Freddie Mac-No Politics (FMCC)

[fresco]

i donno carnac; the climb today was mirrored by decreasing volume which makes me a bit wary. could go either way next week IMO.

but..........you're posts have been very helpful and much appreciated.

not sure if you've had a chance to see the wsj article 5/15
http://blogs.wsj.com/moneybeat/2013/05/15/why-the-fannie-bet-faces-long-odds/?KEYWORDS=fmcc

Hedge funds and other investors are betting on the recovery of Fannie Mae FNMA +18.50% and Freddie Mac FMCC +23.75%, but political analysts say that this investment faces long odds. Here’s a primer on what has to happen for these investors to see their bets redeemed:

What do investors see in Fannie and Freddie? Some funds have been betting on the preferred shares of the bailed-out mortgage-finance giants for years on the assumption that the companies would one day become very profitable, and lately, they’ve been proven right on that score. The companies are raising their loan-guarantee fees, they are backing very conservative loans, and they enjoy very low borrowing costs thanks to their effective federal backstops. All of those have led to huge profits in recent quarters. (John Hempton of Bronte Capital first laid out a bull case in the summer of 2009.)

If the financial side of the bet is showing a payoff, what about the political side? If investors should have learned anything by now, it’s that Fannie and Freddie will not be treated by Washington as normal companies. The companies were effectively nationalized in 2008 to keep mortgage markets functioning. At the time, the U.S. Treasury created a new class of “senior preferred” shares that paid a 10% dividend, which they took in exchange for injecting cash. The government also received warrants to acquire 79.9% of the firms’ common stock. (The U.S. didn’t simply nationalize the companies because that would have brought the companies’ $5 trillion in assets and liabilities onto the federal ledger.)

The Treasury made a very important change last summer in amending those bailout agreements. It replaced the previous 10% dividend structure with a new arrangement that requires the companies to send nearly all of their profits as a dividend payment to the government. The upshot is that Fannie and Freddie can’t recapitalize themselves, which means there is no way for them to ever redeem the $188 billion in senior preferred shares now held by the Treasury. Dividend payments do not count as “repayment” of the senior preferred.

If Fannie and Freddie are profitable but can’t build capital and exit conservatorship, then what are investors betting on? The bull case goes something like this: policymakers will change their minds.

Fannie and Freddie are now profitable enough that, at some point in the next year, they will likely have sent more in dividends to the Treasury than they have borrowed. Even though it doesn’t mean anything legally—Fannie and Freddie will still owe at least $188 billion to Uncle Sam—this will be an important symbolic moment, potentially changing the political calculus about what to do with the companies, because policymakers will be able to say that taxpayers were made whole on the bailout.

“I’m not aware that there’s ever been an instance in 200 years where equity shareholders in a company that’s currently profitable were forced to take 100% losses,” says Rob Zimmer, a former Freddie Mac lobbyist who has his own government-relations practice.

Meanwhile, there’s a growing consensus among policymakers and the industry that the government will still play a key role backstopping the mortgage-securitization market so that banks make long-term fixed-rate mortgages. The bull case assumes that when Congress rolls up its sleeves and does the heavy lifting to sort out how to rebuild the nation’s $10 trillion mortgage market, lawmakers will preserve the corporate entities of Fannie and Freddie in some refashioned form rather than completely reinventing the wheel.

So why are political analysts so skeptical? There are essentially three ways that investors can make their political bet pay off, all of which require having last summer’s amendments withdrawn or changed.

First, they would need to convince the Treasury Department to revisit those amendments once they start the process of overhauling Fannie and Freddie. That isn’t likely to happen, at least not under the current administration, according to people familiar with the matter. This political bet “faces unimaginably long odds,” said Jim Parrott, who served as a top housing-finance adviser in the White House until the end of last year.

Second, Congress could entertain the hoped-for spin-off of Fannie and Freddie. Right now, lawmakers of both parties agree on little, but they both believe the companies should be buried. Given that, investors’ gamble on Congress’s change of heart “seems totally irrational,” says Charles Gabriel, a policy analyst at Capital Alpha Partners in Washington. “To some lawmakers, the move seems all but insulting—reflective of savvy hedge funds’ bet that Congress might ultimately be compelled to change its mind.”

Third, if both of those are dead ends, investors could sue the government to challenge the legitimacy of last summer’s amendments. Some legal experts, for example, have argued that Fannie and Freddie’s regulator may have violated its responsibility to conserve and preserve the companies’ assets when it agreed to the amendments last summer, which do not allow the companies to rebuild capital or exit conservatorship.

Ultimately, this is a political bet, not a financial one. Investors are gambling on a political outcome that, for now, has long odds, or they’re betting on a court ruling that goes against the U.S. Treasury.