Replies to post #30596 on Options Wonderland

[Market Technician]

Fannie, Freddie Subordinated Debt May Be Cut by S&P

July 25 (Bloomberg) -- Standard & Poor's may downgrade the subordinated bonds of Fannie Mae and Freddie Mac, surprising investors who had anticipated the securities would be supported by any Treasury rescue plan.

The potential cut would affect $19.2 billion of AA- rated subordinated debt at Fannie Mae and Freddie Mac, according to data compiled by Bloomberg. The cost to protect the bonds from default rose for the first time in three days. S&P said it may also downgrade $26 billion of preferred stock, pushing down the securities in New York trading. The AAA ratings on the companies' senior debt were affirmed with a stable outlook.

New legislation authorizing a backstop of the mortgage- finance companies leaves it up to the Treasury Secretary to decide whether to honor preferred dividend payments or to repay subordinated bondholders before the government, S&P analyst Victoria Wagner said in a telephone interview. That ``ambiguity'' casts a cloud over the securities, she said. Once analysts have fully analyzed the final legislation, the ratings may be cut one or two levels, she said.

``We had factored in some federal support for these securities, but now I think the financial risks are now outweighing support and have to be reflected in the rating,'' Wagner said.

The House of Representatives approved Treasury Secretary Henry Paulson's request for the authority to extend credit and buy unlimited equity stakes in Fannie Mae and Freddie Mac if needed. The Senate plans to vote as early as tomorrow.

`Confidence Crisis'

Paulson moved to shore up the companies as concern grew that they may not have enough capital to weather the worst housing slump since the Great Depression. Fannie Mae and Freddie Mac shares are down more than 70 percent this year.

Fannie Mae dropped 47 cents, or 3.9 percent, to $11.55 in New York Stock Exchange composite trading. Freddie Mac dropped 54 cents, or 6.1 percent, to $8.27.

Freddie Mac's 5.57 percent preferred stock fell 1.9 percent, and Fannie Mae's 5.5 percent preferred shares dropped 10 percent.

The plunge in the stocks is ``adding to the already-stressed business cycle'' and may make it difficult for the companies to raise capital, Wagner said.

``We feel that given the changing market dynamics and the changing legislation landscape, that that heightened risk should be more of a factor in our current,'' Wagner said.

`Questionable'

Investors had anticipated any government rescue would come in the form of equity, which would rank behind subordinated debt for repayment, said Jamie Jackson, a portfolio manager at Minneapolis-based RiverSource Investments, which manages $93 billion of fixed-income assets.

The potential downgrade of the preferred stock isn't as surprising, Jackson said.

``The fact that they lumped the sub debt in there seems questionable,'' Jackson said. ``If we are talking about equity capital being contributed by the government, by any measure that we can come up with, that should protect the subordinated debt.''

Credit-default swaps on Freddie Mac's subordinated debt, which is repaid after senior bonds, climbed 42 basis points to 182 basis points, while contracts on Fannie Mae's subordinated debt rose 40 basis points to 180 basis points, according to CMA Datavision. The contracts rise as investor confidence falls.

The difference between credit-default swaps on Fannie Mae and Freddie Mac subordinated and senior debt widened.

For Fannie Mae, the gap widened about 38 basis points to 135 basis points, CMA data show. The gap for Freddie Mac widened 42 basis points to 138. The median gap in the past year for both contracts has been about 51 basis points, CMA prices show.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.

Last Updated: July 25, 2008 17:43 EDT

[3xBuBu]

U.S. regulators seize two more banks, engineer sale
U.S. regulators took over two banks on Friday and sold them to Mutual of Omaha Bank, the sixth and seventh bank failures this year as financial institutions struggle with a housing bust and credit crunch.
Two weeks after the Federal Deposit Insurance Corp seized IndyMac Bancorp Inc (IDMC.PK), the Office of the Comptroller of the Currency said it closed First National Bank of Nevada and First Heritage Bank NA of California.

First National, characterized as undercapitalized, had total assets of $3.4 billion and $3 billion in deposits. First Heritage, described as critically undercapitalized, had assets of $254 million and $233 million in deposits, regulators said.

The FDIC said the cost of the transactions to its insurance fund is estimated to be $862 million, adding that the two failed banks represent just 0.3 percent of $13.4 trillion in total industry assets at about 8,500 FDIC-insured institutions.

The FDIC said the 28 offices of the two banks will reopen on Monday as Mutual of Omaha Bank. Over the weekend, customers can access their money by writing checks, using automatic teller machines or debit cards.

Mutual of Omaha Bank currently has more than $750 million in assets and operates 14 retail branches in Nebraska and Colorado with commercial lending offices in Dallas and Des Moines, Iowa, the FDIC said.
It is a subsidiary of Mutual of Omaha, a 99-year-old insurance and financial services company with more than $19 billion in total assets.

Top banking regulators have warned of additional insolvencies this year and next, but for now do not expect failures the size of IndyMac, which had $32 billion in assets and $19 billion in total deposits at the end of March.

IndyMac, the third largest U.S. bank failure, was regulated by the Office of Thrift Supervision and is expected to deplete the FDIC's insurance fund by between $4 billion and $8 billion.

IndyMac is being run by the FDIC while the agency looks to sell its assets.

The FDIC oversees an industry-funded reserve of about $53 billion used to insure up to $100,000 per deposit and $250,000 per individual retirement account at insured banks.

The agency also has a running tally of problem banks that its examiners closely monitor. At the end of the first quarter, 90 institutions were on the list that is expected to be updated next month.

First Heritage of Newport Beach, California, had three branches with customers comprised mostly of corporations, while First National of Reno, Nevada, had 25 branches. Both were owned by First National Bank Holding Co of Scottsdale, Arizona.

In addition to assuming all the deposits, Mutual of Omaha Bank will purchase about $200 million of assets and pay the FDIC a 4.41 premium to assume the deposits.

None of the entities are publicly traded.
http://news.yahoo.com/s/nm/20080726/bs_nm/banks_fdic_dc_4

[daiello]

Congress approves housing rescue plan

SAN FRANCISO (MarketWatch) -- Congress on Saturday passed a housing rescue bill designed to help more than 400,000 homeowners avoid foreclosure and President Bush is expected to sign the measure quickly.

The measure, approved by a 72-13 vote during a weekend session in the Senate, allows homeowners who cannot afford their monthly payments refinance into government-backed loans. The bill also offers temporary financial help to Fannie Mae and Freddie Mac

Lawmakers have been working for months on the massive housing bill that's been given new urgency by the Bush administration's plan to backstop Fannie (FNM) and Freddie (FRE), which have seen the value of their shares gyrate over concerns about their capital levels.

House Financial Services Committee Chairman Barney Frank, D-Mass., said the overall bill deals with a housing crisis brought about by "bad decisions and inaction and malfeasance from years before."

The bill includes such provisions as allowing the government to insure up to $300 billion in refinanced mortgages, establishing a tax break of as much as $7,500 for first-time homebuyers and creating a new regulator to oversee government-sponsored enterprises Fannie and Freddie.

The rescue plan would extend an unlimited line of credit to the two mortgage-finance giants for 18 months and give the Treasury the authority -- also for 18 months -- to buy Fannie and Freddie shares if the Treasury deems the companies' capital to be inadequate.

Some lawmakers have been skittish about the administration's plan for the GSEs, calling it a "blank check" that potentially puts U.S. taxpayers on the hook.

A Freddie Mac spokesman praised the bill in a statement last week.

"Passage of this bill sends a helpful signal of confidence to housing markets and investors. Freddie Mac will continue doing its part to help the economy by raising private capital, helping put families into homes through sound underwriting, and helping troubled borrowers avoid foreclosure," said Doug Duvall.

Fannie Mae CEO Daniel Mudd said "the legislation should reinforce confidence that the GSEs will be able to serve the housing finance system now and in the future."

On Tuesday, the Congressional Budget Office said the plan could cost the government up to $25 billion. However, the same report said chances are better than 50% that the government wouldn't need to help the companies out. See related story.