WASHINGTON (Reuters) - Fairholme Capital Management said on Monday that it has acquired a combined $2.4 billion stake in the preferred shares of Fannie Mae FNMA.OB and Freddie Mac FMCC.OB, making a long-shot bet that the government-controlled mortgage finance firms will be revived as private companies in the future.
Recently, a number of day traders, investment firms and hedge funds have poured into both the common and preferred stock of Fannie Mae and Freddie Mac in the hope the firms will eventually be able to buy their way out of government control.
Even if the two companies’ dividend payments were to exceed the amounts borrowed from the U.S. government in the future, the companies would owe money, because the bailout does not have a mechanism for a buyback of the government-held preferred shares.
Fairholme reported a stake in the two companies that is much larger than what was previously known. Cable business network CNBC reported last week that Fairholme, which is managed by Bruce Berkowitz, had taken a roughly $500 million stake in the two companies, which have received almost $190 billion in taxpayer cash injections.
Fairholme provided no details on how its $2.4 billion stake is split between the two companies, but it signaled it wanted a change in their bailout terms, including a full repayment of the bailout.
Fairholme said it was ”ready to help with a restructuring that accelerates the return of meaningful investment to the secondary mortgage market.
“The time to restructure Fannie and Freddie is upon us. Sustaining our nation’s economic recovery requires it,” it said in its statement.
The U.S. Treasury has about an 80 percent stake in the firms, which were taken over by the government in 2008. Under the terms of their bailout, Fannie and Freddie are unable to repurchase the shares held by the government, though they are scheduled to pay the government a total of about $132 billion in dividends by the end of June.
The future of Fannie Mae and Freddie Mac is uncertain. Lawmakers on Capitol Hill have said they want eventually to shut the two firms down, which could wipe out existing equity.
In calling for full repayment of the government bailout, Fairholme said, “And equitable treatment of taxpaying shareholders, including community banks, insurance companies, and mutual funds holding preferred stock, must be restored with dividends reinstated.”
Fannie and Freddie’s over-the-counter common shares were each up about 20 percent on Monday. Year-to-date, Fannie Mae’s shares have risen more than 800 percent, touching a year high of $5.44 on May 29. Freddie Mac’s shares have made similar gains.
The preferred shares have also had outsized gains. Fannie Mae preferred Series S shares FNMAS.OB have risen from a 2012 low of 46 cents on August 17 to $5.98 on Monday. Freddie Mac’s preferred series Z shares FMCKJ.OB have risen from a 2012 low of 42 cents, also on August 17, to $6.07 on Monday.
Reporting by Margaret Chadbourn in Washington; Editing by Leslie Adler