“The game is over” as independent companies said Buffett, the 77-year-old chairman of Berkshire Hathaway Inc., in an interview on CNBC today. “They were able to borrow without any of the normal restraints. They had a blank check from the federal government.”
Freddie Mac and Fannie Mae touched 20-year lows yesterday on the New York Stock Exchange on speculation a government bailout will leave the stocks worthless. U.S. Treasury Secretary Henry Paulson won approval from Congress last month to pump emergency capital into the companies, which account for more than half of the $12 trillion U.S. mortgage market.
Fannie and Freddie mispriced their products and “kept existing because they had the federal government behind them,” Buffett said. Omaha, Nebraska-based Berkshire had been among the largest holders of Freddie until about 2001, when it became apparent the company wasn’t being run well, he said.
The two mortgage companies recorded almost $15 billion in combined net losses in the past four quarters as delinquencies rose to record levels, shrinking their capital. The swoon sparked concern they may not be able to weather the worst housing slump since the Great Depression and prompted Paulson to step in with a rescue plan.
Fannie, down 95 percent in the past year before today, advanced 34 cents to $5.19 at 9:32 a.m. in New York Stock Exchange composite trading. The stock was trading at almost $70 a year ago. Freddie, down 91 percent this year, added 24 cents to $3.40.
Fannie’s market value has shrunk to $5.2 billion from almost $40 billion at the beginning of the year. Freddie has declined to $2 billion from $22 billion, making it increasingly difficult for the companies to raise new funds.
Fannie Mae was created as part of Franklin D. Roosevelt‘s New Deal in the 1930s, a time when the U.S. economy was struggling to emerge from the stock market crash, industrial production had tumbled 50 percent and the unemployment rate rose as high as 30 percent. Freddie started in 1970, when the economy was strained by the Vietnam War.
Both have the implicit guarantee of the U.S. government, so they can borrow at lower rates than banks and make money by purchasing higher-yielding mortgages from home lenders, providing new capital for loans.
Buffett had an 8.5 percent stake in Freddie until he became “uncomfortable” with the risks Freddie was taking on. In 2005, he said “it would not be the end of the world” if Fannie and Freddie stopped buying new mortgages.
Former Federal Reserve Chairman Alan Greenspan and Richmond Federal Reserve Bank President Jeffrey Lacker have called for the companies to be nationalized. William Poole, former head of the St. Louis Fed, said last month Freddie is technically insolvent and Fannie’s fair value may be negative next quarter.
Buffett said he may have increased his stake in Wells Fargo & Co. or American Express Co., without being more specific.
More bank failures are possible this year, Buffett said, and he suggested penalties should be meted out to people who spread rumors about the solvency of investment banks. Speculation about cash shortages contributed to a run on Bear Stearns Cos. and its forced sale to JPMorgan Chase & Co. earlier this year.
“If your virtue is questioned, you’ve got a problem,” he said. In the normal course of business, “there is no investment bank that can pay all its liabilities tomorrow.”
Buffett, ranked the world’s richest man by Forbes magazine, said he made a $500 million bid on a Chinese stock “not so long ago” that wasn’t accepted. He declined to name the company involved, adding that he’d “be surprised if we don’t do something in the next few years” in China.
He also said he traveled with Bill Gates, founder of Microsoft Corp., to a Canadian site for extracting oil from tar sands, though an investment isn’t imminent. Buffett said oil has “changing dynamics because there’s not a buffer for supply like there was” a few years ago.
Buffett has been seeking acquisitions to put some of Berkshire’s idle cash to work and toured Europe earlier this year to find candidates. He said today that he’s been getting more “distress” calls than real opportunities, and that he’s been referring callers to sovereign wealth funds. While he wouldn’t call the funds, often controlled by national governments, “dumb money,” he characterized them as “innocent money.”
The U.S. economy is likely to continue slowing the rest of this year, Buffett said. Berkshire Hathaway’s retail businesses slowed more during June and July, and they’re trying to raise prices as margins get squeezed by higher costs, he said.
Buffett said he’s concerned that inflation will start being built into expectations as it was during the 1980s.
“If that happens again, we’re in big trouble,” he said.
In his comments on U.S. politics, Buffett said he favored former Senator Sam Nunn for Barack Obama‘s Democratic Party running mate, and that former Democratic candidate John Edwards should consider returning small donations because he “misled” people. Edwards admitted having an extramarital affair that he earlier denied.
Last Updated: August 22, 2008 09:38 EDT
By Josh P. Hamilton