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Fannie & Freddie
Posted by: vp (IP Logged)
Date: September 7, 2008 11:12AM

What a tragicomedy this is! After GSE’s accounting scandals (see Buffett’s comments below) it is OFHEO with a new fancy name managing Fannie and Freddie on a temporary basis.

OFHEO's recent comment on GSE’s capital:
[www.bloomberg.com]

Paulson to support FNM and FRE ”in their current form”
[blogs.wsj.com]

Fannie’s CEO Mudd on FNM's capital position (8:52):
[wamu.org]

Buffett's remarks on OFHEO ( a case study of regulation):
[www.cnbc.com]

Paulson’ statement (07 Sep 2008)
[www.cnbc.com]|headline|quote|text|&par=yahoo

It will be very interesting to see how FNM’s and FRE’s -specially FNM’s- largest shareholders will react to Mudd’s recent comments on Fannies’s capital position and to Paulson’s argument that ”based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.”
[www.cnbc.com]|headline|quote|text|&par=yahoo

How little things seem to change, and how fast...

About the conservatorship:

”In addition, Section 1367 of the recently passed Housing Bill significantly enhanced the conservatorship powers of the government. The new director of the nascent Federal Housing Finance Agency, James B. Lockhart III, now has the power to appoint a conservator for either Fannie or Freddie if, among other things, they are critically undercapitalized, inadequately capitalized without a means to recapitalize, cannot pay their obligations as they become due, or are in an unsafe or unsound condition. And in a nice provision, if a conservator is appointed, the directors are relieved of any liability under the law for acquiescing in this.”
[dealbook.blogs.nytimes.com]

Anyone see lawsuits coming?

It also looks like that based on today's information many experienced value investors with good track record lost big time in FNM and FRE.


Stocks Discussed: FNM, FRE,
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Rating: 3.3/5 (4 votes)



Re: Fannie & Freddie
Posted by: commodity (IP Logged)
Date: September 7, 2008 12:06PM

Jim Rogers shorted and made big bucks

WEB sold out and avoided a big loss


Stocks Discussed: FNM, FRE,
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Rating: 2.3/5 (4 votes)



Re: Fannie & Freddie
Posted by: vp (IP Logged)
Date: September 7, 2008 01:01PM

OFHEO's/FHFA's Lockhard had today's best line.

Lockhart (July 9 2008):"My view is that Fannie and Freddie are adequately capitalized at this point."
[www.bloomberg.com]

Paulson (September 7 2008): "Based on what we have learned about these institutions over the last four weeks - including what we learned about their capital requirements - and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form."
:4c53:http://money.cnn.com/2008/09/07/news/economy/paulsonstatement/index.htm:/4c53:?

Lockhart ((September 7 2008): "This decision was a tough one for the FHFA team as they have worked so hard to help the Enterprises remain strong suppliers of support to the secondary mortgage markets. Unfortunately, the antiquated capital requirements and the turmoil in housing markets over-whelmed all the good and hard work put in by the FHFA teams and the Enterprises' managers and employees. Conservatorship will give the Enterprises the time to restore the balances between safety and soundness and provide affordable housing and stability and liquidity to the mortgage markets. I want to thank the FHFA employees for their work during this intense regulatory process. They represent the best in public service."
[money.cnn.com]

This is surreal.


Stocks Discussed: FNM, FRE,
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Rating: 2.5/5 (2 votes)



Re: Fannie & Freddie
Posted by: cm1750 (IP Logged)
Date: September 8, 2008 09:39AM

Fund manager Amit Chokshki attended this week's 3rd Annual New York Value Investing Congress on behalf of Seeking Alpha. Here are Amit's notes from the presentation of Rich Pzena, Pzena Investment Managment:

* Pzena's talk was entitled 'Evaluating Financials in a State of Panic'
* The only time good businesses sell for cheap prices is during times of distress
* Financial stocks are cheap on a P/B basis against historical multiples
* Freddie Mac (FRE) is the cheapest stock Pzena has 'ever seen':
o Losses are absorbable and GAAP is not useful in evaluating FRE
o Pzena believes the mortgage payment resets that result in higher monthly payments will be handled by borrowers because they will be reluctant to forfeit the equity in their homes
o Fears in the market don’t necessarily impact FRE’s business but are impacting its stock
o FRE Loan to Value = 60% and are mostly in fixed high credit
o Believes FRE will follow similar action to P&C insurance companies
+ Hurricane/natural disaster occurs, P&C insurance companies experience losses, P&C companies raise prices/premiums, P&C stock goes up
+ Housing crisis has occurred, FRE and other industry players will raise fees, tighten credit standards, experience lower losses resulting in strong capital returns and thus improving stock price.


Stocks Discussed: FNM, FRE,
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Rating: 4.0/5 (2 votes)



Re: Fannie & Freddie
Posted by: Sivaram (IP Logged)
Date: September 8, 2008 09:40AM

It's certainly a weird situation. I'm of the opinion that the situation isnt' as bad as it seems. Most of the problems are due to mark-to-market accounting, which I don't believe reflects reality. If you use strict accounting they may be insolvent but otherwise they are not.

This is a good example of why one should always be wary with public-private partnerships. These operations do not operate like private businesses...

---------
Check out my investing blog - contrarian with a macro focus and a value investing tilt: Can Turtles Fly? A Contrarian Investing Blog.


Stocks Discussed: FNM, FRE,
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Rating: 2.6/5 (5 votes)



Re: Fannie & Freddie
Posted by: David Pinsen (IP Logged)
Date: September 8, 2008 09:53AM

"This is a good example of why one should always be wary with public-private partnerships. These operations do not operate like private businesses..."

What do you mean by this? Do you think that shareholders in Fannie and Freddie would have been better off if the companies were truly private sector firms and not 'government-sponsored entities'? That doesn't seem likely to me. First, if they weren't GSEs with implicit government backing (and the lower borrowing costs that resulted in), they would never have gotten to be 'too big to fail'. Second, if they had been purely private sector mortgage companies (e.g., IndyMac), the government would simply have allowed them to fail and let the equity holders get completely wiped out (as opposed to 'just' getting massively diluted as is happening to Fannie and Freddie shareholders).

My signature: I blog at [steamcatapult.com]


Stocks Discussed: FNM, FRE,
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Rating: 3.0/5 (4 votes)



Re: Fannie & Freddie
Posted by: vp (IP Logged)
Date: September 8, 2008 11:40AM

Imagine if the Bush administration, having decided that gasoline prices are too high, decided to nationalize ExxonMobil. The federal energy secretary held a Sunday press conference to announce that the Bush administration had replaced the company's management, that the company would henceforth be run with the goal of reducing gasoline prices for drivers, and that any profits the company made would be the property of the federal government, which would now control 80% of the company. As for the company's existing shareholders, they are out of luck — they won't get any more dividends; they won't even get a chance to vote on the deal.

Substitute mortgage prices for gasoline prices and you get a pretty good sense of what the Bush administration and its secretary of the Treasury, Henry Paulson, did over the weekend in respect of Fannie Mae and Freddie Mac. The administration decided that its interest in low mortgage rates as an artificial boost to housing prices was more important than the property rights of the shareholders of Fannie Mae and Freddie Mac. So without even so much as a shareholder vote, the companies were nationalized.

For what reason? Because they suffered sizeable losses? By that logic, Secretary Paulson ought to seize Merrill Lynch, whose $14 billion in after-tax losses dwarf the $9.44 billion that have been reported by Fannie Mae. Because they violated the statutory capital requirements? No, for all the verbiage offered yesterday by Mr. Paulson and the director of the Federal Housing Finance Agency, James Lockhart, no one accused Fannie of lacking the capital required by law.

Mr. Lockhart did get in a sneer at what he called "the antiquated capital requirements." Those requirements were set by a law — the Federal Housing Enterprises Financial Safety and Soundness Act — that was passed in 1992 after a downturn in the housing market and that can hardly be accurately characterized as antiquated. In any event, if Mr. Lockhart considers the capital requirements antiquated, the right approach is to try to change the law, not to seize the company. At least that way the company's shareholders would have a chance to participate in the legislative process.
[www.nysun.com]


What I don’t understand is exactly this: How can it be possible in the US to ”nationalize” a company just by stating that ”based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements - and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their currentform.” without giving more details.
:eaaf:http://money.cnn.com/2008/09/07/news/economy/paulsonstatement/index.htm:/eaaf:?

FNM’s 10-Q (Period of Report: 2008-06-30) was published in 2008-08-08. What on earth has happened during the last two and a half months in FNM’s books?

I also find it very disturbing that Paulson in his statement on Sunday felt necessary to emphasize that “I appreciate the productive cooperation we have received from the boards and the management of both GSEs. I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither. New CEOs supported by new non-executive Chairmen have taken over management of the enterprises, and we hope and expect that the vast majority of key professionals will remain in their jobs. I am particularly pleased that the departing CEOs, Dan Mudd and Dick Syron, have agreed to stay on for a period to help with the transition.”

Based on the latest 10-Q and what has happened since that, it just makes no sense at all to say that “I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction.” (=No one made mistakes, we were hit by a perfect storm, you say that and our board will accept conservatorship.)

I do understand that when a patient is having a heart attack, it makes no sense to lecture about smoking and it is better to keep saying you are going to make it. However, I am concerned that this episode if not better explained and investigated in every detail, can in the longer run seriously damage trust in the US financial system. Whose’s 10-Ks and 10-Qs can we trust? Are regulators really doing their job? Who is next, LEH, WB, WM, BAC, USD?

You can see and listen OFHEO’s Lockhart’s explanation on what he actually meant when he just two months ago said that GSEs are adequately capitalized.
[www.cnbc.com]


Stocks Discussed: FNM, FRE,
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Rating: 2.0/5 (1 vote)



Re: Fannie & Freddie
Posted by: batbeer2 (IP Logged)
Date: September 8, 2008 01:21PM

A significant ammount of shares of FNM and FRE shares are held by poeple outside of the US.

The US taxpayer may feel his tax money hasn't been spent well. This is a matter for debate. International stockholders of FRE and FNM have been robbed. You better beleive this case will not help to attract foreign capital to the US stock market. At least the Russians give fair warning if they are about to meddle with publicly traded companies. US officials deny it untill the last moment. A disgrace.

- How does this relate to the fact that "foreign stocks" or more accurately non US stocks are perceived to be more risky than US stocks ?

- What does this mean for long-term P/E multiples of US stocks ?

================================================
Take calculated risks. That is quite different from being rash. - George S. Patton


Stocks Discussed: FNM, FRE,
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Rating: 3.3/5 (3 votes)



Re: Fannie & Freddie
Posted by: Sivaram (IP Logged)
Date: September 8, 2008 02:15PM

DaveinHackensack Wrote:
-------------------------------------------------------
> "This is a good example of why one should always
> be wary with public-private partnerships. These
> operations do not operate like private
> businesses..."
>
> What do you mean by this? Do you think that
> shareholders in Fannie and Freddie would have been
> better off if the companies were truly private
> sector firms and not 'government-sponsored
> entities'? That doesn't seem likely to me. First,
> if they weren't GSEs with implicit government
> backing (and the lower borrowing costs that
> resulted in), they would never have gotten to be
> 'too big to fail'. Second, if they had been purely
> private sector mortgage companies (e.g., IndyMac),
> the government would simply have allowed them to
> fail and let the equity holders get completely
> wiped out (as opposed to 'just' getting massively
> diluted as is happening to Fannie and Freddie
> shareholders).
>
>


It would have been better for everyone if they were either wholly private or wholly government-owend. People may not agree wtih that reasoning while things are good but ultimately it was a poor outcome.

The (long-term) shareholders were wiped out anyway. Your argument that they were massively diluted versus being completely bankrupt isn't as good as it seems. First of all, Fannie and Freddie are trading around $0.70 right now but some say it should be less than $0.10. Total bankruptcy and pennies per share is almost equivalent.

Secondly--and this is why it is better to be private--if it was a private company, what little of their fate is in their hands. Once they are bankrupt, they can liquidate anything of value, restructure, or do whatever they can and see if anything is left for shareholders (usually none is left during bankruptcy but the point is that it's the shareholders' call.) In contrast, currently, Fannie and Freddie are run by the government and who knows what they are worth. The market is valuing it at 70 cents so you are getting something but there is no reason for the market to place any value on their shares. The (old) shareholders have no control. The thing is, they never did. Fannie and Freddie were increasing their mortgage over the last year because the government was pressuring them--this wouldn't have occurred if they were private. Conversely, they made huge amount of money during the good times at the expense of the government backing.

If they were private you can bet that they would try to survive through this (usually by deleveraging and downsizing) but they don't have that choice now because the government says so.


To sum up what I'm saying... the GSEs never really were acting in the shareholder interests at all times (they didn't act in the government interest either.) Shareholders in the end would have been better off if they were private. At least you have more control over your firm that way. It's kind of like investing in Gazprom (majority owned by Russian govt) or Petrobras (majority owned by Brazilian govt) or PetroChina (majority owned by CNOOC). You really don't have control over the company. If someone likes riding the stock while times are good, that's fine; but the govt can do anything they want...

---------
Check out my investing blog - contrarian with a macro focus and a value investing tilt: Can Turtles Fly? A Contrarian Investing Blog.


Stocks Discussed: FNM, FRE,
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Rating: 2.5/5 (2 votes)



Re: Fannie & Freddie
Posted by: Sivaram (IP Logged)
Date: September 8, 2008 02:23PM

vp Wrote:
-------------------------------------------------------
>
> What I don’t understand is exactly this: How can
> it be possible in the US to ”nationalize” a
> company just by stating that ”based on what we
> have learned about these institutions over the
> last four weeks – including what we learned
> about their capital requirements - and given the
> condition of financial markets today, I concluded
> that it would not have been in the best interest
> of the taxpayers for Treasury to simply make an
> equity investment in these enterprises in their
> currentform.” without giving more details.
> :2d51:[money.cnn.com]
> /paulsonstatement/index.htm:/2d51:?


It's somewhat troublesome but the only reason I'm not too concerned is because the GSEs are quasi-government entities. If this were a private company then it would be a serious attack on property rights. The GSEs profitted enormously over the decades from the government backing and now, as harsh as it may be, the government is calling in their chps (screwing them over, if you will ;) ).

I think we can both agree that the action taken is not because of imminent financial problems at Fannie and Freddie, but because the government wants to introduce "confidence" into the mortgage market. All this is to placate the foreign central banks (that are becoming nervous with their huge Fannie and Freddie MBS) and the Bill Grosses of this world.

---------
Check out my investing blog - contrarian with a macro focus and a value investing tilt: Can Turtles Fly? A Contrarian Investing Blog.


Stocks Discussed: FNM, FRE,
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Rating: 2.8/5 (5 votes)



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