Berkowitz Proposal
Berkowitz proposed in November that his Fairholme Fund and other investors buy two businesses that insure mortgage-backed securities from Fannie Mae and Freddie Mac, in exchange for the preferred stock held by investors and at least $17.3 billion in new capital. In a Feb. 28 letters to the mortgage companies, he asked the boards of directors of the two companies to suspend payments to the Treasury until they “evaluate strategic and restructuring options” with the help of independent legal and financial advisers. Fairholme owns more than 20 million shares of common stock and more than 66 million of preferred shares.
Corker bristles at the idea that hedge funds will dictate government policy. He wrote legislation with Democratic Senator Mark Warner of Virginia that calls for the companies to go away. They’d be replaced by a new government-owned mortgage insurer modeled after the Federal Deposit Insurance Corp. It would charge for mortgage-backed securities guarantees that kick in after private capital absorbs the first 10 percent of losses. The heads of the Senate’s banking panel are working to turn the proposal into their own bill with input from the White House.
Lawmakers’ Warnings
Policymakers from both political parties, including former Treasury Secretaries Lawrence Summers, a Democrat, and Henry Paulson, a Republican, join Corker in warning that fund managers may undercut efforts to do away with a duopoly that used an implied government guarantee to benefit private shareholders and is too big to be allowed to fail.
Reviving the companies is “just not, to me, what’s in the public interest, and people have hired me to look after the public interest,” Corker said.
Doing what’s right by shareholders, even by keeping the firms alive, won’t prevent lawmakers from overhauling the system, according to Matthew D. McGill, a partner at Gibson Dunn who’s working on Perry’s case.
‘Smoke Screen’
“People are using the political unpopularity of hedge funds to blow a smoke screen,” he said. “Congress could enact all kinds of laws to change the business models. It could change their names, it could change their ownership structure, it could remove their government charters, it could subject them to any matter of taxation. There’s all kinds of things that Congress could do on a going forward basis.” The money sweep, the focus of Perry’s legal complaint, “literally has nothing to do with that,” he said.
The conflict is playing out in public forums. Olson said last month at an event in Washington organized by Nader that the government was acting like Argentina, Russia or Cuba by stripping Perry and other investors of their money.