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Fairholme Offers to Acquire Parts of Fannie, Freddie

The return of David Iben, plus new short-duration bond funds from Fidelity, Edward Jones' first-ever mutual fund, a new global industrials fund from T. Rowe Price, and more.

Morningstar Fund Analysts, 11/14/2013

On Wednesday, Fairholme Capital Management disclosed that it is making a long-shot offer to buy parts of mortgage giants Fannie Mae and Freddie Mac from the government.

The parts of the two government-sponsored enterprises that Fairholme hopes to buy are the portions that insure mortgage-backed securities from Fannie and Freddie.

In a statement, Fairholme CIO Bruce Berkowitz, who was named Morningstar's Domestic-Stock Fund Manager of the Decade in 2010, announced that his proposal would answer "the bipartisan call for significantly more private capital in the mortgage market." Under his proposal, Fairholme would lead a group of investors in bringing about $52 billion of private capital to support credit risk on more than $1 trillion worth of new mortgages. The proposal also would allow for the liquidation of Fannie and Freddie, ending their federal charters and concluding "the unsustainable federal conservatorship" of Fannie and Freddie.

"We know many people in and outside of government are working on the redesign of the mortgage market, and trying hard to get it right for America," Berkowitz said in the statement. "Fannie and Freddie's business model was not consistent with insurance industry best practices. However, in this country we fix valuable businesses by restructuring; we do not simply throw them away. Fairholme is prepared to do its part to help effectuate this restructuring and to be long-term owners of the insurance businesses, without the need for any Federal assistance or special Federal status."

Fairholme would offer $34.6 billion in exchange for preferred stock in Fannie and Freddie owned by a group of hedge funds. Another $17.3 billion in preferred shares would be raised in a rights offering. Berkowitz has a vested interest in Fannie and Freddie, as Fairholme currently holds preferred stock with a face value of about $3.5 billion in the two government-sponsored enterprises, which the government seized control of in 2008 as they were heading toward bankruptcy. However, those preferred shares currently are trading at less than 40 cents on the dollar. Under Berkowitz's proposal, those preferred shares would be converted to common stock at 100 cents on the dollar.

Berkowitz's bid comes amid proposed bipartisan legislation in Congress to transform the United States' $9.4 trillion mortgage-finance system. Under that proposed legislation, Berkowitz's preferred shares in Fannie and Freddie are at risk.

We view Berkowitz's bid as a long-shot at best. It would require approval from the Federal Housing Finance Agency, which currently lacks a Senate-confirmed director after Republican senators recently filibustered President Obama's nomination of U.S. Rep. Mel Watt to the job, as well as the U.S. Treasury Department and Fannie and Freddie's other investors. And given some recent comments from White House officials, it's not likely that the government would sign off on his plan.

Former Tradewinds Head Launches New Global Offering
David Iben, the former chief investment officer of Nuveen's Tradewinds Global Investors, has returned to the mutual fund world as manager of the recently launched Kopernik Global All-Cap KGGAX.

Morningstar fund analysts cover more than 1,700 mutual funds and write regular commentary covering fund industry news, fund investing trends, picks, portfolio planning, international investing, and more.

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