Berkowitz out to acquire two insurers from Fannie, Freddie

Fairholme Capital Management

LLC, the mutual-fund firm run by Bruce Berkowitz, proposed buying two businesses that insure mortgage-backed securities from Fannie Mae and Freddie Mac to salvage a bet on the two government-backed companies.

The businesses would be acquired in exchange for about US$34.6-billion in Fannie Mae and Freddie Mac preferred stock that Fairholme and investors, including Paulson & Co. and Perry Capital LLC, bought in a wager that the U.S. government would keep the mortgage companies alive. Fairholme’s proposal would raise at least US$17.3-billion in additional funds from preferred holders and through a rights offering, Fairholme said Thursday in a statement.

The proposal by Mr. Berkowitz, who is locked in a legal battle with the government over his investment in the two agencies, would more than double the value of preferred shares in Fannie Mae and Freddie Mac that Fairholme, billionaire John Paulson and other investors own. The plan is a long-shot attempt to head off a bipartisan bill being prepared by U.S. senators that would transform the US$9.4-trillion mortgage-finance system and probably wipe out the value of preferred shares, according to Isaac Boltansky, policy analyst at Compass Point Research & Trading LLC.

“This plan will not gain traction,” Mr. Boltansky said. “It doesn’t in any way address the underlying political and practical issues” in the debate.

The government seized Fannie Mae and Freddie Mac after the mortgage-finance companies were pushed to the brink of bankruptcy by investments in bad loans. The two took US$187.5-billion in taxpayer aid before reporting record profit this year as the housing market rebounded.

Any decisions about their ownership would have to be approved by the Obama administration, which has called for the two companies to be wound down and replaced. The Senate bill would liquidate Fannie Mae and Freddie Mac within five years.