Bharper

The AIG Bailout: Advice from Buffett, Munger and Grantham

This was in Berkshire's 2002 Annual report...it was part of Buffett's thoughts on "financial weapons of mass destruction". It describes to a T what happened to AIG:

"Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a
company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their
requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown."

Fannie and Freddie: 80% Dilution

The treasury is going to make a killing on this. Borrowing at the risk free rate and buying nearly riskless securities at nice spreads. Ultra low risk preferred paying 10%, financed with borrowings at under 4%. 80% of both co's at likely zero cost, co's will probably have earning power of $2 a share each in a couple of years after the dilution. The warrants are the kicker-probably will be worth over $100 billion collectively in a few years.

Bill Ackman's Plan to Save Fannie and Freddie

This is very preliminary and early...FNM/FRE's liabilities are covered by the highest quality asset mix of any financial institution in the country. At this point the backstop is just that; a backstop, over time this thing will likely correct itself as the financial panic fades

Fannie & Freddie: Myth vs. Reality

The FRE and FNM preferred are senior to the common and there is significant upside under the scenarios of 1) massive common dilution to raise capital or 2) big recovery of the common as the current situation is related to market fear and panic. In the case of a government bailout, the preferred could be worthless.

Record Spreads on Fannie Mae

Shedlock most of what is said on Wall Street is rendered silly within months or weeks. Bear Stearns collapsed because they were reliant on fickle funding in an irrational market. In time we'll see that the well capitalized JP Morgan, who is a fortress in terms of capital, got a terrific deal. You're parroting the collective fear of the market...this is the equivalent of a crazed mob. The voices of the rational and truthful are inaudible amidst the panicked.