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TheStreet Open House

Blackstone Discusses Fannie and Freddie Stake

NEW YORK (TheStreet) -- Blackstone Group  (BX - Get Report) President and COO Hamilton "Tony" James confirmed the company's preferred equity stake in Fannie Mae  (FNMA) and Freddie Mac  (FMCC) but said he does not believe the asset management giant will drive the debate over the future of the government sponsored enterprises (GSEs).

"I honestly don't think we are going to be the mover and shaker on this," James told TheStreet during a call with reporters following the company's first quarter earnings release Wednesday. He added the firm does not have so large a position it will be a make or break player in the debate.

"We think we have a plan that makes a lot of sense in terms of getting the GSEs out of being a liability for the government," James said.

James did not elaborate on the plan, though in a follow up email exchange a Blackstone spokesman said the company's plan is distinct from a proposal floated by Fairholme Capital in November that Blackstone was reported to be behind.

"We have our own plan but do not want to comment on details," wrote spokesman Peter Rose.

Fairholme has stood by its plan despite its rejection by the White House and other public officials. It has also stated in a letter to the Boards of Directors of Fannie and Freddie last month that in addition to its plan "there are other viable alternatives to restructure Fannie Mae and Freddie Mac, any of which would be more constructive than maintaining the status quo, which is unfortunately but steadily eroding the Company's balance sheet and, in turn, weakening a cornerstone of the great American Dream."

It seems unlikely government officials would be receptive to any plan backed by private investors, something James, who is friendly with many at the highest levels of government in both major parties, presumably knows better than anyone.

"Clearly this is going to be a highly political process," he said.

GSE reform legislation proposed by Sens. Tim Johnson (D, SD) and Mike Crapo (R., ID) effectively ignores current shareholders, which in addition to Blackstone include high profile investors such as Perry Capital, Fairholme Funds and Pershing Square Capital among many others, as well as consumer advocate Ralph Nader.

It also codifies the Treasury Department's controversial 2012 amendment to the 2008 conservatorship of Fannie and Freddie. The amendment changed the terms of Fannie and Freddie's debt to the government. Instead of owing the Treasury an annual 10% dividend, the GSEs suddenly owed the Treasury all of their profits for an indefinite period, aside from minimal capital buffers. That amendment -- also known as the "net worth sweep" -- is at the crux of many of the roughly 20 lawsuits brought against the government by GSE shareholders. The lawsuits taking issue with the sweep contend it violates the Fifth Amendment of the U.S. constitution's prohibition of the taking of private property for public use without just compensation. Blackstone is not a party to any of the lawsuits, though it will benefit if they succeed.

GSO Capital Partners, a unit of Blackstone, commissioned a liquidation analysis of Fannie and Freddie by restructuring firm Alvarez & Marsal. The report, published last month, projected the mortgage giants would be worth about $170 billion combined if they were wound down.

-- Written by Dan Freed and Antoine Gara in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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