“It’s the biggest distressed trade in history,” said David Ford, co-founder of Latigo Partners LP, a $450 million event-driven credit hedge-fund firm based in New York. Ford first bought the preferred shares in 2011 when they traded at 4 cents on the dollar and started acquiring the common shares last year.
“We very much believe in the investment,” said Ford.
Fannie Mae, created by Congress during the Great Depression of the 1930s, and Freddie Mac, established in 1970 to compete with its older sister, keep money flowing through the U.S. home-loan machine by guaranteeing securities that lenders sell for the cash they can use to make more loans.
For decades, “the agencies” existed as hybrids, part publicly held companies, part extensions of government policy. They operated as private companies, selling shares to the public. Because investors believed they had the support of the U.S. government if they ever got into trouble, their borrowing costs were lower than those of other financial companies. After the companies nearly collapsed in September 2008 due to surging defaults of the mortgages they guaranteed, the implicit government support became explicit.
$500 Million
Perry, which manages $10 billion, now has about $500 million riding on the preferred shares, even after several rounds of sales, according to a person familiar with the investments. It also has a smaller stake in the common equity, the person said. Robert Terra, a spokesman for Perry at Hamilton Place Strategies, declined to comment and said its officials wouldn’t discuss the investment.
Fund managers who have invested in the preferred shares include Paulson, famous for his successful 2007 wager that U.S. subprime homeowners would quit paying their mortgages; Jeffrey Altman of Owl Creek Asset Management LP, one of last year’s best-performing hedge-fund firms; and Bruce Berkowitz, the slick-haired mutual-fund star who runs Fairholme Fund.
Ralph Nader
Units of private-equity firms Blackstone Group LP and Carlyle Group LP were invested in the shares last year, according to people with knowledge of their investments, while hedge fund Marathon Asset Management LP Chief Executive Officer Bruce Richards said on Bloomberg Television last month that he sees betting on the companies as the best opportunity out there. Ackman’s Pershing Square and even Ralph Nader, the consumer activist and five-time U.S. presidential candidate, have said they own the firms’ even-riskier common shares.
Perry was ahead of the wave, thanks to Westhus. The hedge fund stuck to the trade even after rivals such as Kyle Bass of Dallas-based Hayman Capital Management LP said it was too risky to wager on government policy and sold his shares in 2012.