Hedge funds run by John Paulson, George Soros and Steve Mandel cut back on bank shares in the second quarter, before Citigroup Inc. and Bank of America Corp. lost more than one-fifth of their value.
Tudor Investment Corp. and TPG-Axon Capital Management LP were among those trimming banks, according to filings made to the Securities and Exchange Commission by yesterday’s deadline. Fidelity Investments, the second-biggest U.S. mutual-fund company, sold 25 million shares of New York-based JPMorgan Chase & Co., or about 21 percent of its stake.
Money managers had been wagering that shares of banks and other financial institutions would benefit from an economic recovery. As the year progressed, some managers got spooked by banks’ exposure to mortgages the institutions made before the housing bubble burst, said Manal Mehta, a partner at Branch Hill Capital, a San Francisco-based hedge fund that has short positions on Charlotte, North Carolina-based Bank of America.
“As you spend more and more time on the banks you come to the conclusion that you are dealing with an unquantifiable set of mortgage liabilities,” Mehta said. “The scale of litigation is going to be staggering and it’s impossible to handicap how these lawsuits are going to play out.”
Many of the largest U.S. banks are facing demands from firms including mortgage giants Fannie Mae and Freddie Mac to repurchase soured home loans, as well as litigation from investors claiming lenders sold and securitized faulty mortgages or improperly disclosed the risk.
Plaintiff’s lawyers have been scrutinizing companies involved in the mortgage business after the worst collapse in home prices since the Great Depression, and attorneys general in all 50 states are seeking to collect penalties from New York- based Citigroup, Bank of America, JPMorgan Chase and San Francisco’s Wells Fargo & Co.
Bank of America acquired Countrywide Financial Corp., once the largest U.S. mortgage company, in 2008 as Countrywide almost collapsed into bankruptcy.
Financial companies posted the worst performance among 10 industry groups in the Standard & Poor’s 500 Index in the second quarter, losing 6.3 percent. The KBW Bank Index of 24 companies fell 19 percent from June 30 through yesterday, with Citigroup and Bank of America plummeting 25 percent and 29 percent, respectively.
Paulson, who runs the $35 billion New York-based Paulson & Co., had been positioning for a recovery in the U.S. by the end of 2012. He had been a big holder of U.S. banks and other financial-services companies he expected to profit as economic growth accelerated.
Bank of America
In the second quarter, Paulson cut his stake in Bank of America by more than half and sliced about 19 percent from his holding in New York-based Citigroup. He also sold shares in Atlanta’s SunTrust Banks Inc., Hartford Financial Services Group Inc. in Hartford, Connecticut, JPMorgan and New York-based asset manager BlackRock Inc. Even with the shuffling, Paulson’s largest fund tumbled 31 percent this year through the first week in August.
Soros Fund Management LLC, the New York firm that manages $25.5 billion, reduced its stakes in Citigroup and Wells Fargo, according to filings. The firm, which is slated to return capital to outside investors by the end of the year and become a family office managing about $24.5 billion, lost about 6 percent through the end of July.
Mandel’s Lone Pine Capital LLC in Greenwich, Connecticut, sold its stakes in JPMorgan and Purchase, New York-based MasterCard Inc. The value of its holdings in financial-services stocks fell by 4.6 percent in the second quarter, according to data compiled by Bloomberg.
Tudor Investment Corp., the hedge fund founded by Paul Tudor Jones, cut stakes in New York-based MetLife Inc. and Cleveland’s KeyCorp and sold all of its SunTrust Banks shares. The value of Greenwich, Connecticut-based Tudor’s equity holdings in financials declined by 24 percent, Bloomberg’s data show.
Dinakar Singh, who runs the $8 billion TPG-Axon Capital in New York, sold his entire stake in JPMorgan, valued at $156 million at the end of June.
Fidelity, based in Boston, is still the fourth-largest holder of JPMorgan, according to data compiled by Bloomberg. The fund company also reduced stakes in Bank of America and San Francisco-based Visa Inc., according to its filing.
Some money managers were large purchasers of bank stocks in the last quarter.
Lansdowne Partners Ltd., Europe’s biggest stock hedge fund, took a position in Bank of America, buying 5.1 million shares, and added to its holding in Citigroup, while reducing its stakes in Wells Fargo and JPMorgan.
Citigroup was the largest new purchase for Lee Ainslie’s Maverick Capital Management LP, which bought a stake valued at $447 million at the end of the quarter. The New York-based firm sold all of its holding in Wells Fargo.
Bruce Berkowitz, founder of Fairholme Capital Management LLC in Miami, added to his stake in Bank of America. The mutual- fund manager bought 7 million shares in the quarter, bringing his position to almost 100 million shares.
The fund also purchased 544,000 of shares of Citigroup Inc., increasing its position to 26 million.
The value of Fairholme’s stakes in financial stocks rose 8.2 percent in the quarter, according to data compiled by Bloomberg. Financial stocks made up 91 percent of its equity allocation at midyear.
Berkowitz, who last year was named by Morningstar Inc. as the domestic stock fund manager of the decade, has seen his flagship Fairholme Fund fall 25 percent in 2011 as financial companies have slumped.
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