Tuesday, September 9, 2008

Here's A Good Treastise On The Fannie & Freddie Story

Today’s a good day dust off the old dictionary. One word interests us in particular:
Conservator (noun)

1. A person in charge of maintaining or restoring valuable items, as in a museum or library.

2. One that conserves or preserves from injury, violation or infraction; a protector.

3. One that is responsible for the person and property of an incompetent.
The U.S. government -- in what will likely be the biggest bailout in taxpayer history -- has declared itself the conservator of Fannie Mae and Freddie Mac. As early as 2004 , we told you it would happen. Now it has… so what does this “conservatorship” even mean?
First, taxpayers are on the hook. The U.S. Treasury has already pledged $2 billion in emergency financing to each company, and has hinted it’s not interested in doling out more than $200 billion. But there is no official cap on the bailout… sky’s the limit, baby.
Some of those billions will be used to shore up Fannie and Freddie balance sheets. But most will buy mortgage-backed securities on the open market. Such a policy -- in theory -- would restore confidence in that market and simultaneously keep Fannie and Freddie afloat. As Bill Gross famously said, if the Treasury wants investors to buy the U.S. mortgage market, they have to "swim in the pool, not just be a lifeguard."
Treasury Secretary Hank Paulson promised that money borrowed from the government and taxpayers will be the first to be repaid. Our bloggin’ brother Dave Gonigam has a poll going at The Daily Reckoning blog as to how much this fiasco will really cost… you can cast your vote, here.
Fannie and Freddie shareholders are screwed. This strange conservatorship allows the shares of each company to continue being traded. But the government has yanked all dividends, eliminated Fannie and Freddie government lobbyists and demanded the companies shrink their portfolios. Secretary Paulson said his plan places “common shareholders last in terms of claims on the assets of the enterprise.”
Fannie Mae shares opened down 84% this morning, to a puny $1.06 a share. Freddie was down 80% to 99 cents a share.
Sorry, but if you were crazy enough own these “businesses,” you deserve it. We give a particular pat on the back to “smartest guys in the room” like Bill Miller, Rich Pzena, David Dreman and Marty Whitman. These famous fund geniuses bought tens of millions of Fannie and Freddie shares this year on behalf of their loyal minions.
Bondholders can breathe easy. The U.S. government was smart enough to placate the countless foreign governments, global businesses and zillions of investors that hold Fannie and Freddie bonds. According to the Treasury, they’ll still get paid.
And Fannie and Freddie CEOs get permanent vacations and fat bonuses. Dan Mudd and Richard Syron, Fannie’s and Freddie’s CEOs, were fired today. Both have “earned” about $26 million in cash and stock compensation since 2003-2004. And according to The New York Times today, both stand to collect a total of $23 million in severance.
Mudd will be replaced by Herbert Allison -- former COO of Merrill Lynch, former John McCain finance committee head and, most recently, chairman of the mega-money management firm TIAA-CREF. Freddie Mac will now be run by David Moffett. He’s the former CFO of the subprime-slammed U.S. Bancorp and sits on the board of MBIA, among others. His latest role was as senior adviser to the Carlyle Group… a controversial hedge fund with close ties to the Bush family, the U.S. defense industry and Middle East oil.
“Hey, we’ve got an incompetent CEO too,” we imagine the board of Washington Mutual echoed this weekend. So they’d axed their man, Kerry Killinger, who had been CEO for 18 years.
Major stock markets around the world love the Fannie and Freddie bailout. The Taiwanese pushed their major index well over 5%, the best single day for their market in five years. Just about every other Asian index, save the Shanghai Composite, rose 3-4%. Chinese investors sold their major index down 2.6%, to a 21-month low. Investors there are still worried that the Chinese economy is slowing faster than anticipated.
Germany and France were psyched, too. Their big indexes rose 2.6% and 4%, respectively.
The IT geeks at the London Stock Exchange picked the worst possible day for a connectivity issue. The LSE suspended trading for three hours today, the longest halt in eight years. Not only were traders champing at the bit to trade on the Fannie/Freddie news, but the FTSE just came off its worst weekly decline in six years. For all the turmoil, the FTSE still managed to gain 3.8%.

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