Fannie Mae-No Politics (FNMA)

[stockprofitter]

On deck ***feb 21 - mar 28***

1) Freddie Mac 4Q results on February 21th. Preview:

-Profit: in the 3Q, Freddie Mac reported a profit of $1.4 billion if you add $3.947 billion fair value improvement on available-for-sale securities (AOCI, Accumulated other comprehensive income) and add $1.6 billion government's dividend, to the widespread headline of $4 billion loss. So, Freddie is already a profitable company.

-Consolidated Statement of Operations report: in the 3Q, the US government misled investors hiding $3.947 billion fair value improvement on available-for-sale securities (AOCI, Accumulated other comprehensive income) with the objective to spread the headline of $4b. loss throughout the media. This time won’t dare to do the same. We will have a close look here again.

-Impairments: it reported an increase impairment in securities from 0.4 billion to $1.1 billion in the 3Q "due to higher expected credit losses". Clearly this figure was inflated in order to show a draw request to Treasury, because it’s very weird to post a huge fair value improvement of its securities at the same time than a huge impairment. We will have a close look here again.

-Settlement of the repurchase demands (putbacks): Bank of America agreed to pay $1.28 billion to Freddie on effective date December 30. ( $1.52 billion to Fannie).

-Draws: Freddie summited a draw request to Treasury of just $100 million in the 3Q, that’s peanuts. In the 4Q results, it won’t draw any request because of the putbacks settlements and because the fair value improvements on securities have continued in the 4Q.

Bottom line:

With the second consecutive profit in the 4Q and no draw request to Treasury, Freddie could reach 2$ per share very easily.



2) Review of capital levels of the 12 FHLBanks on March 28th.

FACTS:
-The Federal Housing Finance Agency (FHFA) regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks (FHLBanks).
-The 12 FHLB are government-sponsored enterprises as FnF, but they are cooperatives (Bank membership).

a)FHFA press release announcing a FHLB reform: http://www.fhfa.gov/webfiles/19614/Rules...

“FHFA is undertaking a review of its regulations governing Bank membership (each FHLB) to identify provisions that may need to be updated”. Comments are due March 28, 2011.

Why the FHFA is going to reform the "provisions that may need to be updated"of the FHLBs? It means that the FHLBs have low capital ratios to support the risks of their activities. GAO mentions why is that :"Several FHLBanks have recently suffered significant losses because of their investments in nontraditional mortgage assets (e.g., private-label MBS collateralized by Alt-A and subprime mortgages)for their investment portfolios". Page 33 http://www.gao.gov/new.items/d1133r.pdf

b)On November 22, the FHFA (the regulator of both GSEs and the FHLBs) proposed a rule to allow the 12 FHLB (Federal Home Loan Banks) to voluntarily merge because they are cooperatives. (So, if FnF become cooperatives, could merge with the 12 FHLB).

http://www.fhfa.gov/webfiles/19513/FHLBV...

Bottom line:

I bet that the multiples cooperatives that will come up from Freddie and Fannie will merge with the 12 FHLB because, as GAO suggests in its report, the 12 FHLBs are in a bad shape, so they need an urgent recapitalization as FnF.

The regulator of both (FnF and 12FHLB) can’t debate the capital ratios of the 12 FHLBs if it’s not announced in advance that FnF will turn into multiple cooperatives.

THE GOVERNMENT HAS ANOTHER DEADLINE TO ANNOUNCE THE TRUE RESTRUCTURING PLAN: MARCH 23th.

The government can extend the deadline again, but the longer it takes to announce the reform, the higher the conversion ratio of the bonds and senior prfd. shares to commons and the later the economic recovery.

Geithner is between the sword and the wall.