So, it's official: The Treasury has announced its rescue plan for troubled mortgage buyers Fannie Mae and Freddie Mac. The two giants will be placed in conservatorship under the Federal Housing Finance Agency, while the Treasury will buy some of their preferred shares. Current management is out. The ultimate price tag could be as much as $200 billion ″ but it is about more than money. The tremors will be felt in the national elections, Congressional politics and the markets. Here is a quick look at who gets fist-bumps, and who just gets bumped.
Homeowners: The national mortgage default rate is a whopping 9%, but the rescue plan should bring some relief, as the government can exercise more control than private-sector companies can. Interest rates will likely come down, and, as Jim Cramer said this weekend, 'The government can cut the mortgage payments, and it can extend the terms, say to 45 years. It can take any hit to keep you in your home, and the paper is still insured.' Of course, homeowners are also taxpayers and eventually could end up footing the bill anyway.
Hank Paulson: Paulson was a reluctant combatant in the Fannie and Freddie 'holy wars' but he canvassed the big thinkers on the subject, tapped outside advice from Morgan Stanley and pushed for a solution quickly.
Short-sellers: Nationalization is likely a victory for many short-sellers who bet against the ability of Fannie and Freddie to rebound from their troubles. Fannie and Freddie shares, already down roughly 90% since October, probably won't be pretty to look at Monday. But their success won't be morally complicated: The blame for Fannie's and Freddie's troubles fall squarely on their odd structure and the housing crisis, Paulson said in his statement.
Pimco's Bill Gross: The co-chief investment officer of the bond giant Gross bet that his Fannie and Freddie bonds would be saved by Federal intervention, and he was right. He tripled his bet on mortgages in May so that they comprised as much as 61% of his fund. Then he boldly plumped for Treasury to use its own balance sheet in a bailout, preferably buying Fannie's and Freddie's preferred shares. Gross wasn't above talking smack: He provocatively ended his last investor letter with the taunt, 'Booyah Hank?' poking at Paulson's insistence that shareholders suffer 'moral hazard.' Anyone 'aspiring for a perfect 800 on the Wall Street policy exam would conclude that the tab will be less if paid up front, than if swept under a rug of moral umbrage intent on seeking retribution for any and all of those responsible,' Gross nudged.
Republicans: The Bush administration gets kudos for avoiding the economic meltdown that likely would have resulted from further Fannie-Freddie troubles, at least for now. That could boost the candidacy of John McCain, or at least dull any Democratic attacks on things economic. Fannie and Freddie have long been generally supported by Congressional Democrats and generally loathed by Republicans, who wanted the two giants to shrink to a more-manageable level. In conservatorship, Fannie and Freddie are temporarily making 'big government' even bigger. But, as McCain economic adviser Doug Holtz-Eakin said today, 'the long-term reforms are to scale down Fannie and Freddie so their size is no longer a threat. And then privatize them.'
Stockholders: Common and preferred shares will remain listed but those juicy dividends are gone. Still, it isn't the total wipeout many expected. Many banks and financial institutions, including J.P. Morgan Chase, had poured money into Fannie's and Freddie's preferred shares. The threat of the banks' holdings becoming worthless raised the threat of a broad banking crisis. But Treasury will buy some of the preferred shares, and banishing the dividends will save Fannie and Freddie $2 billion a year.
Lobbyists: The mortgage giants wove a mantle of invincibility with their $170 million lobbying bills in the past decade. They spent $3.5 million on lobbying just in this year's first quarter, spreading their largesse among 42 outside lobbying firms. Treasury has turned off the Fannie-Freddie lobbying spigot. Sen. Barack Obama pointedly said in a statement about Fannie and Freddie today, 'any action we take must be focused not on the whims of lobbyists and special interests worried about their bonuses and hourly fees.'
Congress: Congress has been publicly censured for Fannie's and Freddie's troubles even by its own members. Sen. McCain has long derided the political strength of Fannie and Freddie as an example of 'crony capitalism.' Obama said, 'Washington ignored the warning signs in the housing and financial markets.' Cramer railed in a column this weekend, 'We are at this extreme because our policymakers have simply been lazy, wrong, intransigent and foolish. If this were the private sector, all of these people would be candidates to be fired.'
Management: Paulson didn't blame management, diplomatically saying 'I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction. GSE managements and their Boards are responsible for neither.' He added that he hoped most of the employees would stay on. Still Fannie CEO Daniel Mudd and Freddie CEO Richard F. Syron will be succeeded by former TIAA-CREF Chairman Herbert M. Allison and Carlyle Group senior adviser David M. Moffett, respectively. Regime change isn't exactly a ringing federal endorsement.
Value investors: Long-term managers with big stakes in Fannie and Freddie included David Dreman of DWS Dreman Concentrated Value, Richard Pzena of John Hancock Classic Value, and John Thompson of Thompson Plumb Growth as well as beleaguered Bill Miller of Legg Mason Capital Management. Miller was so confident that Freddie would rebound that he took his stake up to 12%, making him its largest shareholder. Fannie and Freddie stock will stay listed, but it's a bold bet to believe that it will recover enough to make a significant profit.
Heidi N. Moore |
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