Buffett’s Big Bet on US Federal Mortgage Credit & Housing

“Anything that can’t go on forever will end.”
~ Warren Buffett, Berkshire Hathaway Annual Meeting, 1987

by Catherine Austin Fitts

I am always surprised when investors in Berkshire Hathaway do not appreciate the role which the residential housing sector has contributed to the company’s stock performance. In part, this may be because Berkshire is a large insurance company and, as far as I know, does not provide a detailed breakdown of its fixed income investments. These would typically include mortgages and mortgage backed securities (including federally guaranteed securities) as well as municipal housing bonds.

Housing and mortgage credit is highly dependent on the US federal credit. As a result, the US mortgage market is very much engineered through Washington, numerous credit, tax, and subsidy programs, and agencies such as:

FHA
VA
Ginnie Mae
Freddie Mac
Fannie Mae
numerous other entities

The son of a four-term Congressman who spent part of his childhood in Washington, Buffett has shown himself to be uniquely astute at navigating Washington politics and the repeated pumps and dumps of the US residential housing markets.

The following chronology includes dates pertinent to Buffett’s housing and mortgage holdings and other investment activities which would position him and his companies to take advantage of the extensive federal involvement in the mortgage and housing industry.

This is a work in process. Corrections and additions are welcome.

1962

Warren Buffett begins buying Berkshire Hathaway stock.

1965

Buffett buys Berkshire Hathaway.

October 1969

Buffett and two friends invest in the Washington Monthly.

Jay Rockefeller and Lewis Max were already investors; Publisher Peters introduces Buffett to Kay Graham, publisher of the Washington Post.

1969

Berkshire Hathaway buys Sun Newspapers, a neighborhood weekly in Omaha.

1972

Buffett asks Sun editors to get a copy of the IRS filing by Boys Town. The paper runs a series on Boys Town stock holdings.

1973

May 1973, Sun Newspapers win a Pulitzer Prize for special local reporting on Boys Town.

1973-74

At the beginning of the 1973-1974 stock market slump, the Washington Post’s stock price drops to $4. Buffett buys 10.6 million shares – a 12% stake in Class B or about 10% of the total – making Berkshire the second largest shareholder outside the Graham family.

Buffett had worked as a paperboy as a young man at the Post 25 years earlier when he lived in Washington. His father Howard Buffett was a four-term Congressman.

1974

Buffett is named to the Washington Post Board.

1976

Buffett Buys into Geico.

1977

Buffett buys The Buffalo News for $33 million sight unseen through Blue Chip Stamps. Jack Kemp is the Congressman from Buffalo, NY at this time.

1981

Buffett sells Sun Newspapers. In 1983, Sun Newspapers ceases publication.

1984

The Washington Post buys Stanley H. Kaplan Company. In 2000, the Post launches an online education business; sales from 1992 to 2002 grow from 75mm to 600mm.

1985

Buffett invests 517.5 million in Capital Cities facilitating a $3.5B merger in Jan 1986 with Capital Cities/ABC.

1985 to 1987

Buffett is investing in Bowery Savings Bank along with Dick Ravitch, Laurence Tisch and Nick Brady.

1986

Buys 50% stake in NHP for $23.7mm.

1987

September 28, 1987 – Stock Market Crash was only 3 day away. Buffett picks up Oppenheimer stake, backing off Ronald O. Pearlman, chairman of Revlon, to make a $700mm preferred stock investment in Salomon Brothers. Salomon was the leading investment banker and market-maker in mortgage and mortgage-backed securities.

In 1997 Salomon was sold to Travelers which merged with Citicorp. See: The Travelers Companies.

1988 – Late 1988

Berkshire’s Wesco Units beefs up minor stock in Freddie Home Loan Corp to the maximum that can be owned under government rules.

See: Freddie Mac

1989

Jack Kemp, Congressman from Buffalo New York, is appointed Secretary of HUD. Under FIRREA legislation drafted by Treasury, HUD has responsibilities for full privatization of Freddie Mac.

Undersecretary Al DelliBovi (a D’Amato loyalist) is insistent that he personally oversee the Freddie Mac IPO for HUD; Catherine recommends the former Dean of Wharton for a board seat.

June 29, 1989

The Washington Times publishes a front page story by Paul Rodriguez and George Archibald “Homosexual prostitution inquiry ensnares VIPs with Reagan, Bush: Call Boys took midnight tour of White House.” Describes federal and district investigations into a prostitution network. John DeCamp, a Nebraska legislator, later publishes The Franklin Cover Up on a Nebraska pedophilia network during the Reagan Bush period, including children from Boys Town.

During this period, one of Catherine’s deputy’s warns Catherine –without using the word pedophile—that Kemp is
caught up in such a problem and to be careful in dealing in a situation where it appears Kemp is being blackmailed.

See: It’s Hard Out Here for a Pimp

August 9, 1989

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s.

FIREA is signed into law by President George H. W. Bush defining the process for the acquisition and disposition by the newly created Resolution Trust Corporation of approximately $500 billion of failed thrifts and their mortgage and real estate portfolios.

The RTC is overseen by an oversight board with included the Secretary of the Treasury (Nick Brady), the Secretary of HUD (Jack Kemp), the head of the Federal Reserve (Alan Greenspan) and the Attorney General (Dick Thornburgh).

See: Resolution Trust Corporation

1990

October 31, 1990, NHP CEO Rod Heller announces that Berkshire had sold its stock, most of it to Harvard University.
Harvard bought 50% of NHP shares from Berkshire and Weyerhaeuser.
Before transaction, Berkshire owned 50% & Weyerhaeuser owned 25%. Afterward Harvard owned 50% and Weyerhaeuser and other institutional purchasers, including Capricorn Holdings (run by a Harvard Endowment board member) owned 12.5% each.
CEO Rod Heller later tells Catherine that Buffett sold his NHP stake as he was concerned about the impact on his reputation.

1990

Berkshire Invests $25mm in the National Equity Fund – LISC’s low-income, housing tax credit fund.

October 24, 1990

Buffett buys 5 million shares or almost 10% of the common stock of Wells Fargo at P/E of 3.7X for $289 million. Based in San Francisco, as of Q3, 2011, Well Fargo is the largest retail mortgage lender in the US, originating one out of every four home loans.

Feb 1991

Salomon moves from One NY Plaza to 7 World Trade Center.
At year-end 1991, Buffett reported Freddie Mac stock increased to 2.5 mmm shares. With split in March 22, Berkshire held 7.5 million Freddie Mac shares.
Will split on March 22.
Berkshire held 7.5mm Freddie Mac Shares.

1991

Berkshire Invests $20mm in National Equity Fund and Enterprise Fund.
Buffet’s investments were the largest made to date in the low income housing tax credit fund.
See: Low Income Housing Tax Credit.

May 14, 1991

Buffett seeks permission from Federal Reserve Board to double Wells Fargo stake to 22%.

July 5, 1991

Meg Greenfield of the Washington Post introduces Buffett to Bill Gates at a picnic.

August 1, 1991

American Express accepts a $300 mm cash infusion from Buffet. American Express owned Shearson Lehman.

American Express had put $1 billion into Shearson to restructure in 1990. Shearson had lost 900mm that year.

American Express was founded in 1850 by Mr. Wells & Fargo, who also stated Wells Fargo.

August 9, 1991

Salomon (as a primary dealer) discloses that it has uncovered irregularities and rule violations in connection with its bids for Treasury securities.

August 14, 1991

It is found that Salomon knew of illegal bids in April and had not reported.

August 18, 1991

The Treasury Department yanks Salomon’s primary dealer status.
Buffett takes over as Chairman of Salomon and makes a deal with Nick Brady.
Buffett orders all ties with Marc Rich to be severed
Buffett brings in a partner from Charlie Munger’s firm to sever as General Counsel.

May 20, 1992

Salomon reaches $290mm settlement with US Government.

Brady and Buffett have now engineered Buffet’s takeover of the largest market-maker in mortgage and mortgage-backed securities in the world – and a leader in the pump-and-dump of the housing market in the 1980’s.

March 16, 1993

Buffett attends a 21 Club party for the opening of the TV version of Barbarians at the Gate
See: RJR Nabisco

1993 Fall

Gates and Buffett attend Nebraska-Washington games together and then spending a week in Bermuda with other business leaders in the fall of 1993 in connection with a reunion of The Buffett Group meeting every 2 years to discuss world affairs.

Each Summer

Buffett attends media conferences in Sun Valley, Idaho. Brian Roberts (Comcast) refers to playing golf with Buffett at Sun Valley.

August 27, 1994

Buffett and Bill Clinton play golf in Martha’s Vineyard.

Fall 1995

Buffett Group would have met if it kept to a 2-year schedule.

Sept 1995

Buffett takes trip to a Ireland, goes on a train-trip in China with Bill Gates and travels to Switzerland.

Jan 1996

Berkshire acquires GEICO, headquartered in Chevy Chase Maryland.

Jan-Feb 1996

Gates publishes an article for Harvard about his friendship with Buffett.

January 27, 1997

Buffett attends Alfalfa Group Club of 225 who meet annually. In attendance are Bill Clinton, Mike Eisner, William Rehnquist, Colin Powell, and Jack Valenti.

1997

Salomon is sold to Travelers. Buffett swaps Salomon stock for Traveler’s stock. Travelers and Citicorp merged into Citigroup in 1998.

1997

Berkshire’s annual report shows 63,977,600 shares of Freddie Mac worth $2.7 Billion. Berkshire and affiliates sell these positions by 2000.

1998

The staff attorney for the House Banking Committee tells Catherine that no equity investment will be permitted in minority neighborhoods other than low-income housing tax credits financed by corporations and controlled by not-for-profit housing groups. Minority communities will not be permitted to enjoy capital gains.

December 1998

Berkshire acquires Gen Re.

General Re held a 91% ownership interest in Cologne Re as of December 31, 2004. General Re subsidiaries currently conduct global reinsurance business in approximately 72 cities and provide reinsurance coverage worldwide. General Re operates the following reinsurance businesses: North American property/casualty, international property/casualty, which principally consists of Cologne Re and the Faraday operations, and life/health reinsurance. General Re’s reinsurance operations are primarily based in Stamford, Connecticut, and Cologne, Germany. General Re is one of the largest reinsurers in the world based on net premiums written and capital.

1999

Berkshire Holdings include $30 Billion in Fixed Income consisting of:

3.5 Billion Municipal Bonds
1.5 Billion Gov’t Bonds
7.0 Billion Foreign Gov’t Bonds
6.5 Billion Convertibles and redeemable preferred
2.0 Billion in Mortgage Backed Securities

2000

Berkshire’s 2000 Annual Report: “We sold nearly all our Freddie Mac and Fannie Mae shares.”

See: Fannie Mae

March 9, 2000

Buffett, Senator John Kerry and Vinod Gupta host a fundraiser for Hillary Clinton in Omaha.

2000

Berkshire acquires Benjamin Moore Paints in New Jersey.

July 14, 2001

Katharine Graham falls on a walkway at a Sun Valley conference, has brain surgery for 7 hours and dies 3 days later on July 17, 2001.

September 11, 2001

Buffett hosts his last annual golf charity event at the US Strategic Command HQ at Offutt Air Force Base in Omaha, Nebraska. President Bush flies in to join them on Air Force One later in the day. The demolition of Building #7 wipes out Salomon Brothers and related records of its government and mortgage securities operation when Buffet owned it.

2003

Berkshire acquires Clayton Homes, now the largest manufacturer of manufactured housing and modular homes. Clayton is based in Maryville, TN.

2004

The Google IPO makes Stanford University rich.

2004

Average Annual Returns from 1965-2004:

S&P: 10.4%
Berkshire Hathaway: 21.9%

Summer 2004

Buffett and Bill Gates are spotted playing golf in Sun Valley, Idaho.

December 2007

Berkshire acquires NRG (Nederlandse Reassurantie Groep), a Dutch life reinsurance company, from ING Group in December 2007.

December 28, 2007

Berkshire Hathaway Assurance Corp starts to offer municipal bond insurance. The municipal market includes a significant amount of housing financing.

See: https://www.ncsha.org/advocacy-issues/housing-bonds

September 23, 2008

Berkshire Hathaway agrees to purchase $5 billion in Goldman preferred stock plus warrants to buy another $5 billion in Goldman common stock, exercisable for a five-year term. Goldman also receives a $10 billion preferred stock investment from the US Treasury in October 2008 as part of the TARP program.

Goldman Sachs is the leader of the pump-and-dump of the US mortgage market including the “big short” that started the subprime mortgage market crash.

See: Spanking Buffett

2011

Reported positions include:

11.5% Moody’s
5.3% US Bancorp
9.2% Wells Fargo

2014

Average Annual Returns from 1965-2014:

S&P: 9.9%
Berkshire Hathaway: 19.4%

Current Holdings

Berkshire’s fifteen largest stock investments by market value, as reported in the 2014 annual report are, in alphabetical order:

HomeServices of America, Inc., held by Berkshire Hathaway subsidiary Berkshire Hathaway Energy, is a residential real estate brokerage firm based in Minneapolis, Minnesota and founded in 1998. HomeServices has operations in 25 states and over 22,000 sales associates. In addition to brokerage services, these real estate companies provide mortgage loan originations, title and closing services, home warranties, property and casualty insurance and other related services.