Would John Templeton Buy Fannie Mae?

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

What would Sir John Templeton have thought of today’s markets? Would he be buying? Templeton died Tuesday at the age of 95, leaving a legacy of sage investing that few can rival. His ability to lean against the wind and to think not only outside the box but beyond the walls of the entire storage room is the stuff of legend.

Consider his 2004 interview with columnist Scott Burns of the Dallas Morning News: In explaining his cautious view of the American housing market, he says: “In the U.S. now … homes can be sold for far higher prices than reproduction costs. Several times in my lifetime, house prices have been far below reproduction costs, and such cycles are likely to continue.”

That’s just one of many prescient nuggets in the interview, which also contains warnings that worldwide share prices are high and that equity returns may decline to only 3% or 4% over the next market cycle.

Asked about the growth of hedge funds, Templeton answers: “There will be a scandal because the cost burden is so great. In mutual funds, it is unusual for a fund to be ahead more than 2% or 3%. The typical hedge fund is charging 2% to 3%, plus 5% to invest and 20% to 25% of profits.”

Templeton sums up his overarching view of investing thus: “To buy when others are despondently selling and to sell when others are avidly buying requires the greatest fortitude and pays the greatest ultimate rewards.”

Templeton believed in research, and he also advocated being willing to wait — years, if necessary — to reap the rewards of a solid investment. He was early to explore foreign markets and indeed was one of the first to invest in Japan after World War II. Of course, he was ahead of the curve in selling Japanese equities in the 1980s boom.

For Templeton, it was all about value. As has been often reported, he looked to buy countries and nations in trouble, or at what he described as points “of maximum pessimism.”

Wouldn’t he have enjoyed himself in today’s markets? On Monday, we saw one of the best instances of groupthink, or perhaps maximum pessimism, to date. Analyst Bruce Harting of Lehman Brothers published a report that described how a change in accounting standard FAS 140 could affect the reserve requirements of Freddie Mac and Fannie Mae.

A possible revision in the rule, which might require the incorporation of mortgage-backed securitizations onto their balance sheets, could lead to both companies needing large amounts of new capital. Yet, in the first paragraph, he qualifies this by saying, “we cannot imagine such an outcome occurring” and reiterates his view that the current stock prices are “compelling.”

The judgment of the trading community was swift and harsh, despite Mr. Harting’s conclusion. Fannie Mae (FNM $17.62) closed before the long weekend at $18.78, and plummeted 22% on Monday to a low of $14.65, before closing slightly higher at $15.74. Yesterday the stock sank to $15.51, off 72% over the past year. Fannie Mae’s book value stands at $22.50. The reaction with regard to Freddie Mac was even more severe, with the stock dropping 29% at the worst point during the day.

This reaction to a hypothetical and unlikely accounting change says everything about Wall Street’s panicky view of the housing sector, and of the financial markets overall. This could well be the kind of opportunity for which Templeton would have been looking.

Mr. Harting points out that Fannie Mae and Freddie Mac are now more critical than ever to providing liquidity to the mortgage markets, which obviously are in dire need of shoring up. They have emerged as the buyers of last resort for portfolios of mortgages at a time when credit markets, and certainly the mortgage-backed securities markets, are all but closed.

It is the implicit government guarantee behind Freddie and Fannie that bolsters their presence in the marketplace; it is beyond imagining that in today’s fragile climate the Financial Accounting Standards Board or any other group would move to undermine their credibility. In fact, on Tuesday, the head of the Office of Federal Housing Enterprise Oversight, James Lockhart, said government-sponsored enterprises like Fannie and Freddie were “adequately capitalized,” dismissing the notion that an accounting change would undermine their position.

At the end of the day, as Mr. Harting points out, “the GSEs guarantee a combined $4 trillion of MBS (a very large segment of the credit markets), so we believe any threat of GSE failure” would make the disruptions to date look like a modest hiccup.

Of course, it takes guts to walk into the credit maelstrom, and especially into anything housing-related. Larry Coats, who manages the Oak Value Fund, says his firm hasn’t added a financial name in months.

As for Fannie and Freddie, which his firm owned several years ago, Mr. Coats says: “We can’t find the comfort we need, with their high exposures to the mortgage market or with the political risks. They are just too hard to call, so we’ve set them aside. The probability of something going wrong is low, but the outcome would be too negative.”

The Oak Value Fund is running “120 basis points ahead of the market so far this year,” he says. Understandably, Mr. Coats is reluctant to roll the dice. He is in good company.

Sir John, we already miss you.

peek10021@aol.com


The New York Sun

© 2025 The New York Sun Company, LLC. All rights reserved.

Use of this site constitutes acceptance of our Terms of Use and Privacy Policy. The material on this site is protected by copyright law and may not be reproduced, distributed, transmitted, cached or otherwise used.

The New York Sun

Sign in or  Create a free account

or
By continuing you agree to our Privacy Policy and Terms of Use