viewfromnyc

Fannie / Freddie - What Does Treasury Know?

These stocks should be trading at zero. While the govenment has removed the shut down condition, the coming dilution is going to be massive. As public policy these entities should be closed. Let the portfolios run off and there is also no need for the vastly overpaid executives. There is no reason for the government to subsidize mortgages by allowing these entities to borrow at extremely low cost. The diversion of capital to the housing market is crowding out productive investment. The government, both parties, is doing its best to prop up housing prices and will continue to do so as no politician wants to be the one to crush the dream of home ownership. The reality is that home prices are too high for the average income level. By perpetuating the Fannie and Freddie frauds, the politicians, and this is a bipartiasan effort, hope to keep prices up until incomes catch up. The problem is the incomes are not going to catch up any time soon. The only way for the housing market to adjust to equillibrium is to let prices fall dramatically. The new equillibrium may also be at a lower number of transactions.

Fannie and Freddie: Worthless?

While I have thought FNM and FRE are worthless for a while, without a shut down condition there is value to the equity. The value is not in the traditional sense of positive shareholders equity on the balance sheet but option value. If this company is never shut because it lacks capital, eventually the new profitable business that is being written will restore the equity. Right now the movements in the stock are short term speculation since the strike price of the option is so far out of the money.

Bill Gross: Politicking for His Own Bailout

Why bother pontificating about how we got here, who is to blame and why? Why not think about how to make money! The Federal government is poised to take a significant portion of the domestic housing market onto its balance sheet. What are the ramifications? Does anyone think that interest rates are going down because of that action? Anyone want 10 yr U.S. Goverment paper at 3.6%, when the government is going to have to continue to borrow if it wants to maintain the subsisidy, through low cost borrowing, for housing. All the government is doing is interjecting its credit worthworthiness between the American home buyer and the predominately Chinese and Middle Eastern providers of capital. Eventually, the overseas holders of the mighty U.S. dollar will tire of earning negative real rates of return. Investment ideas, short long dated Treasuries,or go long TBT the double short ETF on the Lehman 20+ year bond index.

In the short term, perhaps the hombuiders will rally as market participants believe that liquidity will return to the mortgage market. I would short any strength take your pick of names or use the XHB. The government simply won't have the capacity to reflate the market. All Paulson et. al. are trying to do here is to stabilize home prices. What will probably happen is that home prices will find a bottom but transaction volume will decline and inventories will remain high as the market won't clear due to a wide bid/ask spread and a general lack of creditworthy buyers. After a bailout, I doubt regulators will permit the wide range of "affordability products" to be offered again by banks. Banks will probably be weak too as they continue to be hobbled by a lack of capital and a trouble loan book. It will take some time for potential homebuyers to repair their balances to the point where they can afford 10% down on a Southern California or Northeastern U.S. home.

Asset prices (stocks, bonds, real estate) need to decline for equilibrium to be restored to the market. The government can't keep asset prices at their high water mark through manipulation of short term interest rates. The phantom wealth created by Greenspan is gone! Somebody had to lose the money, it is now just a process of realizing all those unrealized losses. The result will reveal itself in one of two forms, losses at financial institutions as debtors default or long term diminished capacity of debtors/average Americans to consume and invest either because they are debtors who have overpriced assets or they are investors who will never be able to realize the phantom gains. I don't think PIMCO will ever be able to monetize all of its overvalued bonds. Great paper profits and a nice bonus for Bill Gross as the government keeps rates low. Watch out when they lose control.

5 Steps For Saving Fannie

The privization model started to fail a year and a half ago when the mortgage REITs imploded. Does their model, lend money, securitize the loans, buy RMBS sound familar? Sure it does! It is Fannie's and Freddie's model too the only thing that kept the banks and GSEs afloat was the lack of margin calls. With insured deposits at the banks and the implicit guarantee of credit at the GSEs, no need to worry about repaying the borrowed funds. As long as the regulators who are beholden to the politicians, allow the game to continue, there is fun for the whole family. Oh sorry a tax bill for generations!

The solution is to let them fail and end sudsidized loans for housing. But the politicians want to continue to give away money to buy votes. After all if you own a house, you are unlikely to move to another congressional district. Let them fail. Let the bond holders take a hiarcut. Unfortunately, I am sure our government willpay bondholders 100 cents on the dollar, but hopefully over 10 or 20 years in that perverse government accounting way that ignores the time value of money.

Back to the solution. The first American dream most people have is owning a car. Ford and GM found a way to finance that purchase without the government. I'm sure homebuilders and banks can find a solution (or commit thier own capital) without the assistance of Senators Schumer and Dodd and their misguided housing bill.