tag:blogger.com,1999:blog-4815867514277794362.post736455952333689218..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Some quick analysis of what the Frannie bailout meansJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-4815867514277794362.post-4031308766712148382008-09-18T04:18:00.000+10:002008-09-18T04:18:00.000+10:00"So without even so much as a shareholder vot..."So without even so much as a shareholder vote, the companies were nationalized."<BR/><BR/>The difference is that FM&FM were GSEs - in many aspects, already an arm of the government. I thought that was a bad idea, just looking at it (private profit, public risk).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-55938158732228686672008-09-09T06:55:00.000+10:002008-09-09T06:55:00.000+10:00From the NY Sun: Imagine if the Bush administratio...From the NY Sun: <BR/><BR/>Imagine if the Bush administration, having decided that gasoline prices are too high, decided to nationalize ExxonMobil. The federal energy secretary held a Sunday press conference to announce that the Bush administration had replaced the company's management, that the company would henceforth be run with the goal of reducing gasoline prices for drivers, and that any profits the company made would be the property of the federal government, which would now control 80% of the company. As for the company's existing shareholders, they are out of luck — they won't get any more dividends; they won't even get a chance to vote on the deal. <BR/><BR/>Substitute mortgage prices for gasoline prices and you get a pretty good sense of what the Bush administration and its secretary of the Treasury, Henry Paulson, did over the weekend in respect of Fannie Mae and Freddie Mac. The administration decided that its interest in low mortgage rates as an artificial boost to housing prices was more important than the property rights of the shareholders of Fannie Mae and Freddie Mac. So without even so much as a shareholder vote, the companies were nationalized.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-18571280120796716052008-09-09T05:09:00.000+10:002008-09-09T05:09:00.000+10:00You say the common should have been wiped out even...You say the common should have been wiped out even more than it was, but they did not ask for this bailout. If real losses eventually wiped them out then too bad for them, that's the risk they take. But now the government has wiped them out 80% for the government's own benefit. What happened to property rights? The government has taken 80% of the capital owned by the shareholders of these companies. If that is for a social benefit, fine, but the government ought to buy out the shareholders, not just steal from them. You say at one point that the shareholders have been wiped out by future losses. That is silly. We won't know for a couple of years whether that was the case or not. What if we find out two years from now that the losses clearly are not turning out to have been enough to wipe out the equity? Do the warrants get canceled? No, but they should. <BR/><BR/>What has been accomplished by confiscating the propert of GSE shareholders? The most you can possibly hope for is that mortgage rates will come down 50 bp or so, and that could have been achieved without the 80% dilution. The 80% is purely punitive in nature - it serves no other purpose in this deal than to punish shareholders. What exactly did the shareholders do wrong to deserve to have their capital stolen from them? Barney Frank wanted the GSE's to stay levered up. The GSE's could have sold off their retained portfolios to de-lever but government would not allow it. THe GSE's did not have to take on more mortgaes earlier this year but the government begged them to - even LOWERING their capital requirements. THe gov't begged the GSEs to take on larger mortgages, and they did. Then the government encouraged them to raise capital. FNM did, and is just as screwed now as is FRE. Paulson completely suckered the buyers of FNM's last capital raise. <BR/><BR/>If the shareholders for some reason deserve punishment, why don't the debt holders? Aren't they just as responsible for whatever horrors the GSEs have inflicted on the world? <BR/><BR/>Why hasn't the equity of LEH and MER been wiped out? THey did dumb things and the gov't had to "bail" them out by providing access to the discount window.<BR/><BR/>All the crowing about how shareholders deserved to be wiped out here is misplaced. The gov't has just stolen private property. Just because you like the result does not make it right.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-8499230650372680722008-09-09T01:19:00.000+10:002008-09-09T01:19:00.000+10:00Hey, good job, John. Appreciated the analysis. A...Hey, good job, John. Appreciated the analysis. A lot of this will hinge on how foreign investors view the new implicit guarantee, and how mortgage losses proceed from here. <BR/><BR/>My guess is that losses get much worse from here, but that this action has a marginal positive impact on the ability of people able to put down a down payment to finance the purchase/refinance of homes. It doesn't help those that are inverted on their mortgages, or can't make a decent down payment, though.David Merkelhttps://www.blogger.com/profile/05073877918072914309noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-80772200648528168372008-09-08T20:12:00.000+10:002008-09-08T20:12:00.000+10:00You are indeed 100% correct - all of Fannie's pref...You are indeed 100% correct - all of Fannie's preferreds are non-cumulative.<BR/><BR/>Fannie specifically disavows the cumulative structure for regulatory purposes here<BR/><BR/>http://www.fanniemae.com/markets/debt/pdf/fundingnotes_2_01.pdf<BR/><BR/>The structure I talked about was common for banks - and unknown for GSEs. <BR/><BR/>Ignorance.<BR/><BR/>Mine.<BR/><BR/>JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-82241028758025722492008-09-08T20:10:00.000+10:002008-09-08T20:10:00.000+10:00Further follow up -This a typical bank preferredht...Further follow up -<BR/><BR/>This a typical bank preferred<BR/><BR/>http://www.marketwatch.com/news/story/fitch-rates-bbt-capital-trust/story.aspx?guid={8FC37C4B-E762-410F-8993-4BA5017BFF20}&dist=hppr<BR/><BR/>Note it is cumulative and has the same terms as described in the main post...<BR/><BR/>I have yet to find a cumulative fannie one yet.<BR/><BR/>Sorry.<BR/><BR/>JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-18911014687739120122008-09-08T20:02:00.000+10:002008-09-08T20:02:00.000+10:00A further correction:The R series is face value 25...A further correction:<BR/><BR/>The R series is face value 25 - non cumulative.<BR/><BR/>Must be something in GSE legislation regulation.<BR/><BR/><BR/><BR/>JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-92227430021218378052008-09-08T19:53:00.000+10:002008-09-08T19:53:00.000+10:00I apologise about the preferreds - being non-cumul...I apologise about the preferreds - being non-cumulative. Most bank prefs are cumulative. I know - I have at at times even been paid the accrued interest in a lump sum. <BR/><BR/>There is a tradition where the face value is $50 the pref is non-cumulative - as per the example that you gave - and where the face value is $25 the pref is cumulative. <BR/><BR/>But you are right - this pref does not have a five year limit and is non-cumulative.<BR/><BR/>that changes the analysis somewhat.<BR/><BR/>JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-49543337115131999722008-09-08T19:31:00.000+10:002008-09-08T19:31:00.000+10:00I am pretty sure the pref dividends are non-cumula...I am pretty sure the pref dividends are non-cumulative (see here for 1 particular class: http://www.fanniemae.com/global/pdf/ir/resources/preferred/seriesd.pdf). Is this not how they received full equity credit for capital calculations?<BR/>Redeemable, cumulative prefs are just another form of sub debt.<BR/><BR/>So if dividends are stopped (at directors' election), there is no build up as you assume, for the purposes your "5 year exit" calculation....(I think)Andrew Clavellhttps://www.blogger.com/profile/05763965441431952240noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-27858477579085041382008-09-08T16:19:00.000+10:002008-09-08T16:19:00.000+10:00thankyou, thankyou! Very helpful to get this anal...thankyou, thankyou! Very helpful to get this analysis.<BR/><BR/>So... Why is the global market up 3%? Do they think that the government is bailing out wall street? Or that RE prices will stabilize? Or just that it feels so good when the beating stops... if only for a minute?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-77409183347359679592008-09-08T11:00:00.000+10:002008-09-08T11:00:00.000+10:00Nice post, you work fast.One other issue in terms ...Nice post, you work fast.<BR/><BR/>One other issue in terms of future earnings power is the likely significant reduction in the "g-fee" charged to the I-banks packaging the loans. Since the dual mandate of promoting affordable housing financing and maximizing shareholder value has been reduced to the former, this is a logical step (given this new priority). My guess would be the first adjustments to the fee structure would be on the more borderline collateral which dealers in the past might not have shown into the GSEs because of prohibitively priced g-fees (not all conforming loans are created equal).<BR/><BR/>Conveniently, the Treasury will now have a bid for "new GSE MBS", as vague as the purchase program currently stands. This combination should encourage an easy arb trade for dealers to wash through existing loan books, or bid on new loan packages that they would otherwise not have touched given current conditions.<BR/><BR/>The net result for FNMA and FHLMC is that they will increase their credit risk on a loan level basis for some of this new business, while being left which less matched capital to absorb future losses.Anonymousnoreply@blogger.com