MBIA Inc (MBI)

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Berkowitz Says He’s ‘All In’ on AIG (Transcript)
BloombergNews.com
Feb 1, 2011

Bruce Berkowitz, co-founder of Fairholme Capital Management LLC, talks with Bloomberg’s Brooke Hawkins about the future of American International Group Inc. and MBIA Inc. Berkowitz, speaking on Jan. 28 in Palm Beach, Florida, also discussed investment strategy in Asia and the outlook for St. Joe Co., Berkshire Hathaway Inc. and U.S. financial stocks. (Source: Bloomberg)

(This is not a legal transcript of the interview. Bloomberg LP cannot guarantee its accuracy.)

BROOKE HAWKINS, BLOOMBERG NEWS: Are you bullish on the stocks? Are you confident with it?

BRUCE BERKOWITZ,CO-FOUNDER, FAIRHOLME CAPITAL MANAGEMENT LLC: Yes. I am bullish on the country. I am bullish on the markets. Government has done a great job of pulling us from the precipice and saving what I consider to be the global financial system.

And now, this is just a huge opportunity for Fairholme to start to do its part and help sort of restructure, build a more solid foundation for - to help companies rebuild and move forward. And it’s - I think it’s a unique time, and I’m looking forward to the next few years. And I’m - I think it’s going to be good. I’m a little worried about after that -

HAWKINS: Actually -

BERKOWITZ: - because - well, I’m a little worried after that because I want to make sure - you know, I want more investments. You know, it’s like investing is somewhat like going to the supermarket. Right? You’re always going for a loaf of bread and, you know, you may worry that three years from now there’s going to be no more bread on the shelves.

So, this is a great environment. We’re - there’s a long period of recovery going to happen, so there’s going to be plenty to do for us.

HAWKINS: Well, that’s a good sign of opportunity.

BERKOWITZ: I think so, as long as you have the cash and the patience.

HAWKINS: Yes. I agree. Well first, you talk about the Government and I want to talk about the - that ad you took out on AIG. Can you tell me a little bit about what prompted you to do that and why you did take the ad?

BERKOWITZ: Well, I basically thought that the employees of the Government were responsible for the reasonable - you know, the great returns that we had because of the hard work. And government, at various levels, it’s somewhat - it’s kind of a - you can equate it to the electric company. Right?

I mean, it’s a - you know, you do not - you have a wave in your home. You’re comfortable. There’s air conditioning. Everything’s great. You don’t pick up the phone and tell the electric company, “Gee, thanks a lot for now brown-outs, no black-outs. We really appreciate the job you did.” Right?

But when something goes wrong, you know, you pick up that phone in five minutes screaming and yelling like, “Where’s my electricity?” And I think when people look back at the period we’ve been through, you’ll see that the - you know, government was at its best in terms of dealing with this crisis.

Was everything perfect? Of course not, but the amount of pressure, what was going on, the financial system being a day or two away from just the total collapse, bravo.

And we also, given that we are such large investors in many of the companies, which taxpayers have helped out, you know, I believe the owners of companies have been equitably treated and also, in the case of AIG, I think they have - we have been as shareholders have been equitably treated. So, it’s hard to get that message out, and so we did it. Don’t plan on doing it again, but we did it.

HAWKINS: A lot of people are a little nervous about AIG because of the Government involvement and how steady they are. But if you read everything, they do not have to pay back any of their -

BERKOWITZ: Yes -

HAWKINS: - but, that’s the (inaudible)

BERKOWITZ: I - people may be miscounting about $60 billion. It - if people assume that the Government received all the stock and the Company still has to pay off the debt. No. You get - the Company keeps the cash. The Government gets the equity, so, right.

So, the balance sheet of AIG is quite strong. It’s perceived to be weak because of this, but there may be a miscount of about $60 billion. Don’t tell anyone.

HAWKINS: Now the Government is preparing to sell its share - its share of AIG stocks -

BERKOWITZ: So I’ve read.

HAWKINS: - are you planning to get involved with any of that?

BERKOWITZ: Well, we have a big investment in AIG and we would love to have a bigger investment in AIG.

HAWKINS: So, you -

BERKOWITZ: I can’t tell you what I’m going to do.

HAWKINS: So, you -

BERKOWITZ: We love AIG. AIG is a great franchise, powerful, intact businesses, solid balance sheet, great management, really love the job that Bob Benmosche has done and his team and I believe, contrary to opinion, that they have a bright future on a global basis.

HAWKINS: Okay. Well, that brings up a couple of different questions that I have for you. So the first is, then you are a long-term AIG investor?

BERKOWITZ: Yes.

HAWKINS: In it for the long term?

BERKOWITZ: Yes.

HAWKINS: OK. And CEO, Benmosche, are you - you’re happy with his leadership? You’re happy with his -

BERKOWITZ: Bob Benmosche, he’s done a great job. He’s really - the spirit of the place has picked up. He’s tough. He’s had to make some tough decisions. The whole group has.

They’ve had - these people have been working 24/7 at AIG, and they’re - and the people of the United States Treasury, the New York Fed, I mean, they - there have been people just virtually getting no sleep for the past, you know, two, two and a half years, resuscitating one of the great, you know, American companies - a company that started in Shanghai in 1931 by C.V. Starr, a well-respected company outside the United States, a company that I have all of my insurance with.

HAWKINS: So, you’re definitely in close (ph)?

BERKOWITZ: I’m all in with AIG, every way I know how.

HAWKINS: That brings up Asia. You have recently moved into Asia. You’re present portfolio, 7.5 percent, is now involved with Asia.

BERKOWITZ: Yes. Over 10 percent of the Fairholme Fund has now been invested via the Hong Kong Stock Exchange in two companies, AIA, which was formerly part of AIG, and China Pacific Life.

And we are - I am very impressed with the region. I’m embarrassed to say it’s only been in the last few months that I’ve made a few trips to Asia. I should have done it ten years ago.

With such a growing middle class and the need for life insurance and the maturing of financial markets, there’s going to be a lot to do and I hope Fairholme can do more and more in a very unique - very unique place in a unique time. And I hope, you know, there’ll be some unique opportunities for Fairholme, so 500,000 shareholders.

HAWKINS: To further invest in Asia in -

BERKOWITZ: Yes.

HAWKINS: - other companies, diversify, or maintain just those two investments?

BERKOWITZ: Well, we’re hoping that we - we want to go slow, because it’s - this is a - this is new for us, and we need to get to know everyone. But, we’re hoping that our first two investments will form the foundation for making more investments.

I mean, our belief is that there is a giant highway being built between China and the United States with - and the traffic is going to go both ways. There’s much to do for everyone, and we would like to be part of that investment process, whether it’s in the United States, in China, and I’m very optimistic about the future there.

And I’m not too much - I’m not that much of an optimistic person, so I’m a - I think there’s some great potential. Will it be rocky? Will it be volatile? Yes, but both countries have a - just a tremendous amount to offer each other.

HAWKINS: Okay. Now, when you got into those two companies and it’s been recent, correct?

BERKOWITZ: Yes.

HAWKINS: In the last -

BERKOWITZ: Yes. This has been a shift for Fairholme. We are not known as international investors, so this was a - this is a major shift for the Fairholme Fund.

HAWKINS: OK. And did you sell what it - did you sell anything? Did you sell out of the US stocks?

BERKOWITZ: No.

HAWKINS: To move into that?

BERKOWITZ: No. No, no. At Fairholme, we tend to keep an awful lot of cash on hand. Right now, we have about $5 billion of cash. So, we - which we’d like to put to work, so we always have cash. We don’t want to run out of cash. The only hedge you have against difficult times is past knowledge and cash.

HAWKINS: OK, because that was the big question is if you were selling US to move into China.

BERKOWITZ: No. It’s not a question of selling US. It’s a question of buying China. And, in fact, many of our companies, you know, whether it’s AIG or Berkshire Hathaway or Citigroup of Morgan Stanley or Goldman Sachs are international. So, we - we’re already there on a look- through basis with our investments in the - especially in the financial services companies, which we have quite amount - a large amount of money in them.

HAWKINS: You’re just getting more deeply involved is what you’re (inaudible)

BERKOWITZ: Yes. And the financial services, that’s the heart of the economy. It’s the - you know, the blood is the credit. I mean, in order for job creation, for our economy to get going, to get to a more normal period, we have to have strong, vibrant financial institutions.

I mean - and Citigroup Global, Goldman Sachs Global, Morgan Stanley, Bank of America, we need these institutions to be strong and to be profitable for the country to do well.

HAWKINS: I know there’s been some investors out there that are bearish on MBIA, but you are not?

BERKOWITZ: Well, we are about 20 percent of MBIA, like the management team, what they are doing now. I mean, MBIA serves a very valuable function in insuring certain bonds and especially when you think about municipal bonds, say, or the state of municipalities. Municipalities, down the road, are going to need MBIA’s insurance guaranty.

Now right now with - the Company is, I think, finishing issues that they’ve had with past issuers. There’s a bunch of lawsuits going on, but that’s all - in my opinion, that’s all going to be cleared up this year. It has to be so everyone can move forward.

And then, you’re going to find an MBIA that is - who kept its word every insured has been paid what they’ve been due. So, what they’ve insured that went bad, the insured’s been paid.

So that’s the franchise value, as far as I’m concerned, and people are going to want that insurance down the road. And MBIA is getting closer and closer to being able to offer that insurance to bondholders again after the last few years.

HAWKINS: Okay. So, you think that they will recover from all that and -

BERKOWITZ: I think they are recovering.

HAWKINS: Yes.

BERKOWITZ: They’re worth significantly more just liquidating and just slowly dying a death, just running off the business, but that’s not going to happen. They’re going to have a vibrant new business, which is going to make them worth that much more.

HAWKINS: What? In their municipal bonds?

BERKOWITZ: Yes, starting there and in other areas down the road.

HAWKINS: Now, I want to talk about Bill Ackman. I know you guys worked together with General Growth, and -

BERKOWITZ: Yes.

HAWKINS: - he has come out and said that he’s bearish, like MBIA.

BERKOWITZ: Well, he was very bearish on MBIA and he was right.

HAWKINS: But, going forward -

BERKOWITZ: Well, the analogy that I use that you - you know years ago, you went to a restaurant and you didn’t like it and new chef comes in, new management comes in, it’s a difference restaurant. You know, you can’t judge the new restaurant by the old restaurant.

So, I think his call on MBIA was right. He was right. That doesn’t mean that companies just continued down that path. Managements change. Times change. You know? Companies do rise from the ashes.

HAWKINS: So going forward, have you talked to Bill Ackman about your MBIA investments?

BERKOWITZ: No.

HAWKINS: Talk about your positions?

BERKOWITZ: No. He’s too eloquent. I’m worried if I talk to him about it he may convince me of something. I - like, no. I think I understand the point of what - you know, a great book was written about it. I’ve read all the books, read all the analyses. I’ve gone through the history.

I’ve known of MBIAs when I’ve made a - I had a - I was a significant investor in MBIA in the late 1990s - excuse me, the late 1980s and the early 1990s when people worried about Philadelphia going bust.

And so, I have a long history of watching the Company and I have a long history of watching the current CEO at the Company and how he has resuscitated other businesses. So, I’ve very optimistic and excited about MBIA. This -

HAWKINS: Especially with the management company that’s (inaudible)

BERKOWITZ: Yes.

HAWKINS: Now going back, we talked about - I had just mentioned General Growth. You just spent a lot of cash selling your stake in General Growth?

BERKOWITZ: Yes. We got some cash and we also were lucky enough to swap some of the General Growth into Brookfield Asset Management. So, we’re very happy with our new investment in Brookfield Asset Management, high-caliber people, great company.

I’ve watched Brookfield Asset Management for decades and never thought I’d every have a chance to be an investor in Brookfield. So, I’m happy we now have a reasonably sized position in Brookfield and, of course, now we have more cash to add to what we are thinking about doing down the road. There’s still lots to do.

HAWKINS: Now, some have said that you’re - some of that cash that you did get from that sale you would use to buy real estate company, St. Joe, and possibly - any thoughts about taking that private?

BERKOWITZ: Well, I have said in the past that I would like to buy the whole company if I could buy the Company. But today, I and my partner, Charlie Fernandez, we are directors of Joe and we have to work in the best interests of all shareholders of St. Joe.

You know, we bought our St. Joe position for pretty much swampland prices, been down there. We like what we see, brand new international airport, and we have plenty of ideas. And we’d like to help our fellow directors and management improve and increase the intrinsic value of St. Joe. And there are decades worth of work at St. Joe.

HAWKINS: So, if possible, you would work with other shareholders to take St. Joe’s offer?

BERKOWITZ: We’re directors of the Company. We take our - we put ourselves in the shoes of all shareholders, and we do what’s best for them long term. So, whatever it takes to make our shareholders money at St. Joe, we’re all for.

HAWKINS: Now one investor, David Einhorn, and you have had opposing views on St. Joe. He has shorted the stock, and he’d said he’s reached out to you but hasn’t heard back. Any - have you talked with him, discussed your views?

BERKOWITZ: I’ve read his analysis, which is quite extensive, and he makes some very good points and I’ve taken them all into account.

HAWKINS: So - but, you haven’t talked with him?

BERKOWITZ: No. Another case, someone quite smart, you know, I don’t want his eloquence to affect my thinking. And he may be right, and I may be right. We both may be right. We’ll see.

HAWKINS: I want to go back real fast to AIG. You have said that you have - were planning on meeting with management. Have you spoken with the management of AIG?

BERKOWITZ: Yes.

HAWKINS: All right.

BERKOWITZ: Yes, we have. And we are in favor of what they’ve done. We applaud what they’ve done, and we’re in favor of what we read in papers of going forward and of the U.S. Treasury’s selling some of their AIG shares at hopefully a nice profit to taxpayers. It looks that way. We’re - anything we can do to help AIG move forward, and they are moving forward.

HAWKINS: And that’s what you’re - some of your discussions were with the backing of this?

BERKOWITZ: Yes. You know, at - we’re - now that - at the Fund we have about 22 - about $22 billion, we need to be long-term shareholders. It’s in our - it’s to our benefit, it’s our advantage to find investments that we can hold for very long periods of time.

So, yes. We want - we want to be with AIG as long as possible, and we want to be with our other investments as long as possible. You know, it’s like it would be nice to take a vacation.

HAWKINS: Well, I do want to point out the former CEO Greenberg told us on Bloomberg a few weeks ago that the asset sales have made the Company weaker. Do you have any thoughts on that?

BERKOWITZ: The asset sales were necessary to repay the taxpayers of the United States. Did they sell valuable assets? Did they - I - yes. Did they receive a good price for those assets? I believe so. But I think, to some extent, it’s a moot point. Of course, I believe so, because one of those assets were AIA and we bought them - we bought it - a large chunk of AIA in the - sorry, I think during its IPO.

Hank Greenberg’s a brilliant man. He’s just - he knows more about insurance. He’s forgotten more about insurance than I know. And it’s - it’s been a difficult - it must be a very difficult process Hank has gone through.

But, the bottom line is that the - you know, the Company, previous times, had a few businesses that maybe were the equivalent of picking up pennies in front of a steamroller.

And the price has been paid, and it’s time to move on and it’s time and - for the Company to rebuild. And that’s what’s happening.

HAWKINS: So, you think that they’re rebuilding it and not open for a debate on this?

BERKOWITZ: No. There are valuable operations in assets that remain at AIG. I just don’t want to tell you what they all are.

HAWKINS: (inaudible) Berkshire Hathaway, do you have any - can you talk about Warren Buffett, any succession plans, any thoughts on succession - successors for Warren Buffett?

BERKOWITZ: Successors - on his succession plans?

HAWKINS: Yes, his successor.

BERKOWITZ: Yes. He is so good at what he does it’s almost insulting to think that he doesn’t have a reasonable succession plan. And I, frankly, don’t see why he should tell anyone. And, even if he did not and this was the end of Berkshire Hathaway, he’s done an outstanding job for people over many decades. Nothing lasts forever.

I hope Berkshire Hathaway lasts forever, but I don’t think Fairholme’s going to last forever. I think - so, I think people - it’s - the succession plan is a bit overblown. I know it’s important, corporate governance, public company.

I understand it, but I don’t think there’s going to be another Warren Buffett. There are great people at the Company, many great people at the Company, and I think shareholders are just going to do fine after Warren Buffett. What more can you ask?

HAWKINS: One more question on Citigroup, they - Company, or the Government just sold Citi warrants. Were you involved in any of that? Did you buy any of those stocks?

BERKOWITZ: No. We were - we weren’t. You know, it’s mutual funds. And on mutual funds, we have limitations about how much of a bank like Citigroup we can have. And we’re right up to the limit, so we’re not allowed to own more than 5 percent of the Fund in a Citigroup, a Morgan Stanley, a Goldman Sachs, Bank of America. And we’re right there with all of them.

HAWKINS: With all of them?

BERKOWITZ: With all of them.

HAWKINS: So, you like - that way my - going to be my next question is whether or not you intend -

BERKOWITZ: I’d buy more if we could.

HAWKINS: Right.

BERKOWITZ: I like the financials. You know, one of the benefits of getting old is that - sort of seeing the certain plays before, not exactly the same. You know, our country’s been through this before. We’re going to get through this again, and you see how it’s - what’s happened in the last few cycles.

And if you study the history, you can get a good sense of, you know, how it plays out in general for the benefit of the country. It must play out for the benefit of the country.

HAWKINS: So, of the financial companies that you - you know, I’ve read that you liked - you - after listening to a call of Brian Moynihan, you liked where he was going. Or, have you -

BERKOWITZ: I think that’s - he’s heading in exactly the right direction. He’s made some painful choices, which are going to - they’re going to be the long-term benefit of Bank of America. When I look at the pieces of Bank of America, whether they are Merrill Lynch and all of the other pieces, it’s just an amazing organization.

And everybody is so focused right now on the liability side of the balance sheet of Bank of America, the reps and warranties with mortgages, and the same is the true of all the other financial institutions that they’re not focused on the asset side and what the potential for these companies will be in a more normal environment.

And we are slowly working towards a more normal environment and, you know, for our shareholders I want them to be part of these companies as they go - enter into this more normal environment.

HAWKINS: Investors love to hear - you know, they like to follow your investment strategies. Are there any investments that you suggest that you’d like? I know you like financials to be specific financial companies. I know you kind of like max out at 5 percent, but then you -

BERKOWITZ: We have $5 billion of cash. I can’t tell you. The shareholders are first. Owners always come first. You have to respect the people that brought you to the party, and we have a great shareholder base that stuck with us and I am never going to ever say anything to anyone that could potentially hurt our performance for those shareholders. So, all I can tell you is stay tuned.

HAWKINS: Any - but, you will - you do want to put some of that cash to work? You do want to -

BERKOWITZ: Yes.

HAWKINS: Yes. So, you’re looking at -

BERKOWITZ: We will put the cash to work.

HAWKINS: - to use outside financial? Nothing?

BERKOWITZ: Sorry.

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