Did Fairholme sell its position in Freddie Mac and Fannie Mae?
Highlights of Fairholme Capital's third quarter 13F (Part 4 of 9)
Fairholme Capital’s 3Q14 positions
In 3Q14, Fairholme Capital Management added a new position in Chesapeake Energy (CHK) and increased its position in Sears Holdings Corporation (SHLD). It also sold its common equity positions in government-sponsored enterprises Fannie Mae (FNMA) and Freddie Mac (FMCC). It exited its stake in Genworth Financial (GNW) and reduced its positions in American International Group (AIG), St. Joe Company (JOE), Lands’ End (LE), and Leucadia National Corporation (LUK).
Fairholme’s 13F revealed that the company has fully exited its common equity positions in both Fannie Mae and Freddie Mac. It continues to remain invested in both agencies through preferred shares that formed the majority of its holdings in these funds.
Lawsuit goes against Fairholme
In October 2014, Fairholme and other hedge funds lost a lawsuit against the federal government for taking claim on all profits from the government-sponsored enterprises (or GSEs). This had a negative impact on funds like Pershing Square Capital, Fairholme Capital, Perry Capital, Paulson & Co., and Owl Creek Asset Management, which all have positions in Freddie Mac and Fannie Mae.
Investors believe the income distribution policies of both Fannie Mae and Freddie Mac are strongly tilted toward the federal government after the 2008 bailout. The U.S. Treasury has received approximately $219 billion in distributions as of 3Q14 against the payout of $188 billion to these enterprises at the time of the real estate crisis. Had the ruling gone in favor of the hedge funds, the GSEs would have been legally forced to share their profits with private holders.
Following the lawsuit, Bruce Berkowitz, founder of Fairholme Capital Management, expressed disappointment but asserted he would continue to pursue private investors’ legal rights for receiving a fair share of compensation. Over the three-month period ended September 30, 2014, the common equity of Fannie Mae fell by 31% to $2.69, and Freddie Mac’s shares fell by 32% to $2.64.
Fairholme opts out of disclosing holdings in GSEs
In its third-quarter 13-F, Fairholme Capital Management revealed it had decided not to disclose its preferred share holdings in Fannie Mae and Freddie Mac since there are no regulatory requirements from the SEC (Securities and Exchange Commission) to reveal preferred stakes.
Market share of GSEs set to decrease
According to congressional analysts, mortgage financiers such as Fannie Mae and Freddie Mac, who are into securitizing mortgages, could potentially lose their market share to private capital providers. The market share of these two companies shrank to 50% in 1H14, from 60% at fiscal year-end 2013. This is likely due to a substantial increase in fees charged by these firms and the increased availability of capital from private label players.
Correction note: This post originally indicated that Fairholme lost the lawsuit alongside Pershing Square Capital Management, Perry Capital, Paulson & Co., and Owl Creek Asset Management. However, not all these funds were involved in the lawsuit. We’ve since revised to indicate that Fairholme’s lawsuit had a negative impact on other hedge funds with holdings in Fannie Mae and Freddie Mac. We apologize for this error.
Browse this series on Market Realist:
