tag:blogger.com,1999:blog-4815867514277794362.post5625247370752238021..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Modelling Fannie Mae and Freddie Mac – Part VIJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger25125tag:blogger.com,1999:blog-4815867514277794362.post-75432872623781754372009-10-28T08:24:37.534+11:002009-10-28T08:24:37.534+11:00I believe the truth of my criticism posted on Aug ...I believe the truth of my criticism posted on Aug 20th has been borne out. A simple bet such as S&P Case Shiller futures has greatly outperformed gse preferred stock since then. I still believe that if one wants to bet on housing than one should bet on housing: keep it simple.RAnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-23310254517439649622009-08-28T10:49:52.421+10:002009-08-28T10:49:52.421+10:00SEC staff (remember, the guys charged with protect...SEC staff (remember, the guys charged with protecting investors?) are concerned that the FHFA has not been following the law on conservatorship--which creates an interesting new angle. <br /><br />Sometimes it takes a long time to get to the right answer, but this IS the United States. Anyone remember supervisory goodwill and the thrifts?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-77898820102683699312009-08-27T11:39:44.166+10:002009-08-27T11:39:44.166+10:00Fascinating series. Congratulations on a job well...Fascinating series. Congratulations on a job well done. <br /><br />One way to reduce political risk is to become active in the political process. With the GSEs forced to dismantle their government relations staffs, the shareholders have no voice in Washington. There is a group of Fannie and Freddie shareholders organizing a trade group to educate policy makers on the value of the traditional GSE mission. If you would like to get involved, please contact me.<br /><br /><a href="mailto:derek.pilecki@gatorcapital.com" rel="nofollow">derek.pilecki@gatorcapital.com</a>Derek Pileckihttp://derekpilecki.com/72/fannie-mae-shareholders-to-preserve-value/noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-83170541917607247752009-08-22T09:26:36.085+10:002009-08-22T09:26:36.085+10:00Dear John:
I'm enjoying the series, and I hav...Dear John:<br /><br />I'm enjoying the series, and I have long enjoyed your blog. Your case is well laid out and, obviously, well thought out. One thing you don't mention, or if so I have missed it... Fannie and Freddie are still in business, still buying or guaranteeing loans. This is likely to continue, and although the business is likely to perform better, they will still have losses in the future related to loans they have not yet even guaranteed. Is your hypothesis that these future losses on loans originated since the end of your analysis (or loans yet to be originated) is small enough not to matter? I don't know what these losses will be, but it will be greater than 0 and, in the event you are 100% accurate with your scenario, this part would mean that you have overestimated the time period in which Freddie will earn its way out of government ownership. That is to say, it will take longer.<br /><br />Is this a fair argument? Do the current and future loan originations need to be assessed? I believe (with some justification - for the last few months I have been working in the industry) that the loan quality is significantly higher now than it used to be, but it still will suffer losses.<br /><br />Keep up the good work.<br /><br />AOMAOMhttps://www.blogger.com/profile/13428872644613851443noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-34056867294701691502009-08-21T01:26:32.279+10:002009-08-21T01:26:32.279+10:00"then the risk turns to perception that priva..."then the risk turns to perception that private investors are reaping huge profits on the back of a taxpayer subsidy"<br /><br /> That's funny, as the current perception is that the taxpayer is reaping huge profits on the back of usury level interest rates on pref shares held by US gov in F&F <br /><br />10% interest for the right to hold loss reserves is does not a subsidy make.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-65174492566120989662009-08-21T00:20:09.708+10:002009-08-21T00:20:09.708+10:00Ergian - you are right - but that I think is post ...Ergian - you are right - but that I think is post 11. I know - Post 11 sounds a little extreme... but hey - this is one of those series.<br /><br />JohnJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-64232223147051758712009-08-20T23:55:35.087+10:002009-08-20T23:55:35.087+10:00Well, there is an "agreement", that was ...Well, there is an "agreement", that was forced upon FnF. So first, FnF have written a warrant for 80%, that could be exercised, and they have "agreed" to pay 10% dividend on any draw they make on the facility.<br /><br />BUT, what do FnF get in return for this? This is a very delicate question. Before C-ship, FnF had a mission and a Charter to follow, and private shareholders to answer to. After C-ship, as far as the forced upon "agreement" are concerned, the Conservator has no possibility to follow a mission or go about business as before. The Conservator got 80% warrants and 10% dividend on draws, BUT, with this also come a strict responsibility to work hard and forcefully NOT to make any draws, and to say NO to everything that could lower assets values. "Conserve and preserve assets and restore to solvency" is the text.<br /><br />If you look at what the Conservator has done, it is rather the opposite. IMO most people don't realize this.<br /><br />ErgienAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-4473712920334615502009-08-20T23:42:48.997+10:002009-08-20T23:42:48.997+10:00from bloomberg:
"Bernanke has urged Congress ...from bloomberg:<br />"Bernanke has urged Congress to back part of Hoenig’s proposal for dealing with faltering big banks, which would wipe out shareholder equity in any that receive government aid. The Treasury Department’s so-called resolution authority plan, while likely to result in stockholder losses, doesn’t require it." <br /><br />http://www.bloomberg.com/apps/news?pid=20601087&sid=aFsKPn0jLwSUAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-18012360573194267342009-08-20T11:22:34.905+10:002009-08-20T11:22:34.905+10:00I'm not sure I buy your analysis, there is lot...I'm not sure I buy your analysis, there is lots of downside risk still to housing, and as you say the political risk is huge.<br /><br />BUT, if you were to buy preferreds just to gamble, which one? I was looking through the listings today -- and what a load of FNM.xxx trading for pennies!zanonnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-85458187314488055132009-08-20T11:04:26.582+10:002009-08-20T11:04:26.582+10:00Did anyone else notice that the amount a bank got ...Did anyone else notice that the amount a bank got in TARP funding was very close to the dollar value of the loss on fre/fnm preferred?<br /><br />Just thought it was worth noting here...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-87630848429653928832009-08-20T05:38:53.130+10:002009-08-20T05:38:53.130+10:00I got interested in the prefs. as a result of an o...I got interested in the prefs. as a result of an offhand comment by Jamie Dimon during the 3Q08 chase call, where he said there might be residual value in them. That said, there have been comments in the news that the administration intends to eventually take the GSE's into govt. ownership, as a quasi-agency like GNMA.<br /><br />There is an inherent conflict between the goals of a profit-making firm and a govt. agency solely concerned with a well-functioning conforming mortgage market. That's why the GSE's were taken into administration, and why the firms were such a political football beforehand. They kept the private enterprise hat on and at least FNM got their pocket picked by Mozilo.<br /><br />If the govt. didn't step in the GSE's would have been insolvent. That fact argues against a recovery here. In favor of some recovery is the fact that many banks own the prefs. in portfolio, and took big writedowns. I've had a working assumption that there'll be an exchange offer down the road at 5-10% of face just to help the banks and to reduce a contingent liability.RichLnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-78844570592969159022009-08-20T04:10:04.625+10:002009-08-20T04:10:04.625+10:00John,
I've got a horse with the inside lane t...John,<br /><br />I've got a horse with the inside lane that's got a shot! Come to papa!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-13156280451447195862009-08-20T04:02:37.202+10:002009-08-20T04:02:37.202+10:00John,
You mention restoration of dividends. What...John,<br /><br />You mention restoration of dividends. What do you think of the odds that divvies are not restored, and that F&F just choose to redeem the preferreds? <br /><br />Later,<br />DavidAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-17168364085731173822009-08-20T03:38:35.643+10:002009-08-20T03:38:35.643+10:00Thanks for the interesting analysis. My biggest q...Thanks for the interesting analysis. My biggest question would be HOW MUCH of your portfolio you are willing to put in a bet like this. After all, the downside is total loss of capital.BwOhttps://www.blogger.com/profile/02391137279845715902noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-10749780597720539402009-08-20T02:46:56.393+10:002009-08-20T02:46:56.393+10:00there is talk of a good bank/bad bank breakup of t...there is talk of a good bank/bad bank breakup of the gse's. wouldn't that make the pref's worthless?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-20636810156533362942009-08-20T01:20:02.985+10:002009-08-20T01:20:02.985+10:00Very good analysis, because it is exactly a copy o...Very good analysis, because it is exactly a copy of my own thinking.<br /><br />I have one issue, that bothers me a lot and that is, FNM slavish booking of reserves as a function of NPL's.<br /><br />If you have a company large as FNM and FRE and peoples ability to pay will show follow the overall economy, but only a minority of delinquent mortgages are underwater with more than 30%.<br /><br />FNM has 400 BUSD of underwater mortgages, but only 150 or so are 125% or more under water. And only a fraction of those underwater are also seriously delinquent, that is a combined 50 BUSD. Of this some part are credit enhanced, and should cover even underwater mortgages.<br /><br />It is IMO IMPOSSIBLE to go from adequately capitalized to 50 BUSD in negative equity, in one year, with the book of business FRE and FNM have, and only a 6-15% house prices decline, depending on what index you use.<br /><br />The dramatic panic could case the huge rice in delinquencies, because you cannot estimate them, but you can, however, quite easily estimate the losses, since you now underwater mortgages, and house price decline.<br /><br />FNM has 51 BUSD in credit loss reserve, and also has around 15 BUSD in PBT. Still only 3 BUSD is actual charge-offs.<br /><br />I'm becoming insane with Lockhart and Allison reserve policies, since they force FRE and FNM to make draws that in turn effectively kill these companies.<br /><br />In other worlds, they are killed not by actual losses, but by the huge build op of reserves for future losses.<br /><br />Great, don't you think? ;-(Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-54613297556339231792009-08-20T00:25:44.180+10:002009-08-20T00:25:44.180+10:00The model requires that housing does not get drama...The model requires that housing does not get dramatically worse from here - I will go through the sensitivities in the next post.<br /><br />_ <br /><br />I agree political risk is sub optimal - but I purchased at 1.7 cents in the dollar and they are still only about 4-5 cents in the dollar. The 6000 percent return on my purchase makes the political sub-optimality something I can deal with. <br /><br />Got anything with a better win return? I am all ears...<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-55509590593738116052009-08-20T00:16:27.993+10:002009-08-20T00:16:27.993+10:00One crticism of this well done analysis: Do you ag...One crticism of this well done analysis: <br><br>Do you agree that your conclusion "Buy preferred stock" is ultimately a bet on a housing recovery sufficient enough to limit total GSE losses to levels that allow these companies to free themselves from the Government liability and return to profitability? <br>I would argue that expressing this housing view via GSE preferreds is suboptimal because it is overly exposed to model risk and political risk. In other words, if you really believe in a housing recovery, aren't there simpler or cleaner ways to express this view that don't expose you to such unhedgeable risks? At the end of the day (or five years) you might be totally right about you loss estimates yet lose big on your investment.RAnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-76077693790954500782009-08-19T22:46:00.208+10:002009-08-19T22:46:00.208+10:00To the poster who thinks the political concerns ar...To the poster who thinks the political concerns are overstated: Where have you been in for the last 6 months. Have you seen how the government dealt with bond holders of GM and Chrysler. The Roberts Supreme Court didn't save them. I think a real analysis of the political risks have to deal with possible scenarios should the Government be paid back, and also should deal with whether the GSE's will be forced to cut standards to support any efforts by the Obama administration to "stabilize housing prices".Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-38531070185599248672009-08-19T17:17:19.943+10:002009-08-19T17:17:19.943+10:00Hi John, great series.
In the UK, government offi...Hi John, great series.<br /><br />In the UK, government officials have suggested legislating to limit mortgages to a 3x salary multiple, compared to recent mortgages which have been up to 6x unproven income. Doing this overnight would obviously crater the housing market, and cause untold pain, though I haven't seen anyone say that anywhere.<br /><br />I see parallels with the GSE's in that given they provided a subsidy to US housing, removing that subsidy would cause house prices to fall. If the Republicans want house prices to stop falling, then they have to allow the GSE's to continue to exist.<br /><br />Perhaps they'll be scaled down in size or gradually phased out, but that would have to be much further down the road.<br /><br />Thomasthttps://www.blogger.com/profile/00988364969048526851noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-65441496125201203542009-08-19T14:39:03.582+10:002009-08-19T14:39:03.582+10:00I think your political concerns may be unfounded. ...I think your political concerns may be unfounded. You need to take into account the fact that the Fifth Amendment to the US Constitution prohibits a taking of private property without the payment of "just compensation" to the property owner.<br /><br />Contrary to Henry Paulson's view of the world, the government cannot take the liberties or extract the spoils of a corporate raider in its dealings with the GSEs. The junior preferred stock cannot arbitrarily be wiped out by political action without compensation to the holders, and, if your analysis is correct, the preferred should be money good in an orderly liquidation or sale. <br /> <br />The dividends present an even more serious issue for the government.<br /><br />Since they are not cumulative, each dividend passed will never be paid. The exercise of control by the government to prohibit payment of these dividends, while paying itself a 10% return on the senior preferred it negotiated with itself, also has all the elements of a taking. <br /> <br />While there might be valuation arguments with respect to compensation for a taking of the preferreds themselves, the only "just compensation" for taking of a fixed dividend is the dividend.<br /><br />The statute of limitations on taking actions against the government is 6 years and I have no doubt suits will come long before that if this administration does not take positive action soon.<br /><br />I don't think they want these issues before the Roberts' Court.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-86136408398232604362009-08-19T14:26:19.498+10:002009-08-19T14:26:19.498+10:00I will put the whole lot on a PDF when finished. ...I will put the whole lot on a PDF when finished. Quite a long document already.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-33185780653178156212009-08-19T14:12:43.309+10:002009-08-19T14:12:43.309+10:00This might sound silly - but would it be possible ...This might sound silly - but would it be possible to have all the parts in one PDF? I know I can focus my thoughts when on paper.Alex Cnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-71180907878371801712009-08-19T12:20:11.390+10:002009-08-19T12:20:11.390+10:00Maybe Rod =
But as long as they liquidate slow en...Maybe Rod =<br /><br />But as long as they liquidate slow enough I get paid on the prefs - but the common may be near worthless... <br /><br />But if I am right and they are not zombies then it says something nice about quasi-government finance and something awful about private sector finance. Given I have spent my life in private sector finance that is not entirely comfortable.<br /><br />And is also the subject for a later post.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-90813599023671412902009-08-19T11:18:57.717+10:002009-08-19T11:18:57.717+10:00Re political risk - is there not more political ri...Re political risk - is there not more political risk should your thesis be correct? i.e. if the GSEs are insolvant then there is incentive to keep them in a zombie state to avoid crystalising the political fall-out from admitting the original plan failed. Conversely should they begin to return to positive value, then the risk turns to perception that private investors are reaping huge profits on the back of a taxpayer subsidy - hence more incentive to liquidate?Rodnoreply@blogger.com