Post # of 118612
Squawk Talk Berkowitz Interview Entire: (My transcription of recording)
Interviewer: My next guest has taken large positions in both Fannie and Freddie in the belief that they should be returned to the private sector. Fairholme Capital management president Bruce Berkowitz joins me, nice to see you on the floor of the NYSE, let's talk about Fannie and Freddie. You are known for taking large positions, out of favor positions, here you have decided to buy the preferred shares of the two GSE's even though ostensibly, under some plans in Congress, it could be worthless. Why?
Berkowitz: well I'm coming from a different viewpoint. The preferred is a contract to pay a dividend and that's what we're entitled to, and the companies together make about 40 billion a year in earnings power. They can more than afford to give a big win to the government, taxpayers, and to make everybody whole in the ownership structure. I like the preferred because the market does perceive both Fannie and Freddie to be near death and that makes no sense to me. You can buy the preferred at such discounts that you get unbelievable promised yields. So I expect those preferreds to pay the dividends again, dividends from profits...
Interviewer interrupts: and then they'll go back to par essentially if that were to occur
Berkowitz: well, yeah most of them should go to par, and
Interviewer interrupts again: and you'll make an enormous amount of money, as will other hedge funds who own these preferred shares
Berkowitz: That's what my 200,000 taxpaying shareholders want me to do
Interviewer interrupts: But nobody else in government is talking about that being a possibility even the likes of Sen. Corker, for example, or any of the plans that we've seen at this point for reforming the GSE's, for figuring out what we're going to do with the mortgage market include returning these preferreds or turning back on the dividend
Berkowitz: well here's our thinking, we've been in AIG and Bank of America, invested in Goldman Sachs, Morgan Stanley, and CIT after the 2008 residential real estate debacle, so we you know at Fairholme we buy companies essential, critical systemic companies, that look like they're down and out but their franchises are still intact, they're still absolutely essential to the economy, and they're going to stay, and it's no different with Fannie and Freddie. It's a publicly owned, publicly traded...the government made an investment in 2008, brilliant investment, excellent, the government is an unbelievable hedge fund,
Interviewer interrupts again: TARP has done pretty well
Berkowitz: I mean you gotta, you know, you can't argue with what happened in 2008
Interviewer interrupts again: In 2012, the government made this decision to not take the dividends, but to sweep all the profits to the US treasury
Berkowitz: yeah
Interviewer continues: the 3rd amendment, the 3rd amendment you're suing on that...
Berkowitz: yeah
Interviewer continues: Perry capital is also suing on that, related issue to that, but that's what's going on right now – I, I, I …
Berkowitz: I don't understand the 2012 amendment, the sweep amendment, it's an amendment that's based as if we were still in 2008, I really don't understand it and the lawsuit is about protecting our property, for all I know there could be a typo in the 3rd amendment, I really don't understand… The common sense of it makes no sense, to me, that you can just snap your fingers, and take everything. So, it's, that has not played out...uh... The lawsuits from Fairholme Capital stand alone, its, uh, you know what, we're property owners, this is America, uh..
Interviewer interrupts again: okay, so what's gonna happen here, Bruce, in your opinion?
Berkowitz: I …. It's the common sense construct, in my opinion, in my mind, uh, the housing, the residential mortgage market, okay, is incredibly important to this country, I mean, 30% of families' net wort, it's 20 something percent of GDP, it creates employment, I mean… You have to have it! Now Fannie and Freddie are very valuable franchises; there are 20… Excuse me 12,000+ talented employees in both of these firms, they are absolutely essential to the running of our mortgage industry, the mortgage market, now… Because Fannie and Freddie have a public mission, funded by private capital, from Fairholme and others, they have a very unique place, so for example - in the last 5, 6 years the companies lost about, over 100 billion dollars, but that's their mission, when everybody else runs in time of crisis Fannie and Freddie stand up and keep the mortgage markets running even if it's unprofitable to do so...
Interviewer interrupts again: they are about 90% of the mortgage market, they are the mortgage market… There's little private capital outside
Berkowitz: well… Until private capital starts… The only private capital right now is Fannie and Freddie and they are the private capital market, and they have been, Fannie since the 1930's, there's always been a debate about them. So there's no middle-class housing, there's no American dream, there's no cornerstone to the American dream, there's no housing, there's no 30 year fixed mortgages without Fannie and Freddie, and there's no alternatives… Fannie and Freddie, they are the system.
Interviewer: you are relying on the US government, particularly the Congress perhaps, to act rationally, something, some would say, and that's a big bet… Common sense does not prevail in Washington DC very often these days... You know a lot of investors are counting on you, counting on a thing that doesn't happen very often
Berkowitz: right now I look at the Bloomberg machine, and the ownership lists, I do not see the US government, they have the right to…
Interviewer interrupts again: they have 79.9% warrants, they can make an enormous amount of money, by the way, if they were to exercise as warrants, return these things to the shareholders, to the private sector. (Berkowitz and Interviewer talking over each other to make the point)
Berkowitz: and they should. The taxpayer should make a very nice profit, a very nice return on their investment, and then private capital will do the right thing and put taxpayers before themselves, we're making sure that taxpayers are paid in full, with a profit, before taking a penny! So as owners we're doing the right thing, we're doing what is right for homeowners, what's right for taxpayers... Fannie and Freddie have accomplished their mission! They did it! Mission Impossible! Accomplished! So now it's time for them to be resuscitated, rehabilitated, let the equity buildup in the companies, and prepare for the next rainy day! This is the nature of capitalism. We take good ideas to illogical extremes, we have to correct those illogical extremes, get back to where we were… And that's what makes this such a great country!
Interviewer: I want to talk about some of the other holdings you have… (Fannie Freddie segment ends)
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