Fannie Mae-No Politics (FNMA)

[Dallas66]

Don't know if anyone has posted this yet


By
John Carney
Feb. 8, 2015 2:17 p.m. ET
5 COMMENTS

What a difference four years makes. In 2010, the Fairholme Fund had $18.8 billion under management and its manager, Bruce Berkowitz, celebrated its 25.5% annual gain with effusive praise for the government.

“Over the past few years, Fairholme’s performance is due in large part to thousands of patriots in civil service who rescued the global financial system with much intelligence and hard work, demonstrating government at its best during a time of national crisis,” Mr. Berkowitz wrote in his annual investor letter.

As of November, the fund had shrunk to $6.8 billion. And Mr. Berkowtiz’s most recent letter strikes a different tone, attacking “Washington bureaucrats” for abusing executive power, acting unconstitutionally, and expropriating “two of the most valuable companies in the world,” namely Fannie Mae and Freddie Mac .

Fairholme leads a shareholder suit seeking to dislodge the government’s right to all of the two mortgage giants’ profits. Investors accompanying Fairholme explicitly or implicitly in its battle should beware.

With the fund losing 2.72% last year while the S&P 500 index gained 13.69%, Fairholme’s change of mood is understandable. Less so is Mr. Berkowitz’s claim that the government is putting Fannie’s and Freddie’s profits into a “piggy bank.” It is simply not the case that all of their capital is spent on “executive branch prerogatives.” Rather, the dividends remitted by them to the Treasury are spent in the same way as nearly all of the federal government’s general revenue. That is, in accordance with laws passed by Congress and signed by the president. That basic error about the fate of Fannie’s and Freddie’s funds raises questions about how well Fairholme understands the dynamics affecting the two firms that together make up around 8.7% of its holdings.

This year hasn’t begun on a promising note for those betting on a radical change in Fannie’s and Freddie’s situation boosting their stocks. In late January, a federal judge in Iowa dismissed a shareholder suit at the very moment Mr. Berkowitz was holding an investor call. Days later, the president’s 2016 budget stated that his policy is to eliminate the companies, bluntly declaring they “should be wound down.” Not the most emphatic buy signal.

Write to John Carney at [e-mail]