One of the most high profile shareholders who got blown to bits on Freddie Mac (FRE) was Bill Miller, the legendary portfolio manager at Legg Mason. Bill has had a horrible couple of years, which have erased most of the 15-year S&P outperformance that made him famous, but his decision to stick with–and even buy more of–Freddie Mac in recent quarters is probably the most painful one yet.
Everything’s obvious in hindsight, and there’s nothing worse than listening to armchair quarterbacks tell you why they were smart and you were a moron. But we really would be curious to hear the logic that persuaded Bill Miller to recently buy another 30 million shares in the company.
Given Hank Paulson’s insistence that the Bear Stearns bailout leave shareholders with next to nothing (the $8 increase in the takeout price was the result of Bear Stearns’ bravado and general shock and was $8 more than Paulson wanted to give them), it seemed the same might be true here.
This suggests that Bill didn’t think Treasury would have to bail Freddie out. And THIS, in turn, suggests that Bill believed one or more of the following:
- Freddie would be able to raise cash. (Unlike Bill, however, potential investors refused to fork over a dime on the fear that any investment would be rendered worthless by a government bailout).
- The housing market wasn’t as bad as everyone thought. The markets are usually wrong, but all the data we saw suggested the market would be wrong by underestimating the severity of the slump not overestimating it. So, again, we’d love to know what Bill was thinking here.
- If Freddie had made it through, the stock would have gone to $50.
Bill made his reputation, in part, by making bets with a potentially enormous payoff. His logic with Freddie, we suspect, was that the downside was 1X and the upside was 10X. For that bet to be worth making, though, Bill would have had to have believed that the odds of getting the 10X would been greater than, say, one in three. And that’s where we’re still scratching our heads.
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