Until recently, a majority of judges in various venues have agreed with DC District Court Judge Lamberth’s 2014 decision that the Federal Housing Finance Agency (FHFA), as Fannie (FNMA, Financial) and Freddie (FMCC, Financial)’s government overlord, could do whatever it wanted with the companies’ past, present, and future earnings. But, on September 28th Judge Lamberth changed his mind due to allegations based on new evidence discovered in the Court of Federal Claims and decided that FHFA is not the government but a private actor. Fairholme and others can sue FHFA for money damages for breach of the implied covenant of good faith and fair dealings to be expected from any shareholder-owned company.
This is good news when you count the cash that Fannie and Freddie have earned and will earn. It is obvious that Fannie and Freddie were always sound and solvent. There was never a need for conservatorship or a “net worth sweep” as Fannie and Freddie performed their mandated jobs to protect and serve home ownership during times of financial crisis. And, as was factually obvious in 2009 or 2012 by loan vintage analysis, both have come back strong. Judge Lamberth’s latest ruling should advance the re-IPO of Fannie and Freddie in similar fashion to AIG in 2012.
From Bruce Berkowitz (Trades, Portfolio)'s third-qurter 2018 Fairholme Fund (Trades, Portfolio)s shareholder letter.
