Fannie & Freddie Weekend Wrap Up/Linkfest

The company had made decisions that, while not necessarily in violation of accounting rules …
— Gretchen Morgenstern, NYT, 6 Sep 2008

… the war situation has developed not necessarily to Japan’s advantage …
— Hirohito, Emperor of Japan, 15 Aug 1945

The common and preferred are worthless on FRE and FNM since they will take the losses first and the gov’t owns 80%.

Israel banks are up today, interestingly enough.

Anyone that gave FRE or FNM the loans they used to fund the mortgages is guarenteed.

So basically all other banks but FRE, FNM and any other close to BK should rise come monday.

Thanks Barry for one heck of a job on pulling all of this information together in one place.

Great Job!!

Cramer’s got this one right —- the market SCREAMS higher on Monday. Shorts are going to feel like guinea pigs at a snake farm. I think the SKF gaps below 100 and moves as far as the low 90s.

I’m sitting this one out…”it don’t make sense to fool Mother Nature!!!”

But if I had alot of money I’d buy the world and be a rational king, a practical king…oh hell, I think I’ll just be China.

so where does it end? automakers next? how about that medicare? maybe inevitable and maybe necessary, but it is indeed a sad day in America.

This isn’t about the old MBS, not really. This is about the rest of the banks repackaging (new) MBS to sell to the GSE’s at par. This is the “fix” for the insolvent banking system and represents the “all clear signal” for banks to pile onto the GSE bailout fund. This is a mechanism for loss transfer. This is a false-flag operation to re-capitalize an insolvent banking system. Lockhart said specifically that the GSE’s would be able to expand the book with no limitations. What does this mean to you? NO LIMITATIONS TO THE SIZE OF THEIR BOOK. The book will swell like mad until all banks have offloaded the l3 garbage, and then the shadow-inventory will be dumped. PAULSON DEFRAUDED THE AMERICAN PEOPLE……AGAIN.

Lehman in fresh shake-up of top executives

The head of Lehman Brothers’ international operations is stepping down, triggering a broader shake-up of senior management at the embattled Wall Street bank.

Jeremy Isaacs, the long-serving chief executive of Lehman’s businesses in Europe and Asia, is giving up his executive role and will leave the bank at the end of the year, according to people briefed on the plans.

Benoit Savoret, chief operating officer for Europe and the Middle East, and Andrew Morton, promoted this year to run Lehman’s key fixed income division, are also stepping down.

The shake-up, the latest in a series of management changes at Lehman in recent months, comes as the bank tries to shore up its balance sheet, which has been weakened by the credit crunch.

The bank has been talking to the Korea Development Bank about buying a stake and the Financial Times has learnt that Royal Bank of Canada considered buying the bank in July, but decided against a deal.

One leading institutional shareholder in Lehman says the investment bank’s negotiations with RBC and other potential investors raise doubts about whether the current round of talks will succeed.

One of your better jobs in all these years, Barringo!

We get an incredible amount of quality here for free. Good job and thanks for being a news and analysis hound.
—
On the whole Freddie and Fannie business:

Net, net… I expect this will improve confidence in credit markets and just might have prevented a total freeze-up of the commercial paper market… a disaster of proportions even the most pessimistic of us could hardly fathom.

The circular diagrams of relative portfolio size and mortgage market vol that you reprinted in an earlier post – and the smallest circle representing Fannie and Freddie’s relative net worth – tell the story completely.

As you well remember, Benber N. Anke’s most significant writing to date was last year’s Jackson Hole epistle. You may remember that I analyzed it almost line-for-line.

Fannie and Freddie would’ve never gotten into this situation had they not decided to Trip The Light Fantastic and attempt to magnify their returns on the backs of the very providers of equity capital that give them their bread and butter… the good faith buyers of their syndicated mortgages… by hedging them to the brink of destruction.

By doing that, they ran the risk of collapsing the asset prices of the investors that sustain their core mission and purpose… but unfortunately for them, they’d acquired too great a portfolio of those instruments for themselves. Thus, they wrote the check for their own demise.

Reckless EBITDA… Reckless pro-forma EBITDA… Reckless Supply Side Hocus Pocus Economics. Reckless, reckless… reckless.

Now, the government will re-in-stall the core purpose of Fannie and Freddie, with or without any fractional preservation of shareholder equity (that’s not clear to me yet) and in doing so, the government just might not (I say might not) take a loss.

Poor Fannie and Freddie… they’d have been contentedly sitting on only reduced expectations for income, not the expectations for a collapse of their net worth, had they simply s-t-a-y-e-d with the purpose that was their bread and B-U-T-T-E-R.

Over/Under on when we see Richard Syron in handcuffs?

November 1st?

Will the true home-run king please stand up and bow! Paulson, Paulson, he’s our man…if he can’t do it, go fishing.

Oh BR…just having fun on such a frivolous occation. lol

Banks will surge and a lot of other crap will surge as well. Sit it out for a day or two, then it’s back to business as usual for the intrepid shorties. None of this is going to alter the fact that retail is going to hell in a hand-basket.

Treasuries will sell off, gold will pop, pretty sure about that one. Trading small until we can see the new landscape and keeping an eye on the technicals. 1300 and even 1350-1360 (the 200DMA) are not out of the question. Know your enemy…

Markets look to scream higher at the open. Up 4% for the day? Or fade after the gap higher open?

S&P 500 SEP08 1267.30 +2620
NSDQ100 SEP08 1802.75 B +3275
RUSSELL SEP08 732.00 B +1350
5$ DOW SEP08 11423 +196
GLOBEX Prices as of 09/07/08 05:32 PM

But Jodie, it’s only 6:55 and the markets don’t open until…Hank Paulson says they do! :-)

Great work Barry. You have done an awesome job pulling this all together as it broke. Cable news sucked as this came out and they talked over the newsmakers. Nice work. I’m getting ready to harvest some banks tomorrow.

The Great Cabitchulation.

It’s 7:10pmCDT, and I’ve noticed that US Market Futures have shot waaay up, while Asian, European and other markets are tanking.

In the end, how is this new debt obligation going to impact the US Dollar?

–mf

After careful reading of all Barry’s material link I’ve decided to move my money out of the stock market come market close Monday morning (which looks like a 3% day) and invest the entire bundle in REITs. Future contributions will go into SPY.

I’m going to move my money where the gov’t is backing and eliminate it from where they aren’t backing.

P.S. – I’m young enough to lose the whole thing and come back if it goes wrong.

“People are forgetting Bob and Mary can’t borrow against the home value anymore for everyday needs and buying stuff that’s shiney.” — John Borchers

Nope. Cuz Bob & Mary are just little consumers. Whereas what they need to be are originators — mortgage originators. If Bob & Mary would just write themselves, and their neighbors, some conforming mortgages and whip ’em into an MBS on the kitchen table, why they could sell it to the Treasury and get a check from the New York Fed!

I’m on Chapter 3 of my forthcoming book, “How to Create and Sell MBS for Megabucks in Your Spare Time.” Why risk your capital on shaky real estate, when you can manufacture paper and get a government check at a guaranteed price? When crime pays, you gotta think like a criminal to succeed.

eclectic! it’s been a while, no? good to see you back.

so what percent of mortgage holders need to stop paying their mortgage to bring the Fed Govt to its knees? Maybe form a union of mortgage payors, threaten to not pay unless Govt recasts your mortgage. Maybe bring down PIMCO, too. Either that or let the Govt eat it. Of course, we have met the enemy and it’s us.

as soon as the money was loaned out; then spent on a home, a cycle, a vacation, whatever; the common taxpayer was on the hook at that moment … if that money borrowed was not capable of being repayed to that original loan institution forcing that institution to file for bankruptcy or offer itself for a takeover at pennies on the dollar; the common taxpayer is hooked, line and sinker already … all we are talking about is who’s gonna own this stuff post mega sale (granted its still big big money)

I gotta admit its quite a system for the lawyers, accountants, professional marketeers these days … but what a crappy system for the play by the rule guys

Ann, nice link.

And, Isn’t it funny that, with all the pixels spilled on Frannie, et al., noone has even commented on how “Mortgages”, themselves, actually work?

Please, someone tell me that Banks loan Money..and the Tooth Fairy gets a bad rap!

BR, feel free to excise this, but, from anon’s link:

In one of my more spectacularly awful recommendations, I suggested in my Mar. 10 column that readers buy stock in Fannie Mae (5, FNM) at what seemed then to be the ridiculously low price of $35. My reasoning was that the housing market’s woes were well advertised and the stock was trading at a value that reflected a tremendous amount of pessimism.

Well, not all the pessimism that was due. The quality of the mortgages guaranteed by Fannie Mae continued to erode more than even I had anticipated. Analysts are now expecting 70% of subprime loans to default, with a loss of 70 cents on the dollar for those defaulting notes. Prime borrowers with pristine credit histories, meanwhile, are deciding–in one of the more extraordinary behavioral shifts I’ve ever seen–that there is nothing ethically wrong with defaulting on a mortgage if the property becomes worth less than they paid for it. The viability of Fannie and Freddie Mac (nyse: FRE – news – people ) is being challenged each day; their capital adequacy is legitimately in doubt, and nationalization is on the table. In the worst housing market since the Depression, owning a very highly leveraged mortgage lender hasn’t been a great idea.

At this point, valuation of both Fannie Mae and Freddie Mac (4, FRE)–which I haplessly recommended at $29 in the Apr. 21 issue–requires as much political as economic analysis. No one, including the institutions themselves, is able to project the length or severity of the housing decline. The capital they are required to hold will be determined by their new regulator, the director of the Federal Housing Finance Authority, who will set capital requirements and who must consult with the Federal Reserve board of governors to “ensure financial market stability.”

So what’s an investor to do? Fannie and Freddie are facing not only losses (like the $2.3 billion and the $821 million that they respectively owned up to for the second quarter) but dilution as well. The solution to their capital shortfall will include shrinking their portfolios, cutting their dividends and issuing new equity, both common and, most likely, convertible preferred. Not a happy prospect. The good news, if there is any, is that Fannie and Freddie are now trading like very long term housing-market call options. They have just raised the guarantee fees they charge lenders for handling their mortgages to a level that for the first time is set in a way that reflects the credit quality of the loans. They are now a de facto duopoly that completely dominates the market.

For the taxable investor, I’d suggest taking losses. If you bought Fannie, sell it and hold Freddie instead for 31 days; then get back into Fannie. The 31 days will keep you from having a “wash sale” problem with the IRS, and holding the sister stock will reduce your risk of getting whipsawed–seeing mortgage stocks rebound just when you’re on the sidelines. If you bought Freddie, sell it and buy Fannie.

For tax-deferred accounts, I’d take a big breath and double down, buying more at the current low prices. Risks include the housing market getting even worse and equity holders getting hammered by a Treasury intervention. Not a trivial possibility.

Another suggestion I’d make, for those readers I haven’t already horrified, would be to purchase the perpetual preferred stock issued by Fannie Mae. I’d avoid Freddie’s, for I think its problems are more severe at the moment: It needs more capital, it kept expanding its balance sheet far too long, and it hasn’t yet raised its guarantee fees. Normally I’d run away from perpetual preferred, which has no maturity, for when purchased at par it has all the downside risk of an equity and the upside only of a bond. In the current environment, however, I’d buy the FNMA 8.25% Series S Preferred, which is selling at a deep discount to its $25 par. It pays an 8.25% dividend (calculated on its par value) until Dec. 13, 2010, when the dividend resets to the three-month Libor rate plus 4.23%, with a floor of 7.75%. It is a noncumulative preferred, so if a dividend is missed the company doesn’t have to make it up in the future. But it can’t pay dividends on the common while the preferred dividend is suspended. At a price of $12 its current yield is 17.2%. It’s callable at par every five years starting on Dec. 13, 2010–but the possibility of being forced to take $25 in cash for your $12 stock is not something to lose sleep over.

Why is it likely the dividend will be paid? Fannie is allowed to count perpetual preferred as regulatory capital. If the company were to eliminate the dividend, it would lose access to the market and destroy this source of funding. Also, the largest purchasers of this issue have traditionally been regional banks, and the last thing the Fed and the Treasury want to do is to put additional strain on the commercial banking system.

Lisa W. Hess is a New York money manager. Visit her homepage at http://www.forbes.com/hess.

the only good thing you can say about it is that, at least, she signed her name to it.

another one that should understand they can’t be understood..

“and nationalization is on the table.”

FFR y’all, anyone using this phrase: “on the table”, is a serious risk to your well-being

Articles and content in this section of the website are really amazing. From http://www.puneonnet.com