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Fairholme Wins Round One in GSE Shareholder Suit

FEB 27, 2014 12:07pm ET
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Fairholme Capital Management has overcome its first legal hurdle to get the federal government to recognize its rights as a shareholder in Fannie Mae and Freddie Mac.

The hedge fund sued the government Dec. 9 after the Treasury Department rejected an offer from Fairholme and its founder, Bruce Berkowitz, to privatize and recapitalize the government-sponsored enterprises' mortgage guarantee business.

On Wednesday, a federal claims court rejected Treasury's motion to dismiss the hedge fund's request to conduct discovery into the future profitability of Fannie and Freddie.

Treasury officials have told the court that the future profitability of the GSEs is unknown. But Judge Margaret Sweeney of the U.S. Court of Federal Claims agreed with Fairholme that more information is needed to resolve the issue.

"Discovery will enable plaintiffs to confirm such evidence exists with regard to profitability and additionally answer the question as to when, and how, the conservatorship will end," the judge says.

Berkowitz welcomed the ruling.

"The decision by Judge Sweeney is a positive development for taxpayers, homeowners and investors," he said in a statement. "We hope this accelerates exploration of a consensual solution."

Under Fairholme's proposal, the government would retain the GSEs' current books of guaranteed loans and their mortgage investment portfolios. The hedge fund would get Fannie and Freddie's MBS securitization business.

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