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What prompted Buffett to sell Freddie Mac?


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It always struck me as particularly prescient that he was able to make money on Freddie but was not enticed to stay around when the clock struck midnight.  It's one thing to not want to be involved in an investment at all but to look at Freddie's earnings growth and return on equity in 1988 and 1992 and to take a substantial position only to subsequently sell it into an apparently strong housing market is lost on me.


He cites in the article that he sold primarily because they diversified into an unrelated line of business - anyone know what he's referring to?  Also, given the reaffirmed earnings growth Buffett alludes to, would anyone here sell an investment that was showing stellar returns and guiding mid teens earnings growth just because it happened to diversify some?  I mean if they were good at utilizing retained earnings before why expect that to change?

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He cites in the article that he sold primarily because they diversified into an unrelated line of business [...]


Actually, he says the key reason he sold was the promise of double-digit earnings growth.


The government is trying to show that Brendsel's promises of double-digit earnings growth set Freddie Mac on a dangerous path, and Buffett said they were another key reason he sold.
(emphasis supplied)


Interestingly enough, Buffett apparently held Freddie Mac for quite a few years of these promises of earnings growth. So, it wasn't merely the promise of smoothly increasing earnings that caused him to sell. It's probably the fact that an unrelated diversification meant they now had to "reach" to attain those publicly stated goals.




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During Buffett's FCIC testimony (with the Moody's CEO), he was asked about this. He mentioned 1) the promises of earnings growth and 2) that the company decided to arbitrage their low cost of borrowing (as a result of an implicit Government guarantee to back their debt) to invest in bonds of a tobacco company. This is probably the diversification that he is talking about.

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"Since FHEFSSA was enacted in 1992, the GSEs’ combined book of business grew substantially until

2008. At the end of 1992, Fannie Mae’s retained portfolio was $156.3 billion and the total of its

MBS outstanding was $424.4 billion. Freddie Mac had a portfolio of $33.6 billion and a total of

$407.5 billion MBS outstanding. By 2008, Fannie Mae’s portfolio grew to $768 billion and its MBS

outstanding increased to $2,289 billion. Freddie Mac’s portfolio grew to nearly match Fannie Mae’s,

at $749 billion, while its MBS outstanding rose to $1,403 billion. To put the size of the GSEs’

obligations into perspective, at the end of 2008, the GSEs held about 43.7 percent of the total

outstanding mortgage debt in the United States and their combined obligations were $5.2 trillion.

Their combined obligations rivaled the U.S. public debt, which was $6.3 trillion in October 2008."


33b in PLRMBS in 1992 and 749b in 2008.  20% CAGR.  Ratio of PL portfolio to guarantee portfolio at 1992 was >10.  In 2008, ~2.


Looks like a pretty big shift to me.

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  • 1 month later...


Freddie Mac Jumps into Subprime Mortgages


"Chairman Leland C. Brendsel said Freddie will begin buying lower-quality loans over the coming year and proceed further down the credit spectrum in 1999. "We will buy all the loans we can that meet our parameters and can be priced profitably."


Freddie Mac will deal with mainstream lenders as well as companies that have traditionally offered subprime products, he said.


Freddie Mac will first buy so-called A-minus-quality loans and then move on to the B and C credits of more challenged borrowers, Mr. Brendsel said. He declined to discuss how much buying Freddie Mac would do. All told, the subprime industry originates about $125 billion annually, with A-minus credits accounting for about 10% of volume, according to industry estimates."




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I think Munger said something simple but unhelpful like "they started to do things that we didn't like".


Reading over Buffett's testimony, I suspect he knew more than he is letting on.  He makes it sound like he just started to get a little suspicious and then dumped his shares.  I think there is more to it.


Check this out, from 1997:




Freddie Mac, whose charter calls for it to invest primarily in mortgages and mortgage securities, then used the $125 million to buy corporate bonds issued by the Philip Morris Companies with identical 10-year maturities yielding 7.68 percent.


Mr. Leach said that such an investment strategy might be legal, but that it was not appropriate. ''Freddie Mac was established by an act of Congress for a specific purpose: to advance home ownership, not to facilitate tobacco sales,'' he said. ''What Freddie Mac's action amounts to is taxpayer subsidization of corporate arbitrage and, implicitly, the tobacco industry.''

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