Bruce Berkowitz’s Fairholme Funds has been at the front of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) shareholder’s legal fight against the US Treasury’s profit sweep, with a court case that looks like it’s set to grind on for quite a while. But Berkowitz struck a surprisingly positive tone in his recent interview with Consuelo Mack on WealthTrack, predicting that the government and private shareholders would eventually reach a ‘win-win’ agreement that would make everyone happy.
“There’s a winning solution for every constituency in Fannie Mae and Freddie Mac,” says Berkowitz.
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No cheap, 30-year mortgages without Fannie Mae and Freddie Mac, says Berkowitz
Berkowitz has taken some flak for being so concentrated in financial firms that struggled their way through the financial crisis (three-quarters of his assets are in just four firms: American International Group Inc (NYSE:AIG), Bank of America Corp (NYSE:BAC), Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA), and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)), but he explains in the interview that he saw them as essential to the US economy, Fannie Mae and Freddie Mac most of all.
“Fannie and Freddie may be the two most important institutions in the United States,” says Berkowitz. “There’s no 30-year mortgage at a very low interest rate without Fannie and Freddie.”
Since legislative alternatives like Crapo-Johnson haven’t even been able to get a vote, Berkowitz doesn’t see an alternative to ultimately restoring Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), even though it’s current government policy to wind them down over the next several years. He also doesn’t see a justification for changing the existing agreements with common and preferred shareholders when the economy had already stabilized and the GSEs themselves were no longer in danger.
“We understand that in times of crisis like in 2008, the fog of financial war, that a lot of decisions have to be made and made quickly and you have to give people the benefit of the doubt. But we’re talking about an action that happened in 2012… when the sun was shining and the companies were making money,” says Berkowitz.
Berkowitz describes a surprisingly conciliatory resolution
As for how Berkowitz imagines the situation with Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) ending, he didn’t even mention the lawsuits until he was prompted in the interview. His first response was to compare the government’s position on Fannie Mae and Freddie to its former stake in AIG, which it sold after engaging with private shareholders including Fairholme. He even downplayed the importance of the conservatorship in resolving the dispute.
There’s clearly an element of talking his book here, downplaying the political and legal risks of his investments, but it’s still surprising to hear one of the most prominent litigants say that he expects the government and shareholders to eventually talk it out.