UncleLongHair

Bill Ackman's Plan to Save Fannie and Freddie

FNM and FRE aren't insolvent and don't need a bailout. They're earning gobs of money on the higher spreads, lower risks, and increased market share starting a year ago when all of the fringe players in the mortgage industry were dealt fatal blows. FNM and FRE were never bottom feeders in the industry, they deal primarily in the cream of the US mortgage crop. Most analysis on the companies, like Ackman's, doesn't even take a passing glance at quantifying the default risk and how FNM and FRE can afford it, because if it did, people would realize that the situation is nowhere near as dire as the short sellers want you to think.

Everyone throws around the number of $5 trillion of mortgages guaranteed by FNM/FRE. Even after the widely publicized increase in defaults and losses, default rates are still well below 1%. Even at 1%, that is $50 billion of losses, spread over many years. This assumes default recoveries of 0%, though recoveries will be well above zero with their conservative assets. FNM and FRE currently have total capital of around $95 billion and have plans to raise another $10 billion, and have many options for raising more capital including retaining earnings (i.e. cutting the dividend). They have plenty of capital to withstand current losses, and the ability to raise more.

Ackman's plan makes sense only to himself. It looks like a teenager threw together his slide show after school, he may as well have drawn it with crayons. It is outrageous that he can short the stock, and then go on TV and politely suggest that everyone get together to restructure a company that needs no restructuring just so he can make an enormous return on his investment. The thing that would "benefit America" would be to have investors and journalists laugh in his face when he tries to pull the wool over their eyes.

The timing is no surprise, as Ackman is cranking his publicity machine during the company's quiet period, as the Q2 numbers are probably nearly done but not yet reported, and they can't comment on Ackman's stupid allegations. Ackman is all too aware of the unlevel communications playing field, where executives are limited in how and when they communicate and he is not. He also knows that simply creating fear, uncertainty and doubt (FUD) around a financial company is enough to destroy it, as happened with Bear Stearns and IndyMac.

Ackman is simply trying to initiate a "run on the bank" at Fannie and Freddie, by undermining the investment community's confidence in their obligations. This is all an extremely thinly veiled attempt by Ackman to rape the capital markets for more ill-gotten gains. Analysts and investors should simply ignore him.

Uncle