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The Battle For Fannie Mae and Freddie Mac Continues

A letter sent last week by billionaire Bruce Berkowitz of Fairholme Funds reveals the battle over what to do with Fannie Mae (NASDAQOTCBB: FNMA  ) and Freddie Mac (NASDAQOTCBB: FMCC  ) is a long way from being over.

The history
While many investors like Bill Ackman have proclaimed their interest in Fannie and Freddie with their dollars -- Ackman has a nearly 10% stake in the common shares of Fannie and Freddie -- Berkowitz has been one of the most outspoken. In November he proposed a plan which would ultimately result in two private companies crated to overtake the operations of Fannie and Freddie, which would benefit the holders of the preferred stock.  

Source: Insider Monkey.

More recently in February it was disclosed through SEC filings Fairholme Funds had amassed a total of $1.3 billion in the common and preferred shares of the companies. Yet the biggest news in the month was the letter Berkowitz wrote which called for sweeping changes at the two government sponsored entities. 

The letter
In the letter to the board of directors of the two companies, Berkowitz petitioned for sweeping changes at the firms. He wants a revision of the corporate structure, a relisting of the companies on the stock-exchanges, annual meetings for shareholders, evaluation of its current operations by independent parties, and a host of other moves with the ultimate goal of reforming the companies to operate in a way which would benefit both the public and the common shareholders.

Source: Flickr / a.drian.

In an interview with the Wall Street Journal, Berkowitz said his intention behind the letters was to "wake up the boards that they have a fiduciary responsibility to the owners of the company, the owners of the company being the shareholders." 

He highlighted the reality through the $202.9 billion in dividends, the companies have fully returned the original $187.5 billion investment the U.S. Treasury made and it is now time for a return to normalcy. And normalcy involves an essential and highly profitable business model, which he suggests if properly utilized, would result in significant gains for all investors -- which of course includes the Treasury through its 79.9% ownership stake. 

The response
Despite the letter being dated on Friday, the response to Berkowitz from Fannie Mae came quickly, as Berkowitz received a response Sunday evening from Philip Laskawy, the Chairman of Fannie Mae.

In less than 200 total words, Laskaway all but dismissed the proposal from Berkowitz, noting: 

I am confident that the Board is doing the job it has been given. [Federal Housing Finance Agency] has retained certain authorities for its exclusive determination and control, as provided by federal statute, including all decisions relating to the declaration and payment of dividends to the United States Treasury. Our Board and management will continue to perform their duties, as provided by federal statute and delegated by FHFA, diligently and to the best of their abilities.

It is important to remember Fannie Mae is under conservatorship, and it is under the total control of the guidance from the FHFA. It notes plainly in its annual report the directors -- to whom Berkowitz addressed his letter -- "serve on behalf of the conservator and exercise their authority as directed by and with the approval, where required, of the conservator."

In addition, the company says it is "no longer managed with a strategy to maximize shareholder returns," and it cannot retain any of its earnings as a result of its dividend obligations to the U.S. Treasury, and ultimately, "the conservatorship and investment by Treasury have had, and will continue to have, a material adverse effect on our common and preferred shareholders." 

The bottom line
As with many conflicts surrounding corporate structure, the fight is not resolved in a letter and response, but it is critical to note Fannie Mae is in no way the typical publicly traded company. While Berkowitz could win hands here and there, one has to wonder if the deck is stacked too much against him, and this is ultimately a losing battle.

The stock poised for great things
Fannie Mae and Freddie Mac had an incredible runs in 2013, but there's no guarantee that will continue in 2014. Yet everyone knows there's a huge difference between a good stock and a stock that can make you rich. Thankfully, there's good news. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 06, 2014, at 10:54 AM, olderandwider wrote:

    Imagine the expectations the next time the gov't has to bail them out again. I'll profit a little on the sidelines, but make these billionaires own up to the gambling they are doing with other people's money (probably not so hard earned).

  • Report this Comment On March 06, 2014, at 11:02 AM, smauney wrote:

    To sum it all up watch YouTube: FNMA is profitable again by Big Jam.

  • Report this Comment On March 06, 2014, at 11:18 AM, smauney wrote:

    What Laskaway wanted to say is 'I'm obligated to kiss their backside until Judge Sweeney tells me different, and besides they're paying me a couple of million a year for this fake job, so give me a break".

  • Report this Comment On March 06, 2014, at 12:02 PM, hikingviking wrote:

    If Fannie Mae and Freddie Mac are not allowed to recapitalize and then be released from conservatorship, then the rule of law is dead in this land. It should occur to all that the 4th and 5th amendments to the Constitution are under veiled attack here. There is more at stake than just the Congress deciding to 'wind down' Fannie and Freddie. Congress created both of the GSEs so they (congress) should have a say in how they behave and continue to operate, but a mercy killing them is not the answer. Remember when you were a kid and misbehaved to the point that one of your parents said, "Listen kid, I brought you into this world and I can take you out". Well, that is essentially what the government is saying to Fannie and Freddie. My point is, as a parent you might say the words but obviously you don't act on it. The kid gets scolded, improves his/her behavior, grows up and eventually becomes say.....Matt Koppenheffer (love the ties and you guys are doing great). Moreover, I'm not sure how many of us are old enough to recall how difficult financing a house was prior to Fannie and Freddie's creation but we should all be thinking long term what that world looks like without the GSEs. I hope the good Fool's writing on the GSEs recognize the serious breaches of fiduciary responsibility by the government over the conservatorship of Fannie and Freddie and the still as yet un-aired dirty laundry through discovery in Berkowitz law suit. The mere fact that the government made several amendments to the original agreement diminishing the strength and value of Fannie and Freddie is a going concern for the country not just Fannie and Freddie. If the government or any controlling body can arbitrarily modify terms of the game during the game then no one will know how to play. I'm not sure at all how Fannie and Freddie made it back to profitability so quickly but they have shown great resilience under harsh conditions. Fannie and Freddie deserve to live. The Glass-Stegal Act of 1934 should be returned as law and the President and congress should control their appetite for political manipulation of the GSEs. I am long FNMA.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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9/4/2015 3:59 PM
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