Pershing Square Holdings 2014 Annual Report

From Pershing Square Holdings 2014 Annual Report, released 3/24/15

“Fannie Mae and Freddie Mac remain a critical piece of the U.S. mortgage market and we expect will serve as a core driver of the continuing housing recovery. In spite of much rhetoric about the desirability of replacing and shutting down Fannie and Freddie, we believe that there is no credible alternative to replace them. Consumers in the U.S. benefit enormously from the existence of the 30-year, prepayable, fixed-rate mortgage. As a result, we believe that Fannie and Freddie’s role is fundamental to the economy, and that ultimately, a renewed and recapitalized Fannie and Freddie is a far better alternative to any other.

Beginning in 2013, the U.S. Government began stripping all profits from Fannie and Freddie and sending them to the Treasury every quarter, in perpetuity. The Treasury unilaterally amended the 10% dividend rate on its senior preferred stock to a variable dividend equal to 100% of Fannie and Freddie’s future earnings and existing net worth. We view this net worth sweep as an unlawful taking of shareholders’ private property, and brought suit in District Court and in the U.S. Court of Federal Claims on behalf of common and preferred shareholders.

Annual Report Year Ended December 31, 2014

In September of 2014, the U.S. District Court for the District of Columbia dismissed shareholder lawsuits seeking to enjoin the net worth sweep undertaking by the government. We believe that much of the U.S. District Court ruling may ultimately be overturned on appeal.

The adverse court ruling resulted in a large decline in Fannie and Freddie’s respective share prices, which we used as an opportunity to purchase additional shares in both companies.

We voluntarily withdrew our case in the U.S. District Court and are devoting our legal resources to reversing the Federal Government’s improper seizure of common shareholders’ property by prosecuting our Constitutional takings claims in the U.S. Court of Federal Claims.

In addition to our belief that the net worth sweep constitutes an unlawful taking under the U.S. Constitution, we believe that it is an untenable economic arrangement. By stripping Fannie and Freddie of the earnings that they could otherwise use to build capital, the Treasury is subjecting the U.S. taxpayer to grave risk during the next economic downturn.

We remain convinced that a reformed Fannie and Freddie is the only credible path to preserving widespread access to the 30-year, prepayable, fixed-rate mortgage at a reasonable cost. It is therefore essential that Fannie and Freddie build a sufficient level of capital through the retention of their earnings so they can continue to perform their vital function in the mortgage markets while limiting risk to the U.S. taxpayer. A reformed and well-capitalized Fannie and Freddie will accomplish the important policy objective of providing widespread and affordable access to mortgage credit for millions of Americans while, at the same time, delivering tremendous economic value to the U.S. taxpayer through Treasury’s ownership of warrants on 79.9% of Fannie and Freddie’s common stock.

While we remain confident in the prospects for Fannie and Freddie and believe our investment in their common shares will ultimately be worth a large multiple of current prices, the litigation is likely to continue for a protracted period before being resolved, unless the Administration, Treasury, Congress and other interested parties forge a consensual resolution. In light of the inherent uncertainty of the situation, our combined investment in the two companies represents about 3% of our capital at current market values.”

It’s Time to Get Off Our Fannie – IRA Sohn Investment Conference : Bill Ackman’s Presentation May 5th, 2014


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