I found this from yesterday. Sorry if it was already posted but I have not seen it.
Saturday, March 15, 2014
Stocks DD Opines: What Ralph Nader, Berkowitz and Ackman need to do now!
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GSE shares went down on senate proposal to "wind down" GSE. Politicians are enthusiastic to get their names behind "reforms" without clearly understanding the root cause and the option to fix the root cause. No surprise. Here is what Ralph Nader, Berkowitz and Ackman needs to do without wasting any time:
Why NO BIG BANG Reform is needed ? Risky, Untested and NOT Required?
1. Publicly put the ROOT Cause for the 2008 Crisis - it seems like our politicians are suffering from amnesia.
The point to prove is 2008 Downturn was a ONE-TIME event created by wrong incentives where players who wrote the Mortgage never bothered about Underwriting quality and these front-end mortage salesman were happily satiating the demand of mortgages from so-called "investment banks"(eg: Bear sterns) . These "investment banks" could magically hold these Mortgages with less than 2% capital. Here is a frontline investigative story on that. Such a dramatic housing downturn event will NOT happen as reforms have been done to fix root cause. Investment banks don't exist and now they are all bank holding companies regulated with 10% capital ratio. As the GSE's post 2009 portfolio indicates, the underwriting quality has improved by leaps and bounds and the controls(loan-to-value ratio, credit worthiness check on the borrower, etc) taken by market players will ensure it remains that way.
2. Articulate the minimal reform needed
GSE Proposal to be restructured using "public utility model" and the Government's "implicit" role in such a scenario.
3. Publicly prove by Sensitivity Analysis that "public utility model" is sufficient to ensure GSE will be well capitalized at all times in future.
By sensitivity analysis using 30 year home price fluctuations, 30 year delinquency and 30 year foreclosure rates prove that Government's role or capital would NOT be needed and the capital generated by GSE will be self-sufficient to endure the next trough in the economic downturn. Remember the post-2009 portfolio is historically the best quality portfolio that GSE's have had and also remember the multi-decade profitability of GSE (from 1986-2008 -link).
Estimate the capital that GSE would have by 2018, if the Net Sweep agreement is revoked and the taxpayers get the 10% dividend. If at all needed, raise some more equity capital by means of issuing preferred shares.
Any unwarranted reform - Risky and may endanger the affordability of 30 year fixed mortgage instrument or the instrument itself.
4. Without the regulated public utility model and the implicit Govt backing, the agency MBS would get expensive and the 30 year Fixed mortgage (the most unique thing in American housing market) will get expensive. Nobody knows how MBS investors around the world would perceive if the implicit Govt backing on Agency-backed MBS no longer exists.
If the 4 points are done, I believe it may convince lawmakers to NOT act radically on GSE and endangering the affordability of 30 year mortgage and putting in something that is risky and untested.
Also, articulate the equity value for Shareholders (Govt and Private) in this scenario that legitimately belongs to the Shareholders.
The Rule of Law in America
5.a Lastly, leave it to the Supreme court to decide the Fairness/legitimacy of 2012 amendment a.k.a net sweep agreement at the time when GSE were already Profitable and they were in no dire straits to get capital. If they really needed capital, they could have approached the capital markets and gotten capital at much lower cost to shareholders than the draconian Aug 2012 agreement.
5.b. Also, remember any Congressional reform on GSE that is NOT in the best interests of private shareholders and turnabout from the "quasi-govt/private" nature of GSE or the status quo will also be challenged in the Courts. Lets remember this is America(Not a banana republic) and Government can't whimsically change rules midstream.
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Posted by Stocks DD at 6:13 AM 1 Comment
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Labels: Ackman, berkowitz, fannie mae, FMCC, fnma, raplha nader
