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July 31, 2017
Fairholme Shareholders and Directors:

net worth sweep Fannie Mae Freddie Mac
By User:AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Fairholme has established a track record of successful value investing. Over the past 17 years, our flagship Fairholme Fund has outperformed
the S&P 500 index with a 425.37% cumulative return after all Fund expenses compared to a 132.36% return for a benchmark S&P index.
We have achieved this success by using a distinctive talent for patient value investing – selecting contrarian stakes and then deploying significant
funds with conviction. We have consistently sought out attractive opportunities that meet our strict value-oriented criteria. While the world does
change, and we always try to consider the reasons for change, the Funds’ investment philosophy remains constant. However, the very strategies
that have rewarded us for decades appear misguided. I will explain in this letter why it seems this way and why I still believe the same investment
style will generate future successes.
Fannie Mae and Freddie Mac
After eight long years of cover-ups, bald-faced lies, and judicial obstruction, the government has finally released thousands of documents
demonstrating that the Obama Administration created false pretenses to unlawfully siphon tens of billions of corporate cash from Fannie
Mae and Freddie Mac. These documents clearly demonstrate that senior government officials knew the GSEs were on the verge of sustained
profitability and took actions to usurp all of those profits. Indeed, the documents reveal that these officials lied to the public and perjured
themselves in federal courts. The so-called “Net Worth Sweep” was unnecessary to prevent a “downward spiral.” Put simply, we now have
unambiguous evidence that the Obama varsity team knew what their statutory authorities were, willfully exceeded those authorities to steal
billions of dollars from investors, and subsequently engaged in a cover-up to hide their wrongdoing.
When you follow the cash, it’s easy to see that Fannie and Freddie have generated hundreds of billions in profits, taxes, and consumer savings.
Each held tens of billions of tangible value and maintained tens of billions in earnings power – even at the worst point of The Great Recession.
Each had the wherewithal to pay all bills and pursue its stated mission of providing liquidity when all others cannot.
Federal agencies continue to defend contrived accounting gimmicks by arguing that they followed the law and, notwithstanding, they are above
it. As more and more documents are released, the Department of Justice will see that the actions undertaken by former officials undermine their
defenses and long-established laws. Fannie and Freddie can safely return to their role of insuring the uniquely American housing finance system
against catastrophic risk with private capital. There is a proven blueprint to succeed, and we hope to successfully resolve this matter before
reaching the Supreme Court of the United States.
After all, capital markets are based on the sanctity of contracts – the original buyers’ and sellers’ expectations and rights travel with a contract
no matter who holds it. When this saga ends, we expect contracts to be honored and substantial value for all stakeholders.

Sears, et al.
From the ashes of failed retailers often come great real estate companies. Malls and shopping centers are not in permanent decline. Sears
spin-off, Seritage Growth Properties, has re-tenanted over three million square feet at more than three times old rents since 2015, and demand
continues to grow. Investors may disagree on the exact path forward for Sears, but the company owns many valuable assets and there is huge
value in optimizing all of them. In the first half of the year, Sears sold the Craftsman name for a net present value of $900 million. Real estate
sales added another $400 million. Sears remains extremely competitive in all aspects of hardline retail. Company vendors are estimated to
earn $5 billion annually from relationships with Sears. There is no reason why Sears cannot share in this success and monetize assets through
innovative partnering.
Sears continues to accelerate the pace of its operational restructurings, and is heading toward $1.25 billion in annualized cost savings. The
news that Amazon is now offering Kenmore appliances with Sears’ white-glove delivery, warranty, and installation services greatly improves
the competitive landscape for both. In addition, “Shop Your Way” already has millions of members enjoying a simple, easy, and personalized
shopping experience. If you want to learn more about the Shop Your Way program, visit the following link: www.shopyourway.com/fairholme/
getmore.

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