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that was after takeover...
Speculators aim to milk Fannie and Freddie
http://www.ft.com/cms/s/0/e3440c0a-a141-11e2-bae1-00144feabdc0.html#ixzz2QD8TltUG
April 11, 2013 7:42 pm
Speculators aim to milk Fannie and Freddie
By Stephen Foley in New York
That mooing sound you hear in the distance is a cash cow. There has been quite the transformation in the market’s perception of the US mortgage finance groups Fannie Mae and Freddie Mac, which were taken over by the federal government at the height of the financial crisis in 2008.
From being a money sink, draining the US Treasury to the tune of $187.4bn so far, the pair suddenly look like they will make money for the taxpayer. Investors have piled in to the groups’ defunct preferred shares and common equity, taking a (very) long-shot punt that they might somehow get to milk the cow, too.
Payback time
Funds received from, and dividend payments to, US treasury
Small community banks are weighing in to demand a reversal of the 2008 wipeout of preferred shareholders, adding a further element of uncertainty to the task of reforming the US mortgage market.
For mortgage investors, resolving the future of Fannie and Freddie is vital to settling the US government’s role in the housing market, itself a prerequisite for the re-emergence of a private mortgage-backed securities market.
They fear the return to profitability will diminish the urgency of reform, potentially leaving the market in limbo.
“Record Fannie Mae profits could frustrate reform efforts,” Gennadiy Goldberg, strategist at TD Securities, told clients. “Politicians will have to agree on longer-term housing market priorities [and] reform could continue to take a back seat amid summer and fall budget negotiations, leaving Fannie and Freddie in their current forms for some time to come.”
For the time being, Fannie and Freddie remain the only major issuers of mortgage-backed securities.
Their regulator, the Federal Housing Finance Agency, aims to wind the MBS down and replace them. But in the meanwhile, they have been raising guarantee fees in the hope that banks will find it relatively more attractive to issue private MBS, without the government backstop.
The aim is to widen the pool of private investor money that is available to fund mortgages for US homebuyers. So far, though, just $5.3bn of private mortgage bonds have been sold since the start of 2013, according to Standard & Poor’s. That is strong compared with $6bn for the whole of 2012, but issuance topped $700bn in the peak years of 2005 and 2006.
Jeffery Elswick, director of fixed income at Frost Investment Advisors in San Antonio, Texas, is a potential buyer of private MBS, but he has stayed away from the market, both for new issues and existing securities, because of the uncertainty. “The rules on mortgages are just not clear yet,” he said.
Fewer homeowner defaults and better house prices are behind Fannie Mae’s record net income of $17.2bn for 2012, announced this month.
The Obama administration’s budget projections, released on Wednesday, see Fannie and Freddie handing $51bn more to the Treasury by 2023 than they took in aid.
A year ago, the projection was for a $28bn loss through to 2022.
But Fannie and Freddie are not formally paying back the Treasury; they will remain in hock to it in perpetuity. Instead, the government takes all the pair’s profits in the form of dividends on senior preferred stock held by the Treasury so that there is no way they can build up a cash reserve large enough to pay back anyone else. Yet the apparently worthless preferred shares in Fannie Mae have gone up sixfold since August; the common equity in Freddie Mac has more than doubled – an option on a miraculous restoration, a political volte-face.
Paul Merski, Congressional relations chief for Independent Community Bankers of America, pointed to a Fed study that found 600 banks took more than $8bn in losses when Fannie and Freddie were nationalised, and half the community banks that held preferred shares still have them on their books.
“The truth of the matter is that they are the rightful owners of these companies even though the government is stepping in with their super-duper senior shares,” Mr Merski said. “This goes beyond recovering value. This is more of a moral obligation. The government is playing with fire with the whole perception in the market for preferred shares. It says something about how they treat capital investors.”
Australian investor John Hempton, who with his Bronte Capital hedge fund has been profitably trading the preferred, is pinning his hopes on a well-funded pension fund or lobbyists for small banks or attorneys for anyone who still holds shares in the US.
They could have a legal claim under the US Constitution’s Fifth Amendment, which says private property cannot be taken for public use without just compensation.
“If you believe that change will stick, that Fannie and Freddie preferreds are worthless, there is no way to recapitalise them, since any capital just gets paid out to the government. But the current terms are theft; they will have to attract a Fifth Amendment claim, and that claim will be successful.”
The sound and fury, and the moral suasion, may or may not come to something in Congress, where lawmakers are also starting to take an interest in the future of Fannie and Freddie as part of a wider debate about mortgage rules and housing finance.
For speculators in the groups’ shares, the fight is over who gets to milk the cow while mortgage investors are impatiently waiting to?see?the landscape beyond.
Copyright The Financial Times Limited 2013. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Fannie CEO - Common and preferred shares have soared since then as investors have bet there’s a chance lawmakers will allow the company to become independent again now that it’s profitable.
Fannie CEO response:
“I’m not sure those investments are being made on the basis of business fundamentals,” Mayopoulos said in the interview, which airs in full April 14 on “Capitol Gains.” “There might be bets on really what people think the political outcome is going to be.”
http://www.bloomberg.com/news/2013-04-11/u-s-could-profit-from-fannie-mae-bailout-ceo-mayopoulos-says.html?cmpid=yhoo
20cent....sweeeeeeettttt
0% chance
4cent to 20cent! CKJ at $5
NAME CHANGE TIME!!!!!!
on the lottery thread:
it's $2...I know because any jackpot over $150mm attracts my two bucks!
that said, you only have 3-4 days for that "appreciation"...the ticket is void after the next drawing. however, if more people buy tickets and drive up the jackpot, the reward for your ticket increases quite a bit when a frenzy starts...like when it is getting to $400mmm
however, your reward can easily be slashed greatly (greatly reducing value of said ticket) because if you share the pot with two other winners because so many hundreds of millions of tickets were sold, then your reward drops below the level you thought you would get two days before.
fun thoughts on a green day :)
go figure....
the dude ranting about valuation of freddie and fannie is a freaking law professor! there are almost no creatures on earth so full of themselves, save maybe medical professors, that think they know everything about anything.
stick fingers in ears, say "la la la" ala eddie murphy on saturday night live, and move on...nothing to see here....
and in the words of Clark W Griswold...
hallelujah! where's the tylenol?
[it's been quite a freakin emotional ride, no doubt]
misery/joy index... +4!!
if anyone remembers my index on spectrum of happiness with F&F investment... -10 Suicidal to +10 there is life everlasting and i and my children will never have any pain on this earth...
I'm feeling about a +4 now with my F&F with all the outpouring of hedgefund love.
and I disagree with JStocks...with those hedgies lobbying and fighting for us, no shareholder group needed, they are fighting enough for me and are in the same boat with us.
fair winds and following seas for now....
rosen -- see bloomberg...he's basically for jr.'s but doesn't like political risk...he doesn't seem anti preferred at all...
15 minute mark..."absolutely could work"...Bloomberg won't let him go on it!
he's staying out though...politics, not numbers
Kyle Bass on F&F - Ten Minute mark (The Street misses scoop):
http://www.bloomberg.com/video/bass-sees-beginning-of-the-end-for-japanese-bonds-a8rY8kSZQlStZey5hO2kug.html?cmpid=yhoo
"no clue" on F&F. both sides want bullet in their head, means "you will get bullet in your head". doesn't like g-fee going straight to treasury arrangement possibilities.
gets into "full cyle" losses as credit provision idea, rather than short term cycles for all other banks. goal was to drive into permanent penalty box. only the need for chinese bond holders to keep happy kept GSE alive. punitive tax kept them in quagmire.
now, new situation, admin and congress don't want to enrich anyone.
"how do you handicap the politics? I have no idea"
...and more......
i did not realize a lobstah roll was an event...thought it was a sandwhich that people in food trucks are now trying to spread into Manhattan
cue the monkeys!
[anyone know how credible the Street is?? they are really pumping this hard!]
Hedge Funds Lobby D.C. On Fannie, Freddie Privatization
Dan Freed
04/09/13 - 01:32 PM EDT
http://www.thestreet.com/print/story/11891031.html
NEW YORK (TheStreet) -- Hedge funds betting on the re-privatization of Government-sponsored enterprises (GSEs) Fannie Mae (FNMA)and Freddie Mac (FMCC) have been taking their case to the nation's capital.
"There are hedge funds who are up on the Hill who have invested in these [GSE] preferred shares which are like lottery tickets right now. Of course they're trying to sell the White House on doing that and raising $200 billion, if you will, to pay off debt," said Sen. Bob Corker (R., Tenn) in an interview last week.
Corker has been on the receiving end of these pitches as well, which come from large hedge funds and smaller investors in GSE preferred shares, he says. He declined to identify the investors, however.
The push to reform U.S. housing finance is gathering steam, and while nearly everyone in the Obama Administration and in Congress would like to see the government reduce its role, they are hesitant to upset the apple cart for fear of slowing the economy. Currently about 90% of new home loans are purchased by the GSEs.
Hedge funds have been betting on a recovery in preferred shares of Fannie and Freddie for well over two years. Among those that have publicly identified themselves as participating in this bet, the largest is Hayman Capital Management, which manages $750 million. That is not especially large by hedge fund standards, and Kyle Bass, managing director in charge of the fund, told TheStreet in August 2012 that he sold the shares earlier that year when he concluded that both Republicans and Democrats "wanted them dead." Contacted by e-mail Tuesday, Bass responded, "I am not going to discuss anything regarding the GSEs."
Corker's language suggests a bigger fish, however.
"Let me put it this way: some really big really large hedge funds have taken positions in these preferred shares and they believe that somehow or another--at least some of them believe that, number one they want it spun off. Some of the arguments that are being put forth by the smaller owners are that, you know, the Federal Government's going to have to deal with them at some point. They can't just snuff 'em out," Corker said.
Paulson & Co., the $18 billion money manager run by subprime seer John Paulson, has been rumored to own GSE preferred shares. That would make sense, since Robert Lacoursiere, who worked for Paulson before leaving to start up his own fund in recent months, was a sell-side analyst who covered the GSEs. A spokesman for Paulson & Co. declined comment, and Lacoursiere didn't respond to an email query.
As for whether Fannie and Freddie privatization has a decent chance of happening and whether it needs to happen for preferred shares to be a good investment, views are all over the map.
Many politicians on both sides of the aisle want to sound as tough as possible on Fannie and Freddie, and Corker is certainly doing his best.
"These companies going private and them still having the implicit government guarantee is a non-starter. I don't see that having any traction at all right now. It certainly has no traction with me," Corker said in the interview last week.
That's one of the reasons Corker is taking a hard look at a plan published recently by the Bipartisan Policy Center, a think tank founded by four former Senate majority leaders including two Republicans and two Democrats. The BPC plan favors winding down the GSEs in the hope of replacing them with private mortgage insurers.
"We're spending a lot of time looking at the Bipartisan Policy proposal. It does have a government guarantee in it but we think there may be a way to take a kernel of that idea and do some things where eventually the market may figure out that there really just is no need for a government guarantee at all. But we're still noodling on that and we're still working with others," he said.
Competing proposals have been put forward by Jim Millstein, a former Treasury official who was in charge of the government's AIG (AIG) investment and is now head of restructuring firm Millstein & Co.
Millstein, who served during the Obama Administration, has aligned himself with Philip Swagel , who worked at Treasury during the Bush Administration. Swagel has put forward his own proposals which also involve returning Fannie and Freddie to the private markets. Millstein also owns Freddie and Fannie preferred shares, an investment he thinks may look even better if the GSEs are liquidated instead of being taken private.
While the Millstein and Swagel proposals face the politically difficult hurdle of getting politicians to support rebuilding Fannie and Freddie, they take great pains to argue they are not merely endorsing a return to the old system where GSE profits -- boosted by an implicit government guarantee -- went to shareholders and taxpayers were stuck with the losses.
They argue for higher capital requirements for the GSEs, and a government backstop for the mortgages they guarantee, but not for the institutions themselves. Whether that proposal keeps the government far enough away to satisfy Corker and other lawmakers remains to be seen, however.
For the time being, Corker wants to be sure the GSEs aren't privatized without the consent of Congress, and that their profits don't turn into a "piggy bank" for pet projects. With those goals in mind, he has co-sponsored legislation called the Jumpstart GSE Reform Act, along with Sen. Elizabeth Warren (D., -Mass.), David Vitter (R., La.) and Sen. Mark Warner (D., Va.) to ensure that the Treasury can't sell its stake in the GSEs without Congressional consent, and that increases in the fees it charges can't be used to offset other government spending.
"It's pretty unbelievable to me that we have so many people who are worried about the housing market getting rolling even more healthfully than it is today and at the same time they're jacking up the cost of loans by [increasing insurance costs charged by] Fannie and Freddie and using it to fund government expenditures," Corker said. "It's unbelievable that that's been taking place, and I hate to say it but over the last couple of years people on both sides on the aisle have been doing that. It's beyond belief to me that that's what we'd be doing."
-- Written by Dan Freed in New York.
i forgot about that. if I have to eat it on a roll, better be the best damn lobstah money can buy....
anyone check on the monkeys in heat at FNMA after cramer's preferred reccomendation? are they still crowing about common or will they see the light??
LOL
good to know source of bank-debt quote
i've heard it turned (and I like it better) as:
If you default on a $5 million loan, you have a huge problem. If you default on a $50 million loan, the bank has a huge problem.
In my industry, it means you just might get your bank to pony up more money to help you work out of the situation when "the bank has the problem". Otherwise, they drive you into bankruptcy if it is "your problem".
in humor: a famous economist once said "in the long-run we are all dead"
Keynes? maybe?
too true rosen, too true
hope you're right debil...everytime I'm golden...or think i am, i get screwed. 90% of the time.
exceptions being when I bought XMSR (XM Radio) at $7 and got to $30. ACAS at $2, still hanging in at $14.
otherwise, be it six runs up in a baseball game, Jayhawks up double digits late against Michigan, or buying into some investment..."Golden", more often than not, is a jinx....
i sure was wrong in PPS prediction!!!
why I never time the market. you never frickin know what a stock will do on some piece of new...like Millstein invested. got no idea. the only time I correctly predicted the market was the morning of August 17th...knew it would be a blood bath as soon as that news was released...
joe...an investor's current yield is based on your cost basis in bond language. It is the yield you can get by buying that security that day. once bought, that investor's current yield does not change unless the coupon changes for some reason (e.g., variable rates). Current yield changes throughout a trading day, and each new investor gets a different CY based on the price paid for the security.
yield to maturity (YTM) is your total yield of cost basis + any dividends/interest + redemption of the bond/preferred.
look it up. finance 101
i didn't do the calculation. if he bought at $2 and gets a $1.50 dividend, his current yield is 75% if you actually calculate it.
his internal rate of return will be significantly lower taking into account the years he got no dividend.
JS -- you created more yield by trading to the higher pfd. yield (assuming you didn't get nailed by taxes per another wise poster)
nope...if you invest in 2008, whether a bond, of preferred, you can calculate yield to maturity and it is way higher than the 6% in this example.
$2 invested, $25 gain, add in dividends over the years, calculate internal rate of return. and his current yield is based on his original cost basis. someone who buys at $25 calculates a different current yield of 6%.
Again, you are both right, depending on perspective.
bp and joe are both right, given perspective.
if you hold the shares, BP is right.
if you are at par value and you could sell the shares and invest in another company with a higher current yield, you would have more income. however, BP might make that trade and say he increased his yield on top of what he invested in F&F a few years before. He increased his yield on his original investment by trading to a higher current yield security.
they are both right depending on perspective.
i have estimated for a long time that all small banks sold out. i am very surprised at that comment!
I welcome it as more great news.
i think there is confusion regarding the post that I'm replying to here...the one that mentions Putin...it was cut and pasted from the WSJ article, which I later posted in full.
it was not my personal opinion. it was the only paragraph with a direct opinion on the value of junior securities.
tis all....
one note on all this transfer stuff.
wells fargo requires stock to be liquidated to cash (three day settlement) then transfer to Roth or Traditional (one day, buy the next). then you can re-buy stock. all other types of accounts should allow direct transfers. with IRA contributions, you lose four days of market up and downs...
Fan & Fred Doing Well? What Banker Isn't?
Bernanke has been taking care of the banks. Washington has booted everything else.
http://online.wsj.com/article/SB10001424127887323646604578404432911487270.html?mod=wsj_streaming_stream&cb=logged0.4376599161368331
By HOLMAN W. JENKINS, JR.
There will be time enough for thumbsuckers on what should be done with Fannie Mae FNMA +2.11% and Freddie Mac FMCC +4.57% now that they've become embarrassingly profitable again (Fannie just announced the largest profit in its 75-year history). Let it suffice for the moment to adopt them as a microcosm of the near randomness of Washington policy unless you happen to be part of the financial sector.
For reasons that remain murky, Fan and Fred were seized as insolvent in 2008, though seizing them was redundant because they were already understood to be government-backed. Washington left 20% of their shares in private hands and poured in $187 billion of taxpayer money. It did so for no real reason except to avoid an accounting rule requiring that their debt be recognized as part of the U.S. government's debt (though it is).
Five years later, "failed" Fannie and Freddie, which previously controlled 37% of the mortgage market, now are part of a Washington mortgage complex that controls nearly 100%. On their mortgage guarantee business, they have been minting monopoly margins. A sideshow, though an entertaining one, has been a recent rob-peter-to-pay-peter debate about whether to exploit their previous giant losses to reduce their current tax bills to the Treasury. The same money then could be paid to Treasury as profits.
Fannie and Freddie, under government conservatorship, have become even more of a political slush bucket than they were in their heyday. Fannie and Freddie paid for President Obama's payroll tax holiday. Sen. Dianne Feinstein wants them to refinance underwater mortgages for California homeowners. As if to dispense with any illusions (well, except the illusion that they are still private companies and the government merely is "conserving" them), last August Treasury decided, though it owns 80% of Fannie and Freddie, that henceforth it would take 100% of the profits.
In a country of laws, Fannie and Freddie's private shareholders, whom the government allowed to keep 20%, would have sued. But they haven't sued. In a scene from Putin's Russia, big holders of Fannie and Freddie's junior securities have been visiting Capitol Hill and pleading for visions of "reform" that would restore value to their 20% stub.
Not that Washington has been wholly derelict. Doubting the propriety of Treasury's "cash sweep," an impressive Senate coalition, including Republican Bob Corker and Democrat Elizabeth Warren, is promoting a bill to stop Congressional looting of the housing behemoths and restart the reform process. Even the Obama administration is on record favoring their return to the private sector with a reduced federal backstop.
Unfortunately, the precedents are not good. Iraq, "too big to fail," tax reform—Washington is not exactly home to the sustained effort these days.
Ed DeMarco, Fannie and Freddie's chief regulator, testified to Congress last month and wondered who, five years earlier, would have anticipated so "little meaningful progress to bring these government conservatorships to an end."
Mr. DeMarco might look around. If one formula has been evident in Washington lately, it has been an avoidance of anything that looks like thoughtful reform. In Fannie and Freddie's case, expect them to remain Congress's increasingly profitable slush bucket for the foreseeable future.
Maybe we should all sing a hymn to gridlock as the lesser evil. The stock market has been on a bull run, even if in real terms the nation's corporations are worth less than they were in 2007. The accumulated know-how and entrepreneurial zeal of American business is starting to show again (especially in energy).
If you happen to be among the 90% who have a job and probably never lost it, the results have been nicely tolerable, never mind Friday's employment report. The one consistency has been Ben Bernanke, helping large sums to appear on the bottom lines of our biggest financial institutions so at least the commanding heights of our unreformed financial sector don't come crashing down. Mr. Bernanke continues to be Washington's substitute for all the things it could and should be doing, including reforming Fannie and Freddie.
A version of this article appeared April 6, 2013, on page A13 in the U.S. edition of The Wall Street Journal, with the headline: Fan & Fred Doing Well? What Banker Isn't?.
In a country of laws, Fannie and Freddie's private shareholders, whom the government allowed to keep 20%, would have sued. But they haven't sued. In a scene from Putin's Russia, big holders of Fannie and Freddie's junior securities have been visiting Capitol Hill and pleading for visions of "reform" that would restore value to their 20% stub.
http://online.wsj.com/article/SB10001424127887323646604578404432911487270.html?mod=wsj_streaming_stream&cb=logged0.4376599161368331
bp--- i got your jist...no worries...i used it as an opening to reiterate how poor i've been living! spending $600 on clothes six months ago would have cost me maybe $2400 based on run up! LOL
been living pretty meagerly lately....
i actually need new jeans and shirts. will lose weight before a new suit, which is also needed. I have had the same three suits since 2003 but just grew out of them! must be the stress.....
the "daddy needs a new pair of shoes" was a play on "baby needs a new pair of shoes". i'm actually ok in the shoe category...but i've been wanting those vibram running "shoes" that fit your foot like a glove...barefoot running. will be 70 degrees tomorrow. that will shed a few ounces
millstein is too smart. there was no leverage there. he opened his mouth because he was ready...hallmark of a great banker. he would not be where he is without understanding of timing of when to disclose and not disclose and would not screw up in the eyes of the law.
unless he is criminal and a fraud, and that seems furthest from the truth.
3 cheers for millstein!
joe -- this dude would never open his mouth if he thought it would hurt his case! my bet, he's drumming public support for his plan and saying only he can implement it (though houlihan lokey will give him a run for the business!!)
Office pool on Monday closing price?
FMCKJ or FNMAS? I say $5 for one or both of them. If I were allowed two entries, I'd go to $5.50 on the second "bet".
I think monday will be v. interesting!!
not quite the rocket on millstein investment that I expected.
oh well. monday should rock and roll! and I feel less threatened now by DeMarco!
Cheers!!!!!!!!!!!!!!!!!
looking for aftermarket...not seeing any trades i the 5 series of shares I own...
anyone else?