Chapter 18 Summary and Analysis

During Lynch's last three years at Magellan, Fannie Mae was its biggest position in the fund. Fidelity's clients made over $1 billion in profits from Fannie Mae during the 1980s. Looking back, Lynch thinks Fannie Mae was a rather obvious pick. He realizes, however, that no one can make that much on a stock unless the stock is grossly underestimated by the market.

Fannie Mae created the concept of the "mortgage-backed security." They bought mortgages, bundled them together, and then sold the bundle to anyone, including the banks that originated the mortgages. Fannie Mae earned a fee for this package and passed the interest rate risk on to new buyers. This service became very popular among the banks. Before it was invented, banks and S & Ls were stuck administering thousands of little mortgages. They were hard to keep track of and hard...