Those who are familiar with me know that there are very few investors that I respect more than Bruce Berkowitz of Fairholme Funds. His analysis is always cogent and persuasive, while he doesn’t cater to short-termism like 99% of Wall Street. I was disgusted in 2011 when he had his only really rough year, when investors and commentators denounced him as being risky, when that couldn’t be further from the truth. I haven’t written much about this investment yet but now that it is getting more attention publicly it is worth discussing. Berkowitz and other intelligent investors, including TTCM, have acquired large stakes in the preferred stock of Fannie Mae and Freddie Mac. These GSEs’ are enormously profitable and are on the precipice of completely paying back the government with a profit. The preferred stock deserves to be paid off at par or in Berkowitz’s plan and then it would get converted into common equity to create reorganized mortgage bond insurance companies’. This is the most sensible proposal that I have seen thus far as it creates a private market mortgage market, preserves the most value for the U.S. Treasury’s stake in the company and doesn’t disrupt the mortgage market. By being state regulated, the restructured companies’ wouldn’t have the same conflicts of interest that have saturated the current GSEs’ for years. I’ll let Berkowitz explain the rest in the article below. (Long FNMAI)
http://online.wsj.com/public/resources/documents/FairholmeOffer.pdf