The Fannie and Freddie Experiment Was a "Total Failure"

Warren Buffett and Charlie Munger don't think the old Fannie Mae and Freddie Mac have a place in the world.

May 5, 2014 at 7:30AM


Despite recent reports suggesting Warren Buffett was open to filling a potential void in the housing finance market if Fannie Mae and Freddie Mac were wound down, Buffett and Charlie Munger all but squashed that notion during the Berkshire Hathaway annual shareholder meeting on Saturday.

During the famous day-long Q&A session with Berkshire shareholders, a questioner asked if Buffett thought Berkshire could play a large role in a more privatized housing finance market because of Berkshire's underwriting expertise and experience in the housing market. 

Buffett said it was very unlikely that Berkshire would become a big player in that market.

So what does Buffett think should happen to the market?

Buffett highlighted the U.S. housing market's enormous size ($11 trillion) as a massive challenge to privatizing the market simply because there isn't enough capacity in the private insurance market.

He seemed to believe a system similar to the plan proposed by Sens. Johnson and Crapo, as well as Sens. Corker and Warner, could potentially work. Noting that the 30-year fixed rate mortgage is a great thing for the average American, Buffett said the government ultimately needs to be the insurance entity to keep rates low. 


His partner, Charlie Munger, took a more blunt stance.

Munger believes the current system is best option: Continue to conservatively run Fannie Mae and Freddie Mac and do not return the entities to the hands of private shareholders. Despite addressing the common concerns with the current model, Munger expressed even more doubt that private mortgage finance players would operate a better system. 

One of the largest drivers of the collapse of Fannie Mae and Freddie Mac was the pressure to deliver continued earning-per-share growth for the private shareholders. Both companies aimed to achieve this growth by taking out cheap debt and building massive securities portfolios.

These legacy portfolios are currently being wound down -- a move Buffett and Munger agreed was the right one. They said the two GSEs were essentially operating as the country's largest hedge funds before the housing crisis.

As current common and preferred shareholders continue to hang in a state of financial-limbo, the path to significant profits (outside of potential legal settlements) continues to look like one littered with road-blocks. Any passable law making its way around Congress ignores these shareholders and now two of the best business minds in the world in Buffett and Munger agree that returning these entities to private hands would be a mistake.

Munger wrapped up the discussion by saying that the old Fannie Mae and Freddie Mac "experiment was a total failure."

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Read about the entire Berkshire Hathaway Q&A session here!

David Hanson owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers