ENVOY MORTGAGE Blog

Sept. 8 (Bloomberg) -- Fidelity Investments, Wellington Management Co. and Dodge & Cox topped the list of money managers loading up on Fannie Mae and Freddie Mac in the second quarter before the mortgage lenders lost $18.9 billion in value.

Fidelity, the world's largest mutual fund manager, Wellington, the Boston-based hedge fund company, and San Francisco-based Dodge & Cox added the most to their stakes in Fannie Mae between April and June, according to data from June 30 government filings compiled by Bloomberg. Wellington was the biggest buyer of Freddie Mac on a net basis among fund firms.

Investors who bought on speculation the government would rescue shareholders bet wrong after the stocks tumbled more than 60 percent this quarter through last week. Treasury Secretary Henry Paulson said yesterday the government will take over the companies, hurt by the biggest surge in mortgage defaults in at least three decades, by taking 79.9 percent of the common stock and all their dividends in return for buying $1 billion of preferred shares.

``This is a disaster for anyone who bought the stock,'' said Jack Ablin, who helps manage $65 billion as chief investment officer at Harris Private Bank in Chicago. ``Based on what we know so far it seems like the stock is worth virtually nothing.''

Fannie, based in Washington, and Freddie, based in McLean, Virginia, lost more than 80 percent of their value this year as losses on subprime mortgages spurred more than $500 billion of writedowns among global financial companies. Together the companies' common stock lost $18.9 billion in market value since June 30, the last time firms were required to disclose their holdings in government filings.

Federal Takeover

Adam Banker, a spokesman for Boston-based Fidelity, and Wellington's Lisa Finkel said their firms' policies are not to comment on individual holdings.

Dodge & Cox spokesman Steve Gorski said ``we are currently studying the implications of the unprecedented action by the Treasury Department and the FHFA and are reviewing our options.''

The Federal Housing Finance Agency will take over Fannie and Freddie under a so-called conservatorship, replacing the chief executive officers while infusing cash to preserve their businesses. The agency will receive warrants representing an equity stake of almost 80 percent of each company, reducing the portion owned by existing common shareholders.

Fannie Mae rose 62 cents to $7.04 in last week's final session, then fell to $5.50 in after-hours trading when the Wall Street Journal said a government takeover was imminent. Freddie Mac added 15 cents to $5.10 and slipped to $4.04 after hours.

Today's Plunge

In today's trading, Fannie Mae plunged 83 percent to $1.19 at 10:54 a.m. New York time. Freddie Mac declined 78 percent to $1.13.

Common shareholders are ``last in line'' for claims on Fannie and Freddie and will bear losses ahead of a new series of government preferred stock, Paulson said yesterday. That will result in little or no value for stockholders, according to Chicago-based bond analysis firm Gimme Credit LLC.

``The payoff would have been high if there had been a government bailout, but that wasn't the case,'' said John Davidson, president of PartnerRe Asset Management in Greenwich, Connecticut, which invests more than $12 billion and doesn't own Fannie or Freddie. ``If you haven't prepared investors, then I think the clients will want new managers.''

Wellington funds added a net 12.2 million shares of Fannie Mae in the second quarter, when the stock averaged $27.03 a share. The firm had 26.3 million shares as of June 30, or 2.4 percent of Fannie's stock. Since the end of the quarter, Fannie averaged $10.36, a price that would imply a loss of about $200 million on Wellington's new shares if none were sold.

Doubled Stake

Fidelity's funds added a net 10.3 million Fannie shares during the quarter, bringing their stake to 56.5 million, or 5.2 percent of the outstanding stock. Dodge & Cox reported owning 119.8 million shares as of July 31, based on a government filing required when a stake goes above 5 percent.

Wellington doubled its Freddie Mac stake to 21.5 million in the quarter, when the stock averaged $24.75. Since then, the price averaged $7.33.

Capital World Investors and OppenheimerFunds Inc. mutual funds were among the biggest sellers of Fannie and Freddie shares, according to data compiled by Bloomberg. Capital World, which manages the American Funds series, sold a net 51.6 million Fannie Mae shares prior to a July 31 filing, reducing its stake to 16.2 million, or 1.5 percent of the company.

`Very Risky Investment'

OppenheimerFunds, based in New York, sold 4.2 million Freddie Mac shares, leaving it with less than 0.1 percent of the outstanding stock.

Maura Griffin, a spokeswoman for Los Angeles-based Capital Group International Inc., the managers of American Funds, said the company doesn't comment on individual holdings. OppenheimerFunds Inc. spokesman Andrew Healy didn't return a call.

``It was a very risky investment and there was a 90 percent chance you could be wiped out,'' said Walter ``Bucky'' Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama, and owns no Fannie or Freddie shares. ``If you're a long-only investor you just can't take that risk.''

Let us know what your thoughts are on the "Fannie & Freddie" saga as it continues...