Freddie Mac (Federal Home Loan Mortgage Corp)

The Investment

Berkshire Hathaway made a major purchase of Federal Home Loan Mortgage Pfd. (“Freddie Mac”) in 1988.

• Initial Shares: 2,400,000 shares.
• Initial Cost: $71.7 million.
• Market Value (1988): $121.2 million.
• Regulatory Limit: Berkshire purchased the maximum amount allowed by law for a single holder at the time.

Context

Though nominally a preferred stock, Buffett noted it was "financially equivalent to a common stock." The investment was owned by Mutual Savings and Loan Association, a non-insurance subsidiary, and was therefore carried at cost on the consolidated balance sheet.

Strategy

This investment fits the 1988 theme of concentrating in high-conviction "Forever" positions. Buffett’s partner, Charlie Munger, provided extensive details on the Freddie Mac commitment in his own 1988 letter, highlighting the unique economics of the mortgage-backed security aggregator.

Future Projections

In the 1994 Meeting, Buffett expressed that the market share of Fannie Mae and Freddie Mac was almost certain to grow. Their economics and cost structure for intermediating money between investors and homebuyers were insurmountable for traditional regional banking models.

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• Source: 1988 Letter, 1994 Meeting
• Category: Common Stock Investments (Equivalent)