One of the top investors in the bailed-out mortgage giants Fannie Mae and Freddie Mac thinks the two companies will likely need bailouts from the Treasury, and is reassured that their regulator appears to be on the same page.
Bruce Berkowitz, the head of the hedge fund Fairholme Capital Management and a major investor in Fannie and Freddie stock, said on a call with investors Tuesday that he expected that the companies might need to draw on funds from the Treasury soon because all of their profits have been taken by the Treasury since they returned to positive cash flow.
“Treasury’s hurting. They’re making the situation much worse,” Berkowitz said. He added later of Treasury that “the sheepdog has turned into the wolf.”
Berkowitz was seizing on comments last week from Mel Watt, the director of the Federal Housing Finance Agency, which is responsible for managing Fannie and Freddie since they entered government custody during the financial crisis in 2008. Watt warned that because the companies have been prevented from building up capital, losses could force them to draw funds from the Treasury, causing confusion and political turbulence.
Fairholme has challenged the terms of the Treasury’s “sweep” of all Fannie and Freddie’s profits in courts. Its preferred shares would go up in value if any of the 22 cases it said are pending in courts were successful in reversing the Treasury’s decision, which was made in 2012.
The hedge fund is also lobbying for the two companies to be released from the government’s management, a prospect viewed unfavorably by many members of Congress who have said that they do not want to return to the model in which Fannie and Freddie reaped private profits while enjoying a public backstop.
His hedge fund, Berkowitz said, has “made enormous progress … largely behind the scenes,” on the government-sponsored enterprises. “With each passing day, we seem to be getting closer to the finish line.”
Given that Fannie and Freddie are profitable and growing, he said, it is inevitable that they will be turned into public utilities like water or electric companies, and released into the private sector, despite Congress’ efforts to shut them down.
