Bruce Berkowitz Places Big Bets On Financials

(Dow Jones)

Well-known mutual-fund manager Bruce Berkowitz is still betting on the U.S. financial sector, saying he recently accumulated a stake in Morgan Stanley (MS).

Berkowitz told Dow Jones Newswires on Wednesday that he started buying shares of the investment bank in the second quarter and now holds a stake amounting to just under 2%. That makes his Fairholme Fund (FAIRX) a Top 10 holder in the company with slightly more than 25 million shares.

“It’s a powerful franchise…that has been under the weather with most other financials in the United States,” Berkowitz said. “It’s a company that’s well run and is resuscitating itself with a significant global presence. And the price was right.”

A spokesperson from Morgan Stanley wasn’t able to confirm the stock purchases and declined to comment further.

Morgan Stanley shares closed up 6 cents to $27.01. It shares have dropped 11% over the past three months and are down a little more than 1.5% over the past 12.

Berkowitz recently has been betting on stocks often seen as risky–ones that are undervalued and preferably throw off a lot of cash. He is best-known as manager of the Fairholme Fund, which has $14.7 billion in assets and holdings that also include Citigroup Inc. (C) and Bank of America Corp. (BAC). His investment in Morgan Stanley, worth about $700 million, makes up about 4% to 5% of the fund.

Earlier this month, Berkowitz disclosed a boosted stake in American International Group Inc. (AIG), as well as a hefty holding in MBIA Inc. (MBI). Both companies’ shares jumped on the news, taken by other investors as a sign of continued confidence in the U.S. financial sector.

“While we don’t know how much money we will make for shareholders, we believe we aren’t going to lose money with these institutions,” Berkowitz said, adding he’s investing in financial stocks for the long haul.

Berkowitz said Wednesday that while a double-dip recession is possible, it’s not probable and that it’s the “nature of recovery to have fits and starts.”

He added that “it has never been a good idea to bet against the United States and its people.”

Berkowitz also expressed confidence in MBIA’s management team and said the company still provides a valuable service as a municipal bond insurer–something that’s necessary despite the investment community’s doubts.

“MBIA still, in my opinion, has a franchise, and it has the right people to lead the company back to past glory,” Berkowitz said. “And most importantly for [Fairholme's] 400,000 shareholders, we believe it has the cash to sustain the business.”

Berkowitz also said MBIA’s transformation plan appears to be progressing on track and that the company’s separation of divisions was the right choice.

MBIA split off National Public Finance Guarantee, its public-finance business, as part of an attempt to restart its business of selling financial guarantees on bonds issued by cities, water authorities and other public-finance entities. Its main unit was left with fewer claims-paying resources for its troubled mortgage exposures, which caused banks, investment funds and other policy holders to balk at the plan and file litigation against MBIA.

Still, Berkowitz said he expects the restructuring litigation to be resolved by the end of the year. He also said he would “love to find ways to further help the company beyond buying shares in the open market,” including taking actions to strengthen MBIA’s balance sheet.

As for AIG, Berkowitz said he continues to believe the government can eventually sell its stake in the troubled insurer, and a clear exit path should be established by the end of 2011.

“The history of our country and the history of capitalism is not a smooth, easy path,” he said. “Given what the country has just been through, I can see and feel the recovery. But it’s still going to take some time.”

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