Take Fannie Mae and Freddie Mac: nobody would touch these stocks. Why? There was potentially bad accounting, and the government could have pulled the plug because of the bad accounting. Did anybody ever sit there and say, “Does the accounting matter in this business.” I mean how many people looked at this and said, “You can’t use generally accepted accounting principles for this business.”
You can’t. The fact that anybody is even looking at GAAP earnings is ludicrous, including it’s a hedge fund. What are Fannie and Freddie? They’re a small number of people sitting in
This is a very great advantage. In fact, almost all the problems in the banking industry come from the mismatch of short term borrowing and long term lending. Add to that the GSEs special status which makes investors feel it is essentially backed by the US government. This allows them to borrow at the rate of the US government, plus about 10 to 15 basis points. These two benefits give a huge moat around the company. But perhaps the most interesting statement is this:
"And the stock gets killed. So where does it go? It actually trades below the liquidation of their portfolio. Forget accounting, I could stop the business and earn a profit. And people are saying, “Oh my god, the business is going to stop. I don’t want to own the stock.” But it’s already selling for below what it’s worth if the business stops. And if doesn’t stop, you’re making a fortune."Since this interview, the share prices of both companies have gone essentially nowhere, while the businesses have continued to operate, so I can only assume the discount has increased. If so, this might still be a great opportunity to get into a wide moat company at a very cheap price.