Earlier this month, famed investor
disclosed that he is once again placing an enormous bet on the
recovery of the U.S. financial infrastructure. This time he
purchased a stake valued at approximately $2.4 billion par value
of Fannie Mae (
) and Freddie Mac preferred stock. Previously in 2009 and 2010,
Berkowitz invested the majority of his
) into crippled financials, after which his returns nosedived,
though his fund
recently reached an all-time high
Fannie Mae and Freddie Mac are secondary mortgage market
government-sponsored enterprises that entered government
conservatorship in 2008 on fear that they would go bankrupt due
to defaulted mortgage assets from the U.S. housing crisis. Fannie
Mae in 2012 was the largest single issuer of mortgage-related
securities in the secondary market.
As of March 31, no gurus besides Berkowitz have purchased shares
of Fannie Mae. In fact, 14 gurus tracked by GuruFocus sold out of
their holdings in 2008, and more followed in 2009. The last to
exit their positions were
in the fourth quarter of 2009, and Richard Pzena in the second
quarter of 2012.
Several firms lost substantial sums on Fannie Mae, as they bought
shares in the first three quarters of 2008 when the price plunged
to $27 and $8 per share on average. Then, by the fourth quarter
of that year, the stock traded for under a dollar. It remained
there for the next several years.
The stock suddenly sparked to life, however, in mid-March. That
month, Fannie Mae reported $58.7 billion in net income and $8.1
billion in pre-tax income for the first quarter of 2013 - the
largest pre-tax income in its history. It compared to pre-tax
income of $2.7 billion in the first quarter of 2012.
The year-over-year improvement largely resulted from rising home
prices, higher average sales prices on its properties, a decrease
in delinquent loans and a resolution agreement between it and
Bank of America (
In the fourth quarter of 2012, the company also reported its
first annual net income since 2006.
Fannie Mae five-year price, revenue and net income history:
Fannie Mae also continued to the government for its massive
bail-out this year. It plans to pay $59.4 billion to the Treasury
by June 30, 2013. Including that payment, it will have paid the
government $95 billion in cash dividends in total since
conversatorship began on Sept. 6, 2008. The Treasury held $117.1
billion in senior preferred stock as of March 31, 2013, as well.
It seems to be "d�j� vu all over again," as
Berkowitz's comments about Fannie Mae and Freddie Mac echo those
he made about other investments that raised eyebrows in recent
"Privately owned Fannie Mae and Freddie Mac are critical to our
nation's economic security, lowering the cost and increasing the
availability of homeownership," he said in a release on June 3.
"There are no substitutes. Fannie Mae and Freddie Mac currently
purchase or insure 6 out of every 10 home mortgages in America.
Today, they are stronger than ever - enabling the United States
Treasury to rapidly recoup its temporary emergency investments in
Berkowitz said similar things in defense of his major purchases
of financials such as Bank of America (
), CIT (
) and AIG (
). For instance: "So this is why we're in financials; a group
essential to the country, essential to the world," he told
Bloomberg in March 2012. "They are the financial system of the
United States and a good chunk of the world's financial system."
Berkowitz himself drew the comparison to his financial stocks in
his June 3 letter. "The time to restructure Fannie and Freddie is
upon us," he wrote. "Sustaining our nation's economic recovery
requires it. On behalf of the hundreds of thousands of Fairholme
shareholders who helped to rebuild American International Group,
Bank of America, CIT Group, General Growth Properties (
), MBIA Inc., and others after the Great Recession - we stand
ready to do our part."
Though it took longer than expected, Berkowitz has made excellent
returns on most of the mentioned holdings. Of those he still
holds, he has made 50% on AIG, 59% on MBIA (
), but is still down 9% from the average price he paid.
But Fannie Mae and Freddie Mac carry unique risks. Namely,
Congress is currently discussing legislation introduced by a
bipartisan group of senators for the companies to remain under
government control until they can form a plan to replace them,
In his letter, Berkowitz seemed to brush off this possibility:
"Taxpayer dollars expended by the government during a time of
national crisis will be fully repaid," he said in a release. "And
equitable treatment of taxpaying shareholders, including
community banks, insurance companies, and mutual funds holding
Preferred Stock, must be restored with dividends reinstated.
Repaying taxpayer investments, restructuring government
guarantees, and restoring shareholder property are not mutually
exclusive. This is the American way."
The statements mark a change in opinion from February 2013, when
he suggested to Bloomberg that he expected Fannie Mae and Freddie
Mac to be liquidated. "For example, as government-sponsored
enterprises Fannie Mae and Freddie Mac run off/wind down, who
will take their essential roles?" he asked. "Could it be the big
banks that at one time funded 100% of home loans? Could it be AIG
to insure residential mortgages?"
On the other side, hedge funds that hold preferred shares, such
as Paulson & Co. and Perry Capital, are lobbying Congress to
allow the companies to go independent again, and shareholders are
seeking $41 billion in damages from the government, who they
believe should not have taken over the companies.
Additionally, the prices of Berkowitz's other investments
imparted confidence. Many of them were trading at half of
shareholders' equity or half of book value when he bought them.
Fannie Mae, however, has not reported positive book value since
FNMA data byGuruFocus.com
The Peter Lynch Chart, however, is indicating that the stock was
significantly undervalued on a fundamental basis until the price
Fannie Mae Preferred shares are down 3.53% on Thursday, at $5.27
See Bruce Berkowitz's portfolio here. Also check out the
Undervalued Stocks, Top Growth Companies and High Yield stocks of
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