1998: Will higher interest rates hurt Fannie Mae and Freddie Mac?

AUDIENCE MEMBER: Marc Rabinov. I’m a shareholder from Melbourne, Austria.

Gentlemen, we have large holdings in Freddie Mac and Fannie Mae, and as you both know, they were quite — well, they were hurt quite a lot when interest rates went up in the past.

I’m wondering if you think there’ll be hurt again when interest rates go up in the future?

WARREN BUFFETT: Well, the question about Freddie Mac and Fannie Mae on interest rates, they are not as interest rate sensitive as people formerly thought they were.

But it would be the pattern, and I have a feeling that if interest rates got extremely low, so that there was a huge turnover in the portfolio, and then rates went up dramatically, that even though they have various ways of protecting themselves against interest rate scenarios, that that might get very tough. I think there would be some kind of squeeze there.

They may have good answers as to why that wouldn’t happen, incidentally, because they certainly worry about every kind of interest rate scenario. That’s their job.

But I think, in a sense, very low interest rates are more of a long-term threat, because if you get a portfolio chock full of, say, 4 percent mortgages or something of the sort, and then you had a huge move upward, that would be quite painful for some period of time, no matter what you’ve done in the way of hedging.

Charlie?

CHARLIE MUNGER: I’ve got nothing to add.

WARREN BUFFETT: Yeah. That’s what happened to the savings and loans, in effect, you see, 25 years ago or whenever it was.

And Freddie and Fannie have other functions, and they’ve got a lot of advantages, but they have a savings and loan-type operation. They just do it on a very big scale and they get their money from — in a very different manner than from millions of depositors. But the basic economics have some similarly.