Bruce Berkowitz, who presided over losses last year at his Fairholme Fund as holdings in Bank of America Corp. (BAC) plunged, said financial firms that endured the credit crisis in 2008 and 2009 will prosper.
“Investors are going to do well with all of the survivors,” Berkowitz said in an interview airing today on Bloomberg Television. “If you go back to the late ‘80s, the early ‘90s, the last time we went through this extreme cycle, to survive is to win. And you’re looking at the survivors today.”
Berkowitz started to build the Bank of America stake more than a year after the lender acquired Countrywide Financial Corp. in 2008, saddling the buyer with mortgage liabilities. After two bailouts, tens of billions of dollars in costs and at least 30,000 announced job cuts, Bank of America Chief Executive Officer Brian T. Moynihan posted a fourth-quarter profit and the stock has surged 45 percent this year.
“I like what Brian Moynihan’s doing,” Berkowitz said in a Feb. 10 interview in New York after speaking at the Columbia Investment Management Conference. “I like the trends.”
Berkowitz also had smaller investments in JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) in other funds managed by his Fairholme Capital Management LLC as of Nov. 30, according to an annual report. Both lenders took over faltering rivals and repaid taxpayer bailouts, as did Bank of America.
The Fairholme Fund plunged 32 percent last year, compared with a gain of 2.1 percent for the Standard & Poor’s 500 Index, counting reinvested dividends. The decline was led by losses on Charlotte, North Carolina-based Bank of America, which fell 58 percent in 2011, and New York-based American International Group Inc. (AIG), the insurer majority owned by the U.S. government.
The Treasury Department will be able to exit its AIG stake with a profit, Berkowitz said. Fairholme was the insurer’s second-largest shareholder after the U.S. as of Sept. 30, according to data compiled by Bloomberg. The fund manager added to Fairholme’s position in last year’s second quarter as the government offered 200 million shares for $29 each in a May share sale, lowering its holding to 77 percent of the company.
The Treasury needs to sell its entire stake at an average price of about $28.72 to recoup its AIG investment. The insurer fell 2.5 percent to $26.66 on Feb. 10 and has closed below the break-even price every trading day since July 28.
‘Win for the Country’
“It’s in the interest of the company and the shareholders and taxpayers” for the government to stay with AIG as long as it takes to make a profit, Berkowitz said. “If Wall Street believes that the Treasury is going to bail out of AIG then they will push that stock price down as close to zero as possible, which would not be a win for the country, for business, for the cycle, for the recovery of the nation.”
Financial-services companies’ reserve levels and the improvement in tangible equity helped persuade Berkowitz to invest in the firms, he said.
“Our thesis on financials, it’s pretty simple,” he said. “We expect that over a cycle, systemically important financial institutions, that are too-big-to-fail, that already have been recapitalized, will have the ability to earn a 10 percent return on equity.”
Firms that trade below book value, a measure of assets minus liabilities, are even more attractive, he said. AIG’s stock price was about 60 percent of book value on Feb. 10 and Bank of America’s was about 40 percent, Bloomberg data show.
Financial firms, including AIG, may boost returns with deferred tax assets that can limit future payments to the government, Berkowitz said. Losses at the insurer helped it rack up more than $25 billion in the tax assets by the end of 2010, according to a company presentation.
At the end of November, the Fairholme Fund held 81.6 million shares of Bank of America, a stake valued at about $659 million based on last week’s closing price. The fund also held 84.4 million shares in AIG, which would have been valued at $2.25 billion on Feb. 10. Berkowitz also has warrants to buy 21.6 million shares of the insurer at $45 each by January 2021.
The Fairholme Allocation Fund (FAAFX) held warrants to buy about 314,000 JPMorgan shares at $42.42 apiece and about 760,000 shares of San Francisco-based Wells Fargo at $34.01 each by October 2018, according to the annual report. JPMorgan closed at $37.61 on Feb. 10 and Wells Fargo ended last week at $30.26.
Wells Fargo agreed to buy competitor Wachovia Corp. in 2008 as New York-based JPMorgan acquired Washington Mutual Inc. and Bear Stearns Cos. AIG has sold more than $50 billion in assets, including non-U.S. life insurance operations and a consumer lender, to help pay back a government bailout that swelled to as much as $182.3 billion.
Berkowitz was named the U.S. domestic stock fund manager of the decade in 2010 by Morningstar Inc., a Chicago-based research firm. The Fairholme Fund has returned an annualized 9.6 percent since its inception at the end of 1999 through Dec. 31, compared with a gain of less than 1 percent a year for the S&P 500, according to Berkowitz’s report.
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