Second thought, this headline from September 16, 2008 (the day AIG became a majority owned subsidiary of the U.S. Treasury and one day after Lehman filed for bankruptcy):
Lehman's U.K. Landlord Says AIG Insures Rent Payments (AIG; LEH)I disagree on AIG but, as the old saying goes, it takes a difference of opinion to make a horse-race.
We last saw Mr. Berkowitz in "Who Scores Big on a Move in Citigroup? John Paulson, Bruce Berkowitz, George Soros; the usual suspects".
Here's the interview, from Barron's:
After the Apocalypse
BRUCE BERKOWITZ, THE FOUNDER OF FAIRHOLME CAPITAL Management and president of the Fairholme Fund (ticker: FAIRX), has a very straightforward investing approach. He looks for undervalued companies -- preferably ones that throw off a lot of cash -- and he runs a concentrated portfolio.
His philosophy, which is supported by a lot of in-house fundamental research, has led to very strong investment performance. As of March 24, the fund's 10-year annual return of 14.29% bested the Standard & Poor's 500 by a whopping 15 percentage points, placing it at the very top of Morningstar's large-cap blend category. In January, Morningstar named Berkowitz one of its three "managers of the decade." He received the top nod for the domestic stock-fund-manager category, both for 2009 and the decade.......Turning to the portfolio today, you have some big financial names, including Citigroup, AIG and Bank of America. What's your overall assessment on the health of the financial firms?
There is always a flip side to a difficult environment, whether it is Citigroup, Bank of America, AmeriCredit [ACF], Regions Financial [RF], or any of the financials.
During a difficult period, normally everyone is focused on what I would call the pig in the python -- the pig being bad debt -- and wondering if the python is going to live. But what is not thought about too much is that while that is happening, those institutions that can write new business are going to do quite well. That's because it is during tough times that you write your best business, whether it is an auto loan, a mortgage, a credit card, whatever. Your standards are significantly tighter because of what has happened. You've gone from one extreme of loose, easy credit to the other credit extreme, of giving credit to people who maybe don't even need it.
Let's just assume that the average commercial loan is about three years and that the average consumer loan is, let's say, five years, all in. Peak values probably occurred in late 2006, early 2007 -- and things began to unravel in mid-2007.
So there has been enough time now where financial companies, if they are still around, are getting over the hump of the bad debt and, at the same time, have taken on new loans. So they are through the worst of it with their loans, which they have been writing off at a furious pace. And the loans that they've been making since around the end of 2008 have been quite good.
One of your holdings is Citigroup, which has been through the wringer. What's the upside?
We initiated our position at the point when the stock started to recover. It was in the low-single digits, and we've made a few dollars on Citi -- but nothing to write home about. Yet, it's a global brand, I like the government being their partner for now, and the balance sheet is better than ever.
Citigroup has had two years of intense scrutiny by the government. And the company is hated by investors. Citi reported a loss for last year, but they generated a tremendous amount of cash. So they are rising from the ashes of the quite stupid moves they made in the past. Hopefully, those moves, which were clearly exacerbated by the recession, will not be made again.
What gives you confidence in the management team led by Vikram Pandit, the chief executive?
I see a better job being done than before. But I must admit that the jury is still out.
Still, compared to the price you pay now for what you are getting, there is a reasonable margin of safety. The patient is recovering, and I can see a full recovery.
What is the stock's intrinsic value?
I don't know. It's a reasonable amount, but the range is wide, depending on management moves in the future. But I see value beyond the price of the stock today.
What got you interested in Bank of America, which is a newer holding?
Bank of America also has been under intense scrutiny, but now, it is time to start to appreciate the asset side of the ledger a bit more. And I don't see how we get hurt from here, given that there is good potential for returns. How much? I don't know. It is more important for me to think about how much we could potentially lose than how much we can make.
So it sounds like you think that the ship has been righted, so to speak.
When you think about Bank of America, Citigroup and others, including Wells Fargo [WFC], they and a half dozen others are the financial system of the United States. The financial system in the United States doesn't work without Citigroup and Bank of America and, hence, the government's involvement. But what's nice about the government is that at the end of the day, it will make a profit on all of its investments in these companies.
There are just certain institutions that are interwoven into the fabric of the United States. That's the case with Citigroup and Bank of America, which make up a key part of our banking system. The same is true for AIG in the insurance area.
What's to like about AIG?
Here is a company that is tremendously solid, but just really blew it on the derivatives, which has been a worry of ours for decades. You can go back 10 years and read how little disclosure there was on derivatives.
AIG is in partnership with the government, and it still has risks. And you have to make certain assumptions that there will still be adverse developments with the derivatives portfolio and with the property-and-casualty reserve. But this past year was a chance to start to get it right in terms of reserving. So, we have held stakes in different parts of AIG's capital structure, including the debt and equity. AIG is starting to recover. It is a global brand. Some would say that they've lost their brand, I but don't see that. All of my insurance is now with AIG.
The company, with the aid of the government, has done a reasonable job of restructuring its balance sheet and lowering risks.
Go through AIG's 500-page 10-K [the comprehensive financial report that is required annually by the Securities and Exchange Commission] -- it came out last month. You will see that the company is generating cash, that it is stabilizing, that it is starting to grow in certain areas, and that it has been paying the government back. Eventually they will be able to pay the government in full....MORE
