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Investor Fairholme presses for change at Fannie, Freddie

By Margaret Chadbourn and Tanya Agrawal

March 3 (Reuters) - Mutual fund manager Bruce Berkowitz, founder of Fairholme Capital Management, is pressing the boards of the mortgage-finance giants Fannie Mae and Freddie Mac to let investors have a bigger say in how the companies are run.

Berkowitz, whose firm filed a lawsuit against the U.S. government last July over changes made in 2012 to the terms of the taypayer-funded bailouts of Fannie Mae and Freddie Mac, on Monday publicly released a letter that he sent to the boards of both companies.

In the letter, dated Feb. 28., Berkowitz said that Fannie Mae and Freddie Mac must "now retain earnings to build a fortress-like balance sheet and keep promises made to millions of homeowners and savers."

In the lawsuit filed last year, Fairholme, which is a shareholder of both companies, claims that changes by the U.S. government 2012 to the terms of the bailouts of Fannie Mae and Freddie Mac were illegal and cost investors billions of dollars.

Those changes require the companies to sweep all their profits into the government's coffers. Previously, they were required simply to pay a 10 percent dividend.

A group of investors filed a lawsuit similar to Fairholme's, also in July.

The government-controlled companies, which were bailed out during the height of the financial crisis in 2008, have received nearly $187.5 billion in taxpayer aid. They have since returned to profitability, and by the end of March will have paid $202.9 billion in dividends to the U.S. Treasury.

Their new-found health has prompted investors to snap up their stock in a bet the companies will be made private in the future. In recent days, shares of their preferred stock have traded near the highest levels since the 2008 bailout.

The companies' regulator, the Federal Housing Finance Agency, which is responsible for the bailout terms, declined to comment on Berkowitz's letter.

Fannie Mae Chairman Philip Laskawy said in a statement: "I am confident that the board is doing the job it has been given. FHFA has retained certain authorities for its exclusive determination and control, as provided by federal statute, including all decisions relating to the declaration and payment of dividends."

Freddie Mac declined to comment.

Fairholme also wants the companies to relist on the New York Stock Exchange and hold annual shareholder meetings. "Frankly, it has been a while," Berkowitz said in the letter.

The companies, which own or guarantee 60 percent of all U.S. home loans, have not held annual shareholder meetings since their bailouts.

The fund also wants the companies to hire advisers who are independent of the FHFA.

Fairholme said the companies believe that they don't have to follow basic rules of corporate governance unless specifically directed to do so by the FHFA.

As of Dec. 31, Fairholme had a 2.24 percent stake in Fannie Mae and a 2.98 percent stake in Freddie Mac, according to Thomson Reuters data.