Fairholme Capital Releases Letters To Fannie Mae; Quickly Rebuffed

Fairholme Capital Releases Letters To Fannie Mae; Quickly Rebuffed
By User:AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Fairholme Capital Management on Monday publicly released letters it had been sending to the Board of Directors of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) requesting the company appoint an independent board of directors and provide accurate and timely disclosure.  The letters drew a quick and curt rebuff from Phillip Laskawy, Chairman of Fannie Mae.

Fairholme buys shares in December, now actively interested in issue

Fairholme Capital Management, operated by billionaire investor Bruce Berkowitz, purchased 19.4 million shares of Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) during the 4th quarter of 2012, and is now said to have an “active interest” in the issue.

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“You do not own the Company, but hold it in trust for others.”

In one letter, released February 28, Fairholme demanded that Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) “…must now retain earnings to build a fortress-like balance sheet and keep promises made to millions of homeowners and savers,” and later said that “You do not own the Company, but hold it in trust for others.”

The letter also pointed to potential legal liability the board of directors could have if they do not operate in shareholder interests.  “I’m trying to remind the directors who they work for,” he said in a Bloomberg interview with Tom Keene this morning.


In today’s letter, Fairholme made similar requests but did so in a less direct fashion.  “Fairholme asks the Directors to conserve company assets and retain earnings to rebuild capital, cease borrowing for the purposes of paying voluntary dividends to the United States Treasury, review relevant financial information prior to decision-making, provide accurate disclosure, and proactively address conflicts of interest, including retaining independent professionals to advise each company when FHFA is conflicted,” the letter said. “The letters also request that each Board of Directors convene annual shareholder meetings and relist the companies on the New York Stock Exchange to ensure that trading of their securities occurs in an orderly and transparent manner.”

Quick rebuff from Fannie Mae

Today’s letter from Fairholme received an unusually quick answer from Fannie Mae. “I am confident that the Board is doing the job it has been given,” said Laskawy, and continued to essentially rebuff Fairholme’s request. “FHFA has retained certain authorities for its exclusive determination and control, as provided by federal statute, including all decisions relating to the declaration and payment of dividends to the United States Treasury.  Our Board and management will continue to perform their duties, as provided by federal statute and delegated by FHFA, diligently and to the best of their abilities.”

In other words, Fannie Mae said the US government has laid down the law, and that’s the only master they are taking orders from.

“This is not a publicity stunt”

When asked if the letters were a “publicity stunt in a interview with The Wall Street JournalBerkowitz responded “If you call up the companies and they don’t pick up the phone, what do you do? It’s not a publicity stunt. It’s a way for us to talk to the directors and all the owners of the company in a cost-efficient manner.  I hope that these letters wake up the boards that they have a fiduciary responsibility to the owners of the company, the owners of the company being the shareholders.”

When asked “what other companies have a near-explicit U.S. government guarantee covering trillions of dollars of their debt and securities? How can you say these are normal companies?” Berkowitz dryly responded “Maybe you should ask our defense companies in our country. Health companies aren’t normal companies. Utilities aren’t normal companies. They have made bargains with government in all of its various forms,” he said, noting the unusual state of the US economy.

When asked in the Wall Street Journal interview why he would invest in such a troubled situation when the government is harming shareholders, an issue that started in a Republican administration and continued under a Democratic one, Berkowitz expressed confidence in the system. “I have more faith in the American system than most. I have a better sense of history than most. I weigh history more important than the headlines of the day. Most people are going by the headlines. And I’m old enough to have seen change…. It’s the nature of our system to go—we swing from extreme to extreme…. Our investors have a chance to make very good returns and help resuscitate two absolutely essential companies to our country. Yes, [the government has] every right to change the future of their sponsorship, but they don’t have the right to alter the past.”


Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)www.valuewalk.com
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