Bruce Berkowitz Asking Questions

Bruce Berkowitz’s Fairholme Fund – Ownership of Fannie Mae and Freddie Mac preferred stock

Today, shareholders of The Fairholme Fund collectively own $3.4 billion liquidation value of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) preferred stock. That means each shareholder effectively owns approximately $25,000 (on average) of two of the most profitable franchises in America.

Yet for reasons that are not entirely understood, some in government apparently want their friends in the mortgage-industrial complex to take for free what you, the shareholders of these companies, paid for with cash. So we continue to search for the truth:

  • Why did federal regulators design a financial support program for Fannie and Freddie on the basis of academic estimates of future performance rather than tried and true statutory accounting and claims-paying ability (which is the standard for all regulated mortgage insurers)?
  • Why did federal regulators require Fannie and Freddie, while in conservatorship, to purchase $40 billion per month in underperforming junk bonds from competitors?
  • Why did federal regulators force Fannie and Freddie, while in conservatorship, to participate in Treasury’s Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP), which resulted in more than $46 billion of losses that the companies would not have otherwise incurred?
  • Why did mortgage-backed securities issued by Fannie and Freddie perform dramatically better than private label securities issued by big banks throughout the financial crisis?
  • Why did federal regulators settle litigation cases initiated by Fannie and Freddie against major financial institutions for significantly less than what other similarly situated plaintiffs recovered?
  • Why did federal regulators seize more than $18 billion in litigation proceeds recovered by Fannie and Freddie to date?
  • Why did federal regulators order Fannie and Freddie to delist their securities from the New York Stock Exchange in 2010?
  • Why did federal regulators prohibit Fannie Mae from selling $3 billion of Low Income Housing Tax Credits to third-party investors?
  • Why were Fannie and Freddie, while in conservatorship, forced to divert billions of dollars in guaranty fees to Treasury to offset the cost of a payroll tax cut?
  • Why did FHFA, as conservator, force Fannie and Freddie to gift all of their capital and all future earnings to Treasury in perpetuity?
  • Why were Fannie and Freddie, while in conservatorship, forced to pay “voluntary” cash dividends to Treasury if funds were not available and the regulated entities were “not in capital compliance?”
  • Why did FHFA force Fannie and Freddie, while in conservatorship, to issue debt in order to monetize their deferred tax assets and pay the proceeds to Treasury in 2013, particularly when FHFA had previously stated that deferred tax assets “[could] not be monetized?”
  • Why did Fannie Mae CEO Tim Mayapoulos describe the Net Worth Sweep as a “positive change” with “a lot of good in it” in his August 2012 announcement to employees? Was he coerced by federal regulators?
  • Why has the Securities and Exchange Commission permitted a single controlling shareholder (i.e., Treasury) and its affiliates to simultaneously act as director, regulator, conservator, supervisor, contingent capital provider, and preferred stock investor of two publicly traded companies?
  • Why do some Treasury officials question the sustainability of Fannie and Freddie’s earnings power in the years ahead, when Treasury’s own 2014 Annual Report indicates that the companies will be c onsistently profitable for each of the next 25 years?
  • Were certain federal government employees who crafted the Net Worth Sweep acting at the behest of crony capitalists seeking to displace Fannie and Freddie?

As owners, we demand answers to these and many other questions. Administration officials and their beneficiaries respond with alternative narratives that are wholly unsupported by the facts. They delay discovery and judicial proceedings at every opportunity. They deliberately conceal and withhold pertinent information. They conduct the business of government with little regard for the law.

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