The Deal: Fairholme Bids for Fannie, Freddie Insurance Operations

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NEW YORK (The Deal) -- Fairholme Capital Management, which has been tangling with government officials over the terms of the bailout of the entities known as Fannie Mae  and Freddie Mac  , late Wednesday offered to acquire assets of the mortgage finance firms in a recapitalization valued at $52 billion.

Miami-based Fairholme, which in July filed suit seeking compensation for investors over the way the government handled Fannie and Freddie in the years following the financial crisis, is offering to buy the insurance businesses of the two companies. The firm hopes to bring in new capital from private investors to end the federal charters and special status of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac) in an orderly way that would not disrupt the market.

Terms of the deal call for the creation of two state-regulated private insurance companies that would purchase, recapitalize and operate the insurance businesses. The new companies would drop the Fannie and Freddie names along with their federal charters, with legacy investments used to repay the U.S. Treasury for its $188 billion in investments in the companies.

The plan seeks to raise about $34.6 billion in exchange for preferred stock and an additional $17.3 billion in new capital from preferred stockholders in a rights offering. Fairholme said it owns about $3.5 billion face value of Fannie and Freddie preferred shares.

"This proposal answers the broad bipartisan call for private capital in a way that can advance reform from concept to a viable, sustainable solution," Fairholme managing member and chief investment officer Bruce R. Berkowitz said in a statement.

Berkowitz insisted that Fannie's and Freddie's business model "was not consistent with insurance industry best practices," which helped lead to the mortgage meltdown during the recession.

"In this country we fix valuable businesses by restructuring; we do not simply throw them away," Berkowitz said. "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."

The future of Fannie and Freddie is a hot topic of debate in Washington, but despite calls from both parties for reform the proposal seemingly faces long odds. The Fairholme offer would require the support of the Federal Housing Finance Agency, the U.S. Treasury and other investors in Fannie and Freddie.

Fairholme in its proposal argues the government even without Fannie and Freddie would still have tools to promote affordable housing, trying to minimize a key concern among those who oppose privatization.

Written by Lou Whiteman.