Berkowitz Says Fannie-Freddie Legal Fight May Go Five More Years
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Fairholme manager says U.S. Supreme Court could decide outcome
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Investment firm has not had discussions with the U.S. Treasury
Bruce Berkowitz, Fairholme Capital Management founder and chief investment officer, discusses the legal strategy and timing of his battle with the U.S. government over Fannie Mae and Freddie Mac's profits. He speaks during an interview with Bloomberg's Erik Schatzker. (Source: Bloomberg)
Five more years? That’s how long fund manager Bruce Berkowitz says it may take to resolve his legal battle with the U.S. government over Fannie Mae and Freddie Mac’s billions in profits.
“From beginning to end, it could be a 10-year process,” Berkowitz, whose Fairholme Fund holds one of the largest stakes in the mortgage-finance giants, said in a June 16 interview with Bloomberg Television.
It’s already been more than four years. Berkowitz, hedge fund manager Bill Ackman and several other investors sued the government over its 2012 decision -- under the provisions of a crisis-era bailout -- to seize all of Fannie and Freddie’s earnings. So far, federal judges have upheld the legality of that profit sweep.
Berkowitz said he’d like to see President Donald Trump release Fannie and Freddie from government control and turn them over to shareholders, moves the Obama administration resisted. If Trump’s Treasury Department doesn’t take action quickly, Berkowitz said he’ll bring his case to the U.S. Supreme Court.
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The government took over Fannie and Freddie in 2008 as the housing market was crashing, eventually injecting $187.5 billion into the companies. Under the original bailout terms, the Treasury received a new class of “senior” preferred shares that paid a 10 percent dividend, along with warrants to acquire nearly 80 percent of the companies’ common stock.
In 2012, the government changed the terms. Instead of a 10 percent dividend, the government would receive nearly all profits, but there would be no payouts when the companies suffered losses.
Fairholme and other investors cried foul and sued in 2013. So far, judges have sided with the government. In February, an appellate court in a split decision mostly upheld a lower court’s decision to dismiss Fairholme’s case. While Berkowitz and the other investors have argued that the government lied about its reasons for implementing the 2012 profit sweep, the courts so far have said that such motives or evidence doesn’t matter.
Lawmakers in the Senate are currently at the early stages of developing legislation to revamp the housing-finance system, which has an uncertain outcome for shareholders even if it succeeds. Treasury Secretary Steven Mnuchin has said that it’s his “strong preference” to work with Congress on bipartisan reform, although he hasn’t ruled out taking action without lawmakers.
Violating Constitution
Berkowitz said he hasn’t discussed plans for overhauling Fannie and Freddie with Mnuchin. If the Trump administration doesn’t stop the profit sweep, he said Fairholme will “absolutely” go to the Supreme Court.
“When you go back and think about it, right, there are issues of breach of contract. There are constitutional issues. How do you create an agency that oversees Fannie and Freddie that doesn’t answer to any branch of government?” said Berkowitz, referring to the Federal Housing Finance Agency, which controls the companies.
Berkowitz said that not attacking the constitutional issues in the first place was a mistake in Fairholme’s legal strategy. “We should’ve argued it. It was so obvious. We argued the finer points,” Berkowitz said.