Bruce Berkowitz – Fannie Mae Conference Call we have very ROUGH notes on the latest in GSE reform regarding the future of Fannie Mae and Freddie Mac. A transcript will be up later and we will post it when it is so stay tuned. The conference call begins at 11AM EST 11/18/2016

Bruce Berkowitz starts with opening remarks.

Fairholme up 13.5% YTD and focused up 22.5% YTD – strong year for income producing year.

Interest rates are sky high and we focus on investing in bargains and have taken advantage in credit situations – sr situations like equity – and we love cash.

We are ready for bear and bull situations alike.

Q&A starts right away

Morningstar raised Qs about liquidity?

Bruce Berkowitz – i was hero 5 years ago now I am a zero – time will tell – but as I noted our funds have more than necessary liquidity which is something we always monitor – our commercial paper is 5-6 days in duration. In the fund we are much more liquid than many market pundits assume. Some companies we own are even buying back their own debt.

55% in Fairholme in equity, 20% in cash and 25% in fixed income – all of the funds are generating good income

Tax question – Bruce Berkowitz says its posted online. We anticipate of under $2 per share for Fairholme far less than expected.

By far most questions about Fannie Mae and Freddie Mac.

Berkowitz – these are two of the best businesses in America period. Attractive is an understatement. They earn $30 billion per year. The average FICO score is 752 and delinquencies have dropped 26 consecutive Qs for Fannie Mae, Freddie also said credit quality best in 8 years. They are not banks they are insurance companies. They provide vital services to achieve the American dream.

 

Bruce Berkowitz compares wiping out shareholders to 1984 – they will not be wiped out though as many thought 2 years ago. They help existing homeowners, renters, buyers etc. They earn less than 40 bps to insure/ensure the 30 year remains affordable which every bank refuses to do. Fannie has helped 10s of millions of people in this country – these companies are social good – they should be like electric company. The next rational step is to let companies retain capital and release them from the shackles of the current situation. Only those beholden to special interests make it seem like these companies are doomed and only those opposed to American dream would oppose this – new Administration we are quite optimistic and will overpower Washington establishment, but we are fighting in courts to protect this.

Fannie Mae and Freddie Mac must protect ALL shareholders and obey laws of our great country.

Bruce Berkowitz’s analyst? on DC appeals court – informal terms they heard 308 cases and just 4 remain so we should be close it is probably taking so long is because dissent is being written. Fortunately two of the judges seem very favorable especially on six key issues. We only need to win on one of them.

  1. Was FHFA genuine and operating in solvent manner – obviously not if every nickel is given away as Judge Ginsberg noted. Government says companies were in death spiral but this is nonsense because they have generated huge profits – and Government itself knew this – Fannie CFO told them right before net sweep that they were massively profitable
  2. Treasury imposed net sweep and HERA prevents that
  3. Treasury exceeded authority for proceeding new securities after 2009 when net sweep happened in 2012.
  4. Breach of fiduciary – self dealing for no consideration – its classic breach
  5. Breach of contract – Right to liquidation preference and dividend stops on common and they are still doing it. Tres is paying itself dividends
  6. Breach of good faith – No one would give them $33B they raised in offerings if they could just send money to affiliated entity.

These 6 are key and we think we should prevail. We could get $20 a share on breach of contact claim.

Federal court question

We think case is obvious – biggest expropriation in history and Govt has resisted our ability in the discussions or making it public – now we know why – now we saw internal emails that the death spiral narrative was absolutely bogus and Treas knew about it. The Treasury has tried to draw “an iron curtain” over 100k pages the mother of all privilege laws even with outside private parties.

Sweeney ruled for us and the Government used extraordinary step to prevent that discovery. Did the President know or was he mislead by subordinates? We are eager to continue the discovery.

Is Govt denying and delaying? Yes as much as possible. And usually when denying they have something they are trying to hide.

Will Trump continue the current practice? Its early but we are optimistic and think its unlikely they would deny and delay like Obama

What about other cases like TX, IOWA etc – DC circuit wont be binding but they are waiting to see on DC. TX one is interesting because it has new claim that is completely new. The claim is that FHFA is itself unconstitutional. This is based on having agency with unappointed head like CFBD this pointed out that FHFA also had that situation – this suit would void the net sweep

Prefs vs common – Prefs have contract right to dividend stop and liquidation – this is imp difference – if common worth a penny this is money good

Any shift in sentiment? I think there is a sea change – several years ago everyone was saying they are failed businesses which was not true as Bruce Berkowitz pointed out but that was the narrative which we no longer here – also we are seeing the net worth sweep is not tenable.

Washington Post by Tom Forrestor (sp) was on BOD of Fannie Mae and he said i can tell you stripping firm of capital posses huge risk – that is self evident- but it is big change in DC where they were ignoring it beforehand. Capital is key.

We are in talks with DOJ and willing to settle but ready to see it through.

We are ready to win this case and have 6 foot swords in our office.

Bruce Berkowitz says he is very excited and said David has done a great job and moves onto St Joe – we will end there stay tuned for transcript later. Also video below

Bruce Berkowitz
BB3Image source: CNBC Video Screenshot

Detail below

Bruce Berkowitz, the firm’s Founder and Chief Investment Officer, will host a one-hour conference call on November 18, 2016, at 11:00 AM EST, with the objective of giving investors the opportunity to participate in the discussion of portfolio outlook and recent performance. Click here to view the press release.

The format of the call will mirror that of February’s public call: Mr. Berkowitz will provide commentary on investments while responding to comments and questions submitted in advance by the public. Fairholme will accept questions and/or comments until Friday, November 11 at 5:00 PM EST. All topics for discussion may be submitted electronically to [email protected] Please note that submissions will remain anonymous.

UPDATE: Guest Speaker Will Address Fannie and Freddie Legal Progress during Fairholme Conference Call
We are pleased to announce that David Thompson of Cooper & Kirk, PLLC, will be joining the conference call. Mr. Thompson, one of the lead attorneys representing Fairholme’s interests, will discuss our legal progress with respect to our investment in Fannie Mae and Freddie Mac.