U.S. court deals setback to Miami investor fighting Fannie Mae and Freddie Mac

Bruce Berkowitz, head of Fairholme Capital Management, is one of the investors fighting the U.S. Treasury over a bail-out deal struck with Fannie Mae and Freddie Mac.
Bruce Berkowitz, head of Fairholme Capital Management, is one of the investors fighting the U.S. Treasury over a bail-out deal struck with Fannie Mae and Freddie Mac. The Miami Herald

A Miami investor’s fight to stop the federal government from claiming profits from Fannie Mae and Freddie Mac to repay its $188 billion bail-out got a little harder this week.

On Tuesday, the U.S. Courts of Appeals in Washington rejected shareholders’ claims that a deal struck by the mortgage companies and the U.S. Treasury to keep them afloat exceeded the government’s authority. But the court also said some claims questioning whether the government acted in shareholders’ best interest in its role as conservator need to go back to the lower courts for review.

While the ruling narrows the fight, the decision leaves the door open for shareholders to continue fighting, said Joshua Rosner, managing partner of the consulting firm Graham Fisher & Co.

“By no means does it kill the investors’ suits,” he said. “[When] the regulator...steps into the shoes of the companies and in the shoes of those companies, they have an obligation, a fiduciary and contractual obligation, to the shareholders.”

But the three-judge panel also singled out Miami-based mutual fund Fairholme Capital Management, saying it failed to preserve the right to appeal or argue that the agencies breached their fiduciary duty.

That decision could be another blow to Fairholme founder Bruce Berkowitz, who owns 14 percent of the mortgage companies and vowed to keep fighting.

“Make no mistake – this is far from over,” he said in a statement in response to the Herald. “We firmly believe that the rights of preferred shareholders in these two enormously profitable, publicly traded companies will be upheld one way or another.”

Rosner also said the decision on Fairholme in the 74-page ruling was puzzling.

“I’ve not seen any comment on waving of rights in any prior proceedings,” he said. “I read it and I thought, ‘where the hell did that came from?’”

Berkowitz, the mutual-fund manager who also supports arts and youth intervention programs, argued that the treasury department illegally confiscated Fannie and Freddie earnings after the bailout and, rather than rehabilitate and revive them, gutted the companies and set a dangerous precedent for shareholders’ rights. Initially, the treasury department wanted Fannie and Freddie to repay 10 percent of what it borrowed quarterly. But when the companies failed to make the payments, the Treasury changed the payment formula to equal an amount equal to the companies’ net worth.

Berkowitz has maintained that amounted to a breach of contract or illegal takings.

“No conservator, state or federal, has ever acted in a manner even remotely similar to how [the Federal Housing Finance Agency] has conducted itself here,” Fairholme attorney Charles Cooper said in a statement. “We are continuing to evaluate the implications of yesterday’s decision, but at a minimum, it certainly strengthens our conviction that the [government payment sweep] amounted to a taking of property in violation of the Fifth Amendment.”

In their order, the judges made clear that while they agreed to let some shareholders continue pursuing monetary damages related to liquidation and dividends, they believed the treasury department and FHFA acted within their bounds.

“The $200 billion-plus lifeline is what saved the Companies — none of the institutional stockholders were willing to infuse that kind of capital during desperate economic times — and bears no resemblance to the type of conservatorship measures that a private common-law conservator would be able to undertake,” the judges wrote, adding that Congress made clear in striking the deal that the Federal Housing Finance Agency “is not your grandparents’ conservator.”

Following the ruling, stock in the companies plunged as reports characterized the ruling as a loss to shareholders. The Washington Post reported that shares in Fannie Mae dropped 35 percent whiles shares in Freddie Mac sank by 38 percent.

Follow Jenny Staletovich on Twitter @jenstaletovich