Bruce Berkowitz’s Fairholme Capital Management LLC is seeking to buy two businesses that insure mortgage-backed securities from Fannie Mae and Freddie Mac and support them with $52 billion in equity.
The companies would be acquired in exchange for about $35 billion in Fannie Mae and Freddie Mac preferred stock, and at least $17 billion in additional funds would be raised from preferred holders and a rights offering, Fairholme said yesterday in a statement.
“A significant number” of Fannie Mae and Freddie Mac preferred shareholders indicated an agreement in principle, Paul Scarpetta, a spokesman for Fairholme at Sard Verbinnen & Co., said in a phone interview. The investor group would buy “the two entities but not the existing books of business.”
The $9.4 trillion mortgage-finance system stands to be transformed after Fannie Mae and Freddie Mac were rescued by the U.S. government. Under a bipartisan bill being prepared by U.S. senators, the companies’ preferred securities, whose owners include billionaire John Paulson’s hedge fund as well as Fairholme, are at risk.
“Housing finance is most critical to the American dream and the government wants private capital to invest,” Berkowitz said today in an interview on CNBC. “We and other owners, we want to invest, so we’re ready.”
Berkowitz’s plan would convert those shares into common equity in the target companies at 100 cents on the dollar.
The government seized Fannie Mae and Freddie Mac in 2008 after the mortgage-finance companies were pushed to the brink of bankruptcy by investments in bad loans. The two took $187.5 billion in taxpayer aid before reporting record profit this year as the housing market rebounded.
Berkowitz’s proposal would need the support of the Federal Housing Finance Agency, the U.S. Treasury Department, and other investors in Fannie Mae and Freddie Mac. Denise Dunckel, a spokeswoman for FHFA, declined to comment, as did Adam Hodge, of the Treasury.
Spokesmen for Claren Road Asset Management LLC, Perry Capital LLC and Paulson, owners of the preferred shares, declined to comment or didn’t return telephone messages and emails seeking comment.
Fannie Mae and Freddie Mac common and preferred shares surged this year as profits spurred speculation they would repay the government and be released from conservatorship. Analysts including Jaret Seiberg at Guggenheim Securities LLC’s Washington Research Group said investors were at odds with federal officials in seeing value in the shares.
Berkowitz was named Morningstar’s domestic stock manager of the decade in 2010. He has bet on insurers and financial-services companies with 78% of his fund’s stock holdings in such shares as of Aug. 31, according to research firm Morningstar Inc.
After a 2011 slump that spurred investor redemptions, Berkowitz rebounded in 2012 and his $8.3 billion Fairholme Fund has surged 31% this year to beat 97% of peers, according to data compiled by Bloomberg.
Fairholme, based in Miami, was founded by Berkowitz in 1997 and had $10.5 billion under management as of September.
Fairholme Funds Inc. accused the U.S. in a July lawsuit of expropriating the value of its investors’ preferred shares of Fannie Mae and Freddie Mac by seizing the companies’ profit.
