of money. and they should make, for the taxpayers should make a very nice return on their investment. and then private capital, which put taxpayers before themselves. making sure that taxpayers pay in full with a profit before taking a penny. so as long as we’re doing the right thing, doing what is right for homeowners, it’s right for taxpayers. fannie and freddie have accomplished their mission. they did it. mission impossible, accomplished. so now it’s time for them to be resuscitated, rehabilitated. let the equity build up in the companies and prepare for the next rainy day. this is the nature capitalism. we take ood ideas to a large extremes. correct the logical extremes, go back to where we were and that’s what makes it such a great country. i want to talk about some of the other holdings you have in your $8 million fairholme’s fund. aig, you’ve been a huge holder of this lo not long after the crisis, not long after the government came in. it’s been a big win for you. you suffered some tough years. why do you still own this thing after having had the appreciation you’ve had? why is it 50% of your fund? it’s done well, the position. but besides that, you know, investing is all about, you know, comparing. what you giver sus what you get. when you look at today’s stock price with aig, it’s still selling significantly below aly question dags value. at some point the stock market price at aig will meet the book value of aib which i take as a proxy of the liquidation value. what is the book value? 57 a share. higher depending upon tangible or not. if it gets to that point, are you a seller at any point? i start to think about selling. don’t you have to when it’s 50% of your fund? you know, benjamin graham once ran into this issue with geico. when it got to be too much he distributed the shares to shareholders because it was just ridiculous to sell itnd still too cheap. at an appropriate time we’ll make a decision. if we have to we’ll distribute shares to our fund shareholders but it’s still trading for less than liquidation. i expect some very good returns from aig. we bought it at half of liquidation value. it will double in a bunch of years and there’s such superb franchises the company deserves to sell for more than a liquidation value. listen, you hold on. you and i have not talked on air in a couple of years but we’re talking about many of the same stocks other than fannie and freddie. same concept. which leads me to sears which you still own. seems very little has happened that would endear the company to shareholders. why do you own almost a billion dollars of this still? i may be in the minority but i think lambert has done a great job. if i was in his shoes i would make the same decision looking back. they haven’t had the same store comp sales in years. what really matters is in sales is what matters is on profits. my question to you on sears is this, how can you have sears selling where it is. sears has more square footage than simon propertieses, the largesit in the country. that’s the rub. we have something extremely valuable if it’s an — if it’s anywhere close to being an apples to apples comparison then something is very wrong. one is very expensive and one is very cheap or it’s somewhere in the middle. and it’s a big — talking 10x range. that’s the rub. nothing is free in this world. and you don’t know when. but you’re still hanging in there for when that day is because you still believe that they will realize some of that value. i still have my mini berkshire hathaway model working on sears and i haven’t been able to disprove that theory yet. you will hold it in you disprove it? absolutely. i like what he’s done. he’s taken a lot of cash out of the companies. he’s used it to buy back stock. granted it too high a price but a mistake a lot of us have made over the last few years. and they still generate cash. sten still $5 billion in inventory. real estate is amazing. spend our lives understanding the real estate structures, the ownership structure, the leasing structure. i just got back from puerto rico looking at sears and k marts in puerto rico. hot spots. i want to talk to you about the fund itself. you’re open now investors. yes. 50% in aig. you were fund manager of the decade. you’ve had great performance over a long period of time. but you’ve had some years, man, that are butte tall. what were you down — we had a brutal 2011. and — but if anybody, you know, i write these letters so people can go back ten years, five years, to see what i said. what should i think if i invest with you, i have to believe in the long term, your ability over the long term. there’s no free lunch. to make a lot of money it can’t be easy. and by not easy in value-based business is, you look wrong until you’re right. and in 2011, our companies were doing unbelievably well. but the market disagreed. everybody in the marketplace thought we were going to have a double dip recession, didn’t believe the earnings that were being published. you’re still an owner of bank of america. when bank of america looks like wells fargo a few years from now it’s going to be an unbelievable profit. they have done a great job b. you know, your fund holders, some of them don’t buy and sell you at the right time. it’s a little schizophrenic. people out there saying the best thing you should have done for shareholders is stays closed for good. recent article. investors could do is ignore the fund’s opening. i think that gentleman said the same thing at the bottom of 2011, too. but the point is everyone talks about diversified portfolios. i’m a manager. that’s what i do. i’m a focused investors. that’s what i say in my prospect us the. it’s what i’ve done from day one. i kept my promises and stay focused within the scope of the 40 act. and i am one of many investments for manyst most people. so i don’t understand this argument about diversification upon diversification upon diversification. it’s just going to lead to an average performance. i want to give people above average performance and the price you’re going to say for above average performance is shortvolatility. when people think i’m wrong i’m going to look really wrong. if they eventually agree with me we’re going to get a nice pop. that’s what i do with my family’s money and what i do every day is put myself in the shoes of the shareholder and i stick to it without consequence of what people may say or what the optics may look like. that’s my job. that’s why get paid for. that’s what i’m going to keep doing. it’s always interesting to follow fairholme fund. look forward to having you back. we’ll have more to discuss on fannie and freddie over time. important story for everybody. bruce berkowitz, kelly, over to you. now we know where to find you guy on a friday night.