Powerful Emotions Recollected in Tranquility
Stolen from a middle aged Jew from Miami (rosen62)
"We are still dealing with yesterday's emotions while the press keeps publishing reports/editorials that show a marked degree of confusion. It may take a quarter or two to see what this Treasury move represents. One thing is for sure: we now have that time... and more. So rushing to take any action is probably not a good idea.
This move has solved some immediate considerations: the funding problem at years' end and the vicious 10% dividend cycle. Some action by the Treasury was expected so don't despair.
Things we should not forget about...
1. It was obvious the administration was going to seek getting paid back before anyone else. Aside from guaranteeing good stance to bondholders nothing matters most for them than to "speak taxpayers language". Remember, it is not about justice, fairness, moral or common sense. It is only about votes and preventing political backlash. This is so obvious that anyone not seeing it has a bad case of misjudgment.
2. The deal speaks of continuity so like others, I think any talk of receivership in the near and mid term is misplaced.
3. It also appears that the wording on "net investment" refers to simply what has been loaned and what has been (and will be) repaid, including already paid dividends.
4. It also appears that "dollar of earnings" might include put backs, loss reserves gains, derivative gains and if issued, tax assets gains. Note they could have mentioned operating profits or cash earnings. This is important in the assumption that in future quarters there are windfalls.
5. The accelerated winding down of their portfolios makes little difference in the grand scheme of things. It was part of almost every plan, with some capping it at 250 bill per GSE. The pr was carefully drafted to convey the message that this move is not for the benefit of shareholders and the inclusion of the 4 year wind-down just reinforces this.
6. Talk of full nationalization by the press is also misplaced. Note that the press release only stresses repayment to taxpayers and nothing in the wording can be related to structural changes (except for the already known portfolio wind down), shareholders issues or the like. Appropriation of profits for getting paid is hardly a nationalization: the government does not want (my guess is will never want) to run these businesses. As far as I am concerned and after all is said and done, they still own 79.9% of the company plus warrants with the remaining going to private shareholders. GSEs are still privately run, with no ability to retain profits and no ability to build capital. This does not mean they are not profitable, or insolvent.
7. The news of hedge funds unwinding is all good. Honestly, Bass strikes me as a shady, if not sinister, character. I mentioned last year how much time coincidence there was between his Vegas pumping and the well-reasoned article by an analyst the prior week stating equity had no value. Gamblers and speculators will not help here a bit.
8. One positive thing about Treasury taking all profits is that by a masterful move of a pen, Geithner has prevented Congress to use the GSEs as piggy banks while making any surplus go to where we all wanted them to go: to repay the loans. I was actually dreading Congress getting their hands in the jar again.
9. Don't forget about pardons: Presidents routinely grant them their last day in office when re-election is no more. Why? Any political damage is of no consequence. So it is possible to expect bolder action at the conclusion of next Obama's term, if re-elected. That is... 4 years.
So what do we have?
About 4 years where -hopefully- the debt owed could be fully paid. Last quarter, both GSEs showed a profit of approx 8 billion, 5+ of which went to Treasury. In the hypothetical case this is an average trend (aided with putbacks, lower loan loss reserves, derivative gains, perhaps tax assets) GSEs might be able to repay.
Also, 4 years is a long time and sentiment towards shareholders might change. By that time, portfolios would have shrunk to where most proposals want them to be. Then, the remaining unsolved piece of the puzzle will be the warrants, the government stake and equity holders. I like to think that a move towards partial privatization is highly likely in the form of Milstein's. I personally do not think GSEs will continue to give away their profit (now to government, later to say, social programs) for eternity. It is not in the tradition of the US. That would be Venezuela, Argentina, Cuba, perhaps France and the like. Once uncle Sam has been paid back, with a tiny profit to show to taxpayers, market forces will take care of the rest.
So if you have that time horizon and don't mind the wait, preferred (and common) shares might still hold value."
FYI - (and common) part is mine. Under plans such as Millstein's, commons make out better than those higher up on the food chain (junior preferreds).
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