Why Buffett Sold His Shares of Freddie Mac

Do you believe that you’ve heard it all about Freddie Mac and Fannie Mae? Think again. Wait until you have the opportunity to listen to why Warren Buffett let go of his stake that was previously worth almost $4 billion.

The Constant Push

Many big-name investors, in recent years – including Bill Ackman, Carl Icahn and Bruce Berkowitz – with billions upon billions of dollars at their disposal – have shared their beliefs about what they feel the US federal government should do with Freddie Mac and Fannie Mae. In fact, both of these companies are still sitting in limbo. They are currently controlled by the Federal Housing Finance Agency. Each and every dime that they earn is returned back to the treasury.

This is not a state secret. Fannie Mae’s first sentence in its annual report reads:

“We have been under conservatorship, with the Federal Housing Finance Agency (“FHFA”) acting as conservator, since September 6, 2008. As conservator, FHFA succeeded to all rights, titles, powers and privileges of the company, and of any shareholder, officer or director of the company with respect to the company and its assets.”

Oddly enough, there are so many who are still willing to fight. They even make suggestions that change is on its way and that better days are ahead for the two government-sponsored institutions.

His Enormous Position

With all of this in mind, it’s only natural to wonder what Warren Buffett might think about it. He has certainly provided an answer of what he currently feels about for Fannie and Freddie. He also mentions why he unloaded his Freddie Mac stake around 15 years ago.

There was a point when Warren Buffett owned 9% of the company, and at one point in 1998, his overall position had risen to the market value of $3.9 billion. This represented a 1200% return.

As you can clearly see, the position in the company abruptly ended, as Buffett bluntly noted in his letter, “in 2000, we sold nearly all of our Freddie Mac and Fannie Mae shares.”

Why did Buffett do it? Freddie Mac was starting to focus way too much on quarterly earnings results. Buffett also felt that they took on way too much risk among other things. When he recognized these things he noted, “I figure if you see just one cockroach, there’s probably a lot.”

The lesson to learn here goes well beyond Freddie and Fannie, and it reveals that investors should always be aware of the large and small things that companies will invest in, because a small sign of trouble could only be the beginning.

In relationship to Freddie and Fannie, Buffett says that these institutions were trying to serve the Congressional mandates and the demands of Wall Street, and “that’s a tough balancing act.” There’s no doubt that the balancing act has come to an end and exclusively leans on the federal government side.

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