Wednesday, July 23, 2008

Of Fannie & Freddie

"The Bush administration has held talks about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter, according to three people familar with the matter, as the stock prices of both companies continue to fall. ... The government doesn't expect the entities to fail and no rescue plan is imminent, these people said. ... Treasury officials are nonetheless talking about what the government could--or should--do if Fannie and Freddie become so pressed that they are unable to borrow money and continue operating. ... The two companies own or guarantee about $5 trillion of mortgages or nearly half of all U.S. home-mortgage debt outstanding. ... 'They can't be allowed to fail,' said Peter Wallison, a former Treasury Department general counsel ... 'There is simply no way that the [US] government can let that happen.' ... Treasury Secretary Henry Paulson has said in the past the government will not back the debt of Fannie and Freddie. ... The most likely scenario is that Fannie and Freddie will raise capital from private investors, even though that will dilute the interests of current shareholders, said Josh Rosner, an analyst at Graham Fisher & Co., a New York research boutique", WSJ, 10 July 2008.

"Even as federal officials sought to reassure investors about the financial health Of Fannie Mae and Freddie Mac, pressure mounted on the giant mortgage companies to raise fresh capital to offset the tumbling values of home loans they hold. ... Meanwhile, some high-profile bond investors snapped up Fannie and Freddie debt, believing the government would never allow them to default. ... A default would set off 'a firestorm of intolerable proportions,' [Bill] Gross said. ... Ben Bernanke said the firms 'are playing a critical role' in the mortgage market, but 'I think they could do any even better job if they were better supervised and better capitalized.' ... Politicians in both parties expressed their confidence in the companies and pledged to take action if things worsen. 'Fannie Mae and Freddie Mac are too important to go under,' said Democratic Sen. Charles Schumer of New York. ... Goldman Sachs ... is advising Freddie on possible ways to raise capital", WSJ, 11 July 2008.

"Investors began paying closer attention to the GAAP balance sheet and fair-value figures. On that score, Fannie looked decidedly weak; Freddie was a basket case. At the end of the first quarter, Freddie's regulatory capital was about $38 billion. Yet GAAP total shareholders equity was $16 billion and common equity, or book value, was just $2 billion. On a fair value basis, the company had negative net worth of nearly $17 billion", WSJ, 12 July 2008.

"The Lehman report, released Monday, aired the possibility that Fannie and Freddie would need to raise a staggering $75 billion if a new accounting rule being contemplated went into effect. ... The Lehman report thrashed Fannie and Freddie shares. Then the two stocks took another beating after former St. Louis [Fed] President William Poole said the two companies might need a government rescue", WSJ, 12 July 2008.

"Much of what the [Fed] and the Treasury said to prop up Fannie Mae and Freddie Mac over the weekend was redundant. ... Opening up the Fed's discount window was likewise redundant--at least up until the point where Uncle Sam's own credit is shot and the Fed starts printing money to make good on its commitments. We're not there yet--but that's where all this may be heading: to the [Fed] 'monetizing' all kinds of bad public and private debt, from mortgages to student loans to the unfunded liabilities of Social Security and Medicare ... The obvious solution is to nationalize Fannie and Freddie and break them up. Sell off their regional undewrting offices to private investors. ... If Moody's thinks that honestly owning up to liabilities that everybody knows Washington faces should lead to a downgrade, it only shows how feckless ratings have become. ... In fact, worth noting is how much of this 'crisis' is a crisis of the commanding heights of the Wall Street-Washington axis, and not a crisis of Main Street, which has proved to remarkably resilient so far", Holman Jenkins (HJ) at the WSJ, 16 July 2008.

"And the [Fed] still thinks its chief weapon in quelling this slow-motion panic and restoring confidence is to continue printing as exccessive amount of dollars. Yet it is this very policy--and the resultant inflation--that is perpetuating the crisis and undermining our economy, as well as the global economy. ... One might fathom a former professor's [Bernanke] clinging to his disproved pet theories. But a practical Wall Street money man? Treasury Chief Henry Paulson's continuing passivity in the face of a crashing dollar is increasingly weird and puzzling", Steve Forbes (SF) at Forbes, 21 July 2008.

What's the big deal? Call Zimbabwe, nee Helicopter Ben and let him ride to the rescue with wheelbarrows full of money. Americans can become billionaires too. It works for Zimbabwe.

It's always good to see Goldman Sachs (GS) at work. I wonder what advice it's giving Freddie? If GS doesn't show billions in trading profits in the next quarter from shorting Fannie and Freddie, my advice to Freddie: ignore whatever GS says. Uncle Sam may take "action" to save Fannie and Freddie. Which means: get those helicopter blades twirling. For investors, got gold? Get more.

Fannie and Freddie look like two zombie thrifts.

Might, Mr. Poole?

I agree with HJ, liquidate Freddie and Fannie. The crisis is one of protecting investment bankers seven and eight-figure bonuses at the expense of Joe Sixpack.

SF, I'll explain it to you. Henry Paulson (HP) is Goldman's "Agent of Influence" at Treasury. What's not to understand? I'm sure if he was so inclined, Vladimir Putin could explain it to you, see my 4 December 2007 post. Why believe HP is not doing precisely what he wants? HP has two Ivy League degrees, Dartmouth and Harvard! Hail!

No comments: