Fannie and Freddie: Sticking it to the Taxpayers 21 comments
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In my article titled "Delisting of GSEs Looms Large" published on February 21, 2009, I discussed the fact that as Fannie Mae (FNM) and Freddie Mac (FRE) remained under $1, the prospects were that we'd either see the companies delisted from the NYSE or that the price would skyrocket. Not long after writing the article, the stocks of FNM and FRE fell as low as $0.35 on March 9th. In that February article, I said the following:
Look for a boosting of the share price to ridiculous levels (anything above $1) or go literally to zero in the next delisting notification process.
Soon after falling to $0.35, Fannie Mae and Freddie Mac briefly, on a closing and intraday basis, went above $1 on March 19th and then promptly fell from there. According to the New York Stock Exchange, spend six months under $1 and you get delisted. As strange as it may seem, September is exactly six months away from the month of March.
One reader of Dividend Inc., Ron, poignantly remarked, "...it seems to me the exchanges are constantly bending their own rules about delisting, extending grace periods, etc. Especially in this case the govt will probably be leaning on the exchanges not to delist." My response was, "...there is little need to do this (bend the rules). If you're the government, and you don't know anything about fiscal responsibility, you'll more than likely feel compelled to waste the money and artificially inflate the stock price." Furthermore, I specifically stated that this was going to be "one of the biggest speculations in history."
Well, as promised, the U.S. government proved to be as gullible as has been the case since the beginning of time. In an article titled "Fannie, Freddie Avoid Delisting as Price Triple" published by Bloomberg.com, you get the sense that there is a collective exhaling about the notification that the companies would not be delisted. Strangely, FBR Capital Market's Paul Miller seemed indignant at the thought that the Fannie and Freddie stock price went up. Miller, a banking analyst, said that the rise was "unjustified" and that there was "no fundamental value remaining" in the two GSEs.
I say to Mr. Miller (with tongue firmly in cheek), the threat of being delisted was a completely justifiable reason for Fannie and Freddie stock to go up in value. The government had already gamed the markets by reverse splitting AIG, so it would be challenging to commit the same fraud twice on the investing public in such a short time.
Also Mr. Miller, if Fannie and Freddie are delisted, the market for all bad mortgages cannot be absorbed by the taxpaying public through the GSE conduit. That means these two companies are incredibly valuable. Mr. Miller, maybe Fannie and Freddie are not valuable to you but they are definitely valuable to the banks that are receiving bailouts in the front door and dumping their trash on the taxpayer through the back door. Silly Mr. Miller, still talking about notions like fundamental values and such.
We have witnessed the all too familiar quality known as predictably irrational behavior of the government and the financial markets. In many respects, Ron was right, the rules were bent to favor those in powerful positions. When the NYSE says "The World Put Its Stock in Us," they should have also added that it is the best exchange that money can buy. After all, the NYSE should be held criminally for allowing such blatant fraud to reign on their exchange. Instead, they looked the other way in the face of clear manipulation and malfeasance.
It is just our luck that history repeats so well and so often in financial markets. This is the reason why the addressing of this matter of the delisting of the GSEs was so predictable. The maneuvers that I've described have happened so many times in the remote and distant past with far more inferior technology that it's laughable. The more things change the more they remain the same...and that ain't no cliche in the financial markets.
Disclosure: No positions
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Necessity knows no law.
(Say, it's necessary that foreign demand for Treasuries be maintained. So what are the odds that the US would sell its Treasuries to Japan and China at a discount, if they wouldn't buy them otherwise?)
Well, since FRE/FNM held most of America's mortgages in some form or another at the bottom of the housing crisis, the WORTH was savagely compromised. Now, that the Economy is turning up and most consensus would state that the Recession is over. You would natural conclude that the WORTH of FRE/FNM holdings would also increase in value.
FRE/FNM hold Trillion of dollars in assets (approx. 5.6 T) not billion, but Trillion alot of that was taken on the books at distressed levels. When the MBS membership was leverage 40X and recieved their Margin calls. The GSE step in and bought therefore supporting the market, that the Banks had destroyed.
Those destressed assets are now starting to rise in value. FRE with it's trillions dollar portfolio will have more then the 56 billion in worth to pay off the Government.
So, once again most of the analysis subscribed to the GSE was done at the bottom of the Market. Wait one more quarter or two and re-examined your math,...then tell me the GSE have no Value.-johnc222....Happy Labor Day...folks
The Value of those MBS bought from the banks by the GSE was rock at bottom prices. Here a tip...The Market is starting to turn up.
Therefore isn't it logical to assume that the value of those assets held at the GSE will also increase..?
FRE owes the Treasury $ 56 e+9 ....56 e+9 / 2 e+12 * 100 = 2.8 % of FRE portfolio holdings.
FRE will have no problem paying off the Government.
Also don't underestimate the intangible I talk about earlier...people only value the numbers. But, once again....FRE/FNM was there...!!! to support the Mortgage Market..WHEN there was NO ..Market..!!!
That also has.........." VALUE".
So, it has reached the point where Washington is underwriting the majority of existing mortgage debt throughout the system and is now backing essentially the entire amount of net new mortgage Credit.
www.prudentbear.com/in...
Fannie, Freddie, Ginnie, FHA, FHLB, VA have essentially become the Mortgage Dept., the Ministry of Housing.
The cumulative and combined losses are mounting by the month as lending standards are weakened by the week.
In this brave new world of nationalized housing finance replacing the former private capital sources, the solution being sought is to double down with more lax lending standards identical but larger than previous proven failure.
Your point is well taken. However, a financial institution should alway be held to a higher standard. Therefore, while a consumer signed on the dotted line, the lender was willing to let the loan go through even though it was clear that the client couldn't survive financially in the short and long term.
All consumers, if given the opportunity, will borrow to the max. It is the responsibility of the lender to make the decision not to give the loan. While working for Fannie and Freddie from 2001 to 2006, I would contact the loss mitigation unit of the banks and the response was always the same from the loss mit team inside the bank, "why in the world did the bank give out the loan to this individual?"
The point being, it was abundantly clear from the initial loan docs that were approved, that the individual couldn't maintain the mortgage from the very beginning. You can't expect the public, who is more versed in the art of voting for American Idol contestants, to understand or care about the terms of a document. Most Americans routinely sign legal contracts without faking that they've read the terms beforehand. This puts the responsibility back on the banks.
By no means does my position support the belief that the consumer isn't to blame somehow. Instead, the banks should have been concerned about doing due diligence and long term financial viability while remaining profitable. Such a stance may mean sacrificing short term competitiveness in order to avoid the pending train wreck. Or, you could at least sell out at the top like Golden West Financial did (my favorite financial institution, a real success story) when the sold out to Wachovia.
Unfortunately, Fannie and Freddie fanned the flames which encouraged banks to take on more risk than was prudently acceptable.
Thanks for reading my article Pecede.
regards,
Touc
On Sep 06 10:27 AM pecede wrote:
> While I respect and agree with much of your logic, let's not forget
> that it is the people who borrowed the money to pay for property
> they can no longer afford that are sticking it to the taxpayer by
> reneging on their promises.
You can, or should, expect the government to take the lead on getting these companies off the exchange and given 100% government entity status. Remaining on the exchange and being forced to delist (or the threat of it) is too much to bear upon the financial system.
It is a matter of confidence.
Thanks for reading.
-Touc
On Sep 06 01:44 PM bigspender wrote:
> " if Fannie and Freddie are delisted, the market for all bad mortgages
> cannot be absorbed by the taxpaying public through the GSE conduit."..
> Forgive my lack of understanding, but why is delisting from the NYSE
> so vital. If they are deslisted, are they prohibited or limited from
> buying mortagages?
Your reply states two things which concern me, 1, When going to a bank "All consumers will ask for the max $ " and 2, "Banks should be held to higher standards." I agree Banks have failed us miserably with lack of due diligence, greed based decision making and flagrant disrespect for the taxpayer and consumer alike.
However "All consumers" do not approach banks with larceny in their hearts and are not out to squeeze every last penny they can and damn the torpedoes! The gold "Standard" we need to remember is 'honesty for all and by all.' More than likely there are still a few honest people walking around this country, or am I being naive? If someone came up to me and offered a mortgage of 8 times my annual earnings I would be tempted but instinctively know that I would end up paying the piper at some point in the future as would my family and all the people I love and care for. I agree there are many consumers who were misled by the banks and the Government and essentially are in trouble now because of it and I am truly sorry for them, but there are many, who walked into their bank with untrue and blatantly false claims of net worth, earnings etc. and are now receiving my money to adjust or basically bale them out of their folly.
To repeat, in this dangerous world it is incumbent for us to be meticulously honest as consumers and also do the due diligence on both sides of the equation. Caveat emptor has been the consumers rule for hundreds of years now, why should it change?
Once again thanks for your article.
BTW, I wonder if honesty could be taught in our schools sometime in the future?
I appreciate your thoughts and hope that I didn't imply that the consumer was maliciously trying to get as much out of the bank as possible. Just that, if given the opportunity, consumers would take as much as possible and try to manage it as much as best he or she can until things improve.
What I wanted to do was to point out that the terms conditions and consequences of contracts were not fully understood by the consumers. If the terms and consequences were fully understood then I think the consumer would would pause before entering into a contract. The beauty is that the consumer would pause. That is enough to get some to shop around or rethink if they're capable of handling taking on such a transaction as buying a home or anything else for that matter.
Again, I don't think honesty, or the lack thereof, is the problem. The real problems appears to be that most Americans (not all) who enter into contracts aren't aware of the ramifications once signed. Since it is a large part of our democracy (starting with the declaration of independence), if the importance and consequences of contracts were taught in school then I think that we'd be making some progress.
Thanks again,
Touc
On Sep 06 05:28 PM pecede wrote:
> Dividend,
>
> Your reply states two things which concern me, 1, When going to a
> bank "All consumers will ask for the max $ " and 2, "Banks should
> be held to higher standards." I agree Banks have failed us miserably
> with lack of due diligence, greed based decision making and flagrant
> disrespect for the taxpayer and consumer alike.
>
> However "All consumers" do not approach banks with larceny in their
> hearts and are not out to squeeze every last penny they can and damn
> the torpedoes! The gold "Standard" we need to remember is 'honesty
> for all and by all.' More than likely there are still a few honest
> people walking around this country, or am I being naive? If someone
> came up to me and offered a mortgage of 8 times my annual earnings
> I would be tempted but instinctively know that I would end up paying
> the piper at some point in the future as would my family and all
> the people I love and care for. I agree there are many consumers
> who were misled by the banks and the Government and essentially are
> in trouble now because of it and I am truly sorry for them, but there
> are many, who walked into their bank with untrue and blatantly false
> claims of net worth, earnings etc. and are now receiving my money
> to adjust or basically bale them out of their folly.
>
> To repeat, in this dangerous world it is incumbent for us to be meticulously
> honest as consumers and also do the due diligence on both sides of
> the equation. Caveat emptor has been the consumers rule for hundreds
> of years now, why should it change?
>
> Once again thanks for your article.
> BTW, I wonder if honesty could be taught in our schools sometime
> in the future?
Your first questions is golden, " Why are you wasting your time on the merits or demerits of delisting FME/FRE?"
If, through well reasoned analysis, I can make some money on the prospects that the companies stay on the exchange or get the boot then it is well worth the time invested. Notice my quote about the stock either going ridiculously high or crashing based on the prospect of being delisted or not. I'm hoping someone out there with the risk tolerance was able to benefit from my insights.
At the close on Feb. 21st, FNM was at $0.54/share and FRE was at $0.52. The over 300% price change was the reason why I bothered commenting on the issue of delisting. In my opinion, it literally impacted the price of the stock although many can legitimately claim otherwise.
I agree with much that you had to say but I'm trying to make financial commentary that is aligned with the prospect for investment or speculative opportunity.
Thanks for reading my article.
-Touc
On Sep 07 11:19 AM mineral guy wrote:
> Why are you wasting your time on the merits or demerits of delisting
> FME/FRE. Obama will not let them fail period and to think otherwise
> is absurd. It is not politically unacceptable . The banks unloaded
> their toxic ill-gotten and possibly fraudulent mortgages on these
> two entities. The mortgage companies and banks were the first line
> of defense and should be held accountable. But we rewarded them
> with all sorts of bailouts particularly their bondholders and some
> cases their equity holders as well,such as C, BAC,etc and Goldman
> especially . FRE/FNM were not treated in the same manner as the
> private banks because of Paulson's and the Republicans needed a
> scapegoat. FRE/FNM were it. The downfall of FRE/FNM was especially
> hard for those conservative equity investors particularily older
> Americans who wrongly assumed FNM/FRE were quasi-government backed
> and smaller and regional banks that bought their preferred shares
> were all the big losers. These banks suffered as they were forced
> to write down this preferred stock and forced to raise more capital
> at considerable discounts , taken over by the government backed
> private banks such as those mentioned above , forced to liquidate
> with losses absorbed by the FDIC and the forced foreclosing of millions
> of homes. FRE/FNM will rise again only because it is politically
> the right thing to do. So don't get hung up on delisting/listing
> and quoting analysts that as you know are not always forthright in
> their views which are skewed buy whether they are long or short the
> stock. Give me any depressed stock and i will give an analyst whose
> firm is short the stock. The question before you is. Is it politically
> acceptable to let FRE/FRM go bust. Let your answer be your guide.
market do not work on theory nor do the best things in artistry. In case you miss the bus , it is not too late to late to get in. ONCE THE property prices strart accelerating you can rean FNM 10.
ONCE A LIFE TIME OPPORTUNITY MY FRIEND. RGDS
LALI
Market do not work on theory nor do the best things in artistry. In case you miss the bus , it is not too late to late to get in. ONCE THE property prices start accelerating you can read FNM @10.
ONCE A LIFE TIME OPPORTUNITY MY FRIEND. RGDS
LALI Sep 08 08:49 AM |Report abuse| Link | Reply 00
so if the markets are so predictable on measurable valuations all professors, accoutant should be trillionairs.after all they know how best to read the dollars. When the bus is missed he is a bear when the bus is in he is bull when he wish to be out he is bull, when he is out and wish to get in he is a bear- so goes the measurable factors in to thin air
lali with a fine cup of DAMARU TEA
Government programs account for almost all new mortgages right now. Take away the ability to buy a home completely and you now have a real meltdown. Do the bailouts suck? You bet. Could it be worse? Damn skippy. Also to the endless rhetoric blaming one party or the other keep in mind both parties had presidents approve a bailout.
mortgagestats.blogspot...
Herb and Marion Sandler sold Golden West before the bubble burst because they knew what they had done and profited 2.4 BILLION dollars. They are major contributors to MoveOn.Org, ACORN, and Center for American Progress....all radical left wing groups.
On Sep 06 01:29 PM Dividend Inc wrote:
> Greetings Pecede,
>
> Your point is well taken. However, a financial institution should
> alway be held to a higher standard. Therefore, while a consumer signed
> on the dotted line, the lender was willing to let the loan go through
> even though it was clear that the client couldn't survive financially
> in the short and long term.
>
> All consumers, if given the opportunity, will borrow to the max.
> It is the responsibility of the lender to make the decision not to
> give the loan. While working for Fannie and Freddie from 2001 to
> 2006, I would contact the loss mitigation unit of the banks and the
> response was always the same from the loss mit team inside the bank,
> "why in the world did the bank give out the loan to this individual?"
>
>
> The point being, it was abundantly clear from the initial loan docs
> that were approved, that the individual couldn't maintain the mortgage
> from the very beginning. You can't expect the public, who is more
> versed in the art of voting for American Idol contestants, to understand
> or care about the terms of a document. Most Americans routinely sign
> legal contracts without faking that they've read the terms beforehand.
> This puts the responsibility back on the banks.
>
> By no means does my position support the belief that the consumer
> isn't to blame somehow. Instead, the banks should have been concerned
> about doing due diligence and long term financial viability while
> remaining profitable. Such a stance may mean sacrificing short term
> competitiveness in order to avoid the pending train wreck. Or, you
> could at least sell out at the top like Golden West Financial did
> (my favorite financial institution, a real success story) when the
> sold out to Wachovia.
>
> Unfortunately, Fannie and Freddie fanned the flames which encouraged
> banks to take on more risk than was prudently acceptable.
>
> Thanks for reading my article Pecede.
>
> regards,
>
> Touc
>
> On Sep 06 10:27 AM pecede wrote: