The story of mortgage lenders Fannie Mae and Freddie Mac has been rehearsed many times. Federal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) experienced unusual activity in their stocks in the latter part of May which skyrocketed their market caps in a matter of hours. While there are several big names who have long positions in Fannie and Freddie, Bruce Berkowitz, John Paulson and Richard Perry are just a few, bearish positions in these companies are less common. Waterstone Market Neutral Fund has short bets in Fannie and Freddie which have not worked well for the fund. Being the largest positions of the hedge fund, Waterstone’s overall losses have been sizeable. The hedge fund was down 1.5 percent in May, bringing the year to date loss to -8.19 percent. As shares of Federal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) fell in June, Waterstone was able to cut its losses, and the fund is up 3 percent to June 21.
Recently a Senate committee comprised of both Democrats and Republicans released a plan called the Corker-Warner bill, that calls for a liquidation of Fannie Mae and Freddie Mac and its replacement with a Federal Deposit Insurance Corp (FDIC). This new entity will limit the role of the government in the mortgage market. Currently, Fannie, Freddie and Federal Housing Administration purchase or insure over 90 percent of the mortgages in the U,S. The new plan for these government sponsored enterprises shifts the risk to private companies, like banks, in case the housing market falls again.
Waterstone Says ‘No Value’ in Fannie and Freddie
Waterstone is convinced that there is no value in Fannie and Freddie and its short thesis is wellfounded, however hedge fund has started reducing its exposure on June 26th in the lenders because of the ‘ridiculous’ ways their shares trade, calling the rise ridiculous, irrational and extremely speculative’. Waterstone thinks it can do better if it makes opportunistic short term trades based on the high volatility of these stocks, but stated ‘We firmly believe the common equities will be worth zero’.
Other shorts that incurred losses for Waterstone are SUPERVALU INC. (NYSE:SVU) and New Albertson’s. Winning shorts were in Priceline.com Inc (NASDAQ:PCLN), WellPoint, Inc. (NYSE:WLP) and Lam Research Corporation (NASDAQ:LRCX) whereas long investments in the form of shares and debt of Land America, MF Global Holdings Ltd (OTCMKTS:MFGLQ), Ambac Financial Group, Inc. (OTCMKTS:ABKFQ), while American Airlines and Petrominerales Ltd (TSE:PMG) were profitable in May.