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Barron's (subscription required) cites a government source who warns that absent raising at least $10 billion in capital each, Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) common and preferred shareholders will be wiped out or severely wounded in a government takeover of the two government-sponsored entities (GSEs).
The problem with Fannie and Freddie is that depending on how you count the beans, their liabilities are worth more than their assets. Using so-called fair value accounting -- which marks their assets and liabilities to immediate market value -- Fannie is worth $12.5 billion (a sliver of equity supporting $2.8 trillion in assets) and Freddie has a negative net worth of $5.6 billion. Others calculate that both have a negative net worth of $50 billion.
The Bush administration wants to gut these GSEs (they're Democratic strongholds). How will the GSEs perish? Barron's reports that if Fannie and Freddie fail to raise at least $10 billion in fresh capital, the administration is "likely to mount its own recapitalization, with Treasury infusing taxpayer money into the enterprises. The infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie's and Freddie's existing common shares effectively would be wiped out, and their preferred shares left bereft of dividends." But wait, there's more.
The White House also wants to exact vengeance on Fannie and Freddie's management. It will replace management, limit their investments, and sell their assets before reselling them to the public or merging them with other GSEs. In particular, Barron's writes that "Treasury would install new management and directors at both, curb the GSEs' sometimes reckless investment and guarantee operations, and liquidate in an orderly fashion the GSEs' troubled $1.6 billion in on-balance-sheet investments. Then the companies could be resold to the public without their explicit government debt guarantees, or folded into government agencies like Ginnie Mae or the FHA."
Whatever amount of taxpayer money is used to bail out Fannie and Freddie, I hope that the government uses the $38 million earned by taxpayers such as Richard Syron, Freddie's CEO, and the other executives and directors of Fannie and Freddie, before it uses my taxes. Then they can go after the pay of those government regulators who were supposed to be supervising them.
They should pay the first price for their mistakes.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
8-16-2008 @ 10:51AM
Ryan said...
So, the author thinks the government backstop by the Treasury was also a clever move to gain the leverage to convert these entities into private companies? If so, that's a great move and one of the few ways privatizing these entities would happen. We should hope they are able to do this before their tenure ends in Jan.
To take look at the new housing legislation, check out this free online directory to the new law.
www.ushousingmeltdown.org/2008-housing-law.asp
The reforms to Fannie and Freddie are found on pages 14 through 394. The authority for the Treasury to invest in Fannie and Freddie is found on page 83. The minimum capital requirements is found on page 54.
8-16-2008 @ 1:56PM
william lindblad said...
Peter, If one takes a look at what these two are holding you will come away scratching your head.
They are both holding a lot of paper, but I can't find much in the large note variety. What Freddie is holding looks like the low end of HUD and what Fannie has looks like it complies to the 417,000 limit.
Equating this to the alleged losses, it does not make sense to me. Even with little or nothing down these notes should be in the 300-1500 a month range and in most cases, cheaper than rent. Why do we have all the failure?
Between the two, the note avg. seems to be in the 100-150 range and that would have to amount to one hell of a lot of homes to come up with the billions being mentioned.
Maybe someone else knows how this makes sense - I don't.
8-16-2008 @ 4:34PM
Brett King said...
More BS, FM and SM are charted to buy and service home loans made by banks. Their portfolios cannot be resold at anything near face value because there is no market for them at present. If the holdings are valued on a performing vs. non performing loan basis, they are doing OK. This is just another opportuinity for BUSH and his buddies to rape us.
8-16-2008 @ 4:42PM
Brett King said...
William, The losses are PAPER losses. IF FM or FM had to sell all there loans, the market for them is non existant and BUSH and his buddies would be able to buy these loans for a penny on several dollars. They are charted to buy the loans and service them. For GOD sake don't bend over for these people.
8-18-2008 @ 5:28AM
Mike Sanders said...
It's become too complex for me to understand... I liquidated my FNM, a week or two ago. Things have to be pretty transparent for me to understand. I get too nervous, when I invest in things which I don't have understanding of. I'll let the MBA's figure this one out and if they can explain it, then I'll be back, cash in hand, smile on face and ready to participate in the American Dream, for others.
8-18-2008 @ 7:53AM
zack said...
Freddie and Fannie have a LOT of backup capital. But it is illegal for them to do anything with it. If the government is so worried about them, they should simply lower the legal limit for percentage of capital needed.
8-19-2008 @ 12:50AM
mikep said...
I'm a little confused. Did not the government want FMN and FRE to buy the loans from the banks? If so, the banks who made these loans should suffer. I think a GSE is pressured by the Fed to buy as many loans as possible from banks. It seems the banks knowing made bad loans knowing they could easily and legally dump them off on FNM and FRE.