Fairholme adds to position in Freddie Mac and Fannie Mae
By Samantha Nielson • Oct 20, 2014 12:53 pm EDT
Fairholme Capital’s 2Q14 positions
Bruce Berkowitz’s Fairholme Capital added a new position in Lands’ End Inc. (LE) in 2Q14. The fund also added to its positions in Sears Holdings (SHLD), Freddie Mac (FMCC), and Fannie Mae (FNMA) during the quarter. The only position Fairholme Capital sold was Chesapeake Energy (CHK). The fund reduced positions in Bank of America (BAC), Leucadia National (LUK), American International Group (AIG), and St. Joe (JOE).
Fairholme Capital upped its position in mortgage financiers Freddie Mac (FMCC) and Fannie Mae (FNMA) in 2Q14, which account for 8.79% and 7.09% of the fund’s 2Q14 portfolio.
Fannie Mae Freddie MacEnlarge Graph
Fairholme owns preferred and common stock of Fannie Mae and Freddie Mac
Fairholme said in a release in June last year that it owns approximately $2.4 billion par value of the government-sponsored enterprises (or GSEs) Fannie Mae and Freddie Mac’s preferred stock.
Fairholme Capital said in a May filing that “Fannie Mae and Freddie Mac preferred stocks and common shares constitute approximately 15% of the fund’s portfolio. We believe that the two companies may be the most important financial institutions in the United States – perhaps the world – and directly support housing affordability and accessibility, including the uniquely American 30-year fixed-rate mortgage.”
The U.S. government turned down a proposal by Fairholme last year for a recapitalization of Fannie Mae and Freddie Mac. The fund had sought to buy the mortgage-backed securities insurance businesses of Fannie Mae and Freddie Mac by bringing in around $52 billion in private capital.
Fairholme sells shares to Icahn in March
News reports in June cited a court filing and noted that activist investor Carl Icahn bought 6.8 million common shares of Fannie Mae and 5.7 million common shares of Freddie Mac from Fairholme Capital in March. The reports said that Fairholme sold these shares for around $50 million when both stocks fell more than 26% in March on news of the Senate Banking Committee’s plans to wind down Fannie and Freddie.
Judge dismisses Fairholme’s lawsuit
Shares of the two government-sponsored enterprises, Fannie Mae and Freddie Mac, fell at the beginning of October after a judge threw out a lawsuit that Fairholme and other funds had filed against the U.S. government. This drop had a negative impact on funds like Pershing Square Capital, Fairholme Capital, Perry Capital, Paulson & Co., and Owl Creek Asset Management who all have positions in Freddie Mac and Fannie Mae.
Fairholme said in a statement last year that it filed a lawsuit “to protect its rights as an owner of preferred stock in Fannie Mae and Freddie Mac, including the right to receive dividends from the profitable companies.”
Fairholme said it does not “challenge the 2008 emergency investments by the government in Fannie and Freddie. Instead, Fairholme is contesting the August 2012 “Net Worth Sweep” that attempted to change the rules of priority.” Fairholme said the fund is “owed a contractually specified, non-cumulative dividend for its investment in these companies.”
The Treasury had placed Fannie and Freddie under conservatorship in an emergency bailout in September 2008. As per a 2012 amendment, the Treasury Department was to receive all the profits the mortgage giants earned, instead of a 10% annual dividend payment to investors.
Reports noted that although the common shares of Fannie Mae and Freddie Mac have bounced back and pared the initial losses, the preferred shares have only seen a modest recovery.
Fannie and Freddie see drop in 2Q14 profits
For 2Q14, both companies posted a decline in profit. Fannie posted net income of $3.7 billion, a decline from $10 billion a year earlier. Freddie Mac said profits fell to $1.4 billion from $5 billion a year ago. The decrease primarily reflected lower income from legal settlements related to private-label securities (or PLS).
The next part of the series will highlight Fairholme’s sell-off of its position in Chesapeake Energy.
AI
