Ackman on FnF:
On September 30th, the U.S. District Court dismissed several lawsuits that sought to enjoin the
net worth sweep, the arrangement whereby Treasury unilaterally amended the 10% dividend rate
on its senior preferred stock to a variable dividend equal to 100% of Fannie and Freddie’s future
earnings and existing net worth. We believe the U.S. District Court ruling will ultimately be
overturned on appeal, and similar lawsuits in other jurisdictions will yield a more favorable
outcome. The adverse court ruling resulted in a large decline in Fannie and Freddie’s respective
share prices, which we used as an opportunity to purchase additional shares in both companies.
We voluntarily withdrew our case in the U.S. District Court and are devoting our legal resources to reversing the Federal Government’s improper seizure of common shareholders’ property by
prosecuting our Constitutional takings claims in the U.S. Court of Federal Claims.
In addition to our assertion that the net worth sweep constitutes an unlawful taking under the
U.S. Constitution, we believe that it is an untenable economic arrangement. By stripping Fannie
and Freddie of the earnings that they could otherwise use to build capital, the Treasury is
subjecting the U.S. taxpayer to grave risk during the next economic downturn. We remain
convinced that a reformed Fannie and Freddie is the only credible path to preserving widespread
access to the 30-year, prepayable, fixed-rate mortgage at a reasonable cost. It is therefore
essential that Fannie and Freddie build a sufficient level of capital through the retention of their
earnings so they can continue to perform their vital function to the mortgage markets while
limiting risk to the U.S. taxpayer. A reformed and well-capitalized Fannie and Freddie will
accomplish the important policy objective of providing widespread and affordable access to
mortgage credit for millions of Americans while, at the same time, delivering tremendous
economic value to the U.S. taxpayer through Treasury’s ownership of warrants on 79.9% of
Fannie and Freddie’s common stock.
While we remain confident in the prospects for Fannie and Freddie and believe our investment in
their common shares will ultimately be worth a large multiple of current prices, the litigation is
likely to continue for a protracted period before being resolved, unless the Administration,
Treasury, Congress and other interested parties forge a consensual resolution. In light of the
inherent uncertainty of the situation, our combined investment in the two companies represents
about 3% of our capital at current market values.
