Drawing on a quote from economist Herbert Stein, who once said that “If something cannot go on forever, it will stop,” Fairholme Funds CEO Bruce Berkowitz stated in his annual letter to shareholders on Wednesday [1] that he believes the sweeping of GSE profits into the U.S. Department of Treasury, aka the Net Worth Sweep, will stop and that a “common sense solution” will prevail.
Berkowitz made clear on Wednesday that his intention is not to eliminate Fannie Mae and Freddie Mac, namely because the two Enterprises are invaluable to the economy, resuscitating the economy in 2008 by continuing to provide liquidity at a time when credit markets were frozen. Not only that, he said, taxpayers own nearly 80 percent of the GSEs—and that Fannie Mae and Freddie Mac have provided a combined $7 trillion in liquidity to the mortgage market since 2009.
“Shareholders simply request that the Treasury Department respect the capital structure of each company, respect the economic bundle of rights associated with our securities, and respect the law setting forth the rules of a conservatorship as decreed by Congress,” Berkowitz wrote. He said he believes that when the Net Worth Sweep is halted, “Fannie Mae and Freddie Mac will transform into low-risk, public utilities with regulated rates of return, just like your local electric company.”
Fairholme Funds, a Florida-based mutual fund that is one of the largest investors in Fannie Mae and Freddie Mac, sued the government in July 2013 over the sweeping of GSE profits into Treasury— a practice which began in August 2012 after an amendment to the original 2008 bailout agreement. The year 2012 was the first year of profitability for the GSEs after the bailout. The plaintiffs in the suit claim that sweeping of GSE profits equates to taking private property for public use without “just compensation,” a practice forbidden by the Fifth Amendment of the U.S. Constitution.
Berkowitz said in the shareholder letter on Wednesday that “Treasury’s decision to usurp all of the profits from each company in perpetuity (the so-called ‘Net Worth Sweep’) improved the federal budget deficit in an election year and avoided protracted debt ceiling negotiations with Congressional Republicans.”
A judge in the U.S. District Court of the District of Columbia dismissed Fairholme’s suit and a similar suit by hedge fund Perry Capital in September 2014, but a judge in the federal claims court revived Fairholme's suit in January 2015.