One week after a U.S. Federal Court of Claims Judge ruled that his company's lawsuit against the government over its use of GSE profits could continue, Fairholme Funds CEO Bruce Berkowitz addressed investors on a conference call Tuesday morning, telling them that his company, one of the GSEs' biggest investors, has made "considerable progress" in its lawsuit against the government.
Also on Tuesday, a U.S. District Judge in Iowa dismissed a suit filed by Continental Western Insurance Company similar to the one filed by Miami-based Fairholme Funds over the sweeping of GSE profits into the U.S. Department of Treasury. The judge in the Iowa case cited last year's decision by Judge Royce Lamberth in the U.S. District Court of the District of Columbia which dismissed the Fairholme suit and a similar complaint filed by Perry Capital.
On Tuesday morning, Berkowitz expressed optimism about Fairholme's lawsuit, which was filed in 2013 and revived by Judge Margaret Sweeney last week in the U.S. Federal Court of Claims despite Lamberth's dismissal of the case last September in the D.C. District Court.
"We've had our ups and downs, but we are making considerable progress in the Federal Court of Claims," Berkowitz said. "The judge will decline the Justice Department's motion to stay the case despite the government's purposeful delays. Discovery is ongoing. Our lawyers have reviewed 400,000 pages of documents. Depositions will soon begin."
Berkowitz reiterated in the conference call that Fannie Mae and Freddie Mac are "essential" and "they have no substitutes" because of their role in the housing industry, which includes offering $7 trillion in liquidity to the U.S. mortgage market since 2009.
"If you want to stimulate the national economy in tough times, start with the housing sector," Berkowitz said. "It's roughly 23 percent of GDP. There's nobody better to prime that pump than Fannie Mae and Freddie Mac."
The GSEs have been under conservatorship of the Federal Housing Finance Agency (FHFA) since September 2008, at which time they needed a government bailout totaling $188 billion to stay afloat. They have since returned to profitability and are predicted to earn about $21 billion a year for the foreseeable future, according to Berkowitz.
Under the terms of the bailout, the government acquired 80 percent of the GSEs' common stock and a 10 percent dividend each year through senior preferred shares. Treasury amended the agreement in August 2012, however, and required that all GSE profits be swept into Treasury.
Berkowitz likened the amending of the bailout terms to a farmer whose farm was successful for decades, but when a drought came, was forced to accept an offer from a wealthy neighbor who was willing to loan the farmer money to keep the farm going. The deal he negotiated was tough, however – the farmer pays the neighbor 10 percent interest per year on his investment and gives him 80 percent ownership in the farm. Years later, when the farm conditions are better and the farm returns to profitability, the wealthy neighbor visits the farm and sees it flourishing – then changes the terms of the agreement, requiring the farmer to pay him 100 percent of the farm's profits from that point forward.
"It seems far-fetched, but this is precisely what has happened to Fannie Mae and Freddie Mac at the hands of the U.S. Treasury," Berkowitz said. "Some call it expropriation, others call it a de facto nationalization. Either way, it's illegal and unfathomable. This is America. We're not in Venezuela and it's not the Soviet Union."
A spokesman for Treasury declined to comment on the Fairholme suit, and the Department of Justice was not immediately available for comment. The government's position is that Treasury did not directly affect and control FHFA as conservator of Fannie Mae and Freddie Mac, and that the amending of the bailout terms was not illegal but rather "imposed a so-called net sweep," according to Berkowitz.
Berkowitz remained positive in the conference call about his company's future relationship with the GSEs.
"At Fairholme, we believe in America," he said. "We don’t bet against America. Fannie and Freddie are two of the most valuable companies we have in America. We own them, we own them at cheap prices, and we look forward to staying invested in them for a very long period of time."