Treasury Takeover of GSEs: 10 Key Points
I am still working my way through the details of the GSE takeover by Treasury, but here is my initial read of the details:
• FHFA will act as conservator of the two firms -- meaning the US government has day-to-day control of Fannie and Freddie;
• The conservator's goals are to (1) put the company in a sound and solvent condition, and (2) carry on the company's business and preserve and conserve the assets and property of the company.
• There is an immediate moratorium of the firms' lobbying activities.
• New lending facility: "Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks;"
• Fannie and Freddie will increase their mortgage-backed securities portfolios through the end of 2009. (Treasury is initiating a temporary program to purchase GSE MBS).
• Treasury purchases the mortgage-backed securities from the firms; no word about any derivatives or swaps owned by the two;
• Starting in 2010, the portfolios must be reduced at the rate of 10% per year.
• Both CEOs (Daniel Mudd and Richard Syron) dpart after a transition period. TIAA-CREF Chairman Herb Allison will take over as CEO of Fannie; U.S. Bancorp Chief Executive David Moffett at Freddie.
• Senior preferred stock purchase agreement includes an upfront $2 billion issuance of senior preferred stock with a 10% coupon ($1B per GSE); Dividends are quarterly starting in 2010, and warrants represent an ownership stake of 79.9% in each firm.
• 3 Goals of the takeover: market stability, mortgage availability and taxpayer protection.
• The takeover is the result of a "detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve;"
This looks like a 80% haircut for the common holders, I am trying to figure out if this is a haircut for the preferred holders . . .
UPDATE: It seems the Preferred Shareholders take an even bigger haircut than the common, as they lose the present dividend payments.
Regarding common and preferred losses: "With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares . . . conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses."
On Moral Hazard: "Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise."
>
Sources:
Treasury Department, September 7, 2008
http://treasury.gov/press/releases/hp1129.htm
Treasury Department Reports:
FHFA Director Lockhart Remarks on Housing GSE Actions
Fact Sheet: FHFA Conservatorship
Fact Sheet: Treasury Preferred Stock Purchase Agreement
Fact Sheet: Treasury MBS Purchase Program
Fact Sheet: Treasury GSE Credit Facility
Sunday, September 07, 2008 | 12:04 PM | Permalink
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Comments
"Starting in 2010, the portfolios must be reduced at the rate of 10% per year."
WTF? How can I invest in a company that plans on reducing its business by 10% a year. BTW, this will cause the bottom of housing to be extended and, dare I say, over-shoot to the down side. Look for recovery in 2015.
Posted by: johnnyVee | Sep 7, 2008 12:10:44 PM
The treasury to get preferred senior to existing preferreds, a 10% coupon and 80% of the common. Exisitng preferred dividends are eliminated.
Whether prefs get protected or not has been one of the detail uncertainties with this bailout. The banking industry’s lobbying to protect itself from losses on the preferred fell on deaf ears as well it should have. If taxpayers lose a penny, the common and preferred should and will get wiped out. Having to pay a 10% coupon on whatever the government gives them will assure there is nothing left over. Banks are going to have to take other than temporary impairment on their preferred holdings creating a new capital hole to fill in addition to that from credit losses. Banks will/may rally but this isn’t really good news. Not going to help credit or do anything to balance the negative effects of rising unemployment.
Posted by: Doug Kass | Sep 7, 2008 12:12:33 PM
johnnyVee,
Maybe you don't like the edict from an investor point of view; but as a taxpayer, I fucking love it.
Get the US Government out of this business. We already know they can't do anything efficiently; so turn it back over to private enterprise where it should have been all along.
Hallelulah!!
Posted by: BG | Sep 7, 2008 12:21:21 PM
They should extend the no-lobbying to all financial firms, heck, why not to all firms? That quid pro quo would go down quite well with the 95% of Americans who are paying for this.
Posted by: VennData | Sep 7, 2008 12:22:16 PM
Interesting picks for the CEO positions.
What about the common?
Posted by: TopForeignStocks | Sep 7, 2008 12:22:32 PM
Barry:
Good to see Allison from Tiaa-Cref being tapped to run Fannie-Mae instead of another Wall Street insider. Tiaa's track record has always reflected a careful, conservative approach to managing other people's money and with good results.
Posted by: alnval | Sep 7, 2008 12:22:47 PM
This looks like it is senior to the existing preferred with both dividend and liquidation preference and a dividend ratchet under covenant breach scenarios. They've cut the baby between the preferred and the sub-debt, leaving the latter alive, much to the chagrin of Ackman et al.
I like this plan and disagree that it won't help credit and liquidity markets. This ate least sets a floor on where the buck stops with more than half of the mortgage paper out there. That will bring some needed stability which will lead to increased confidence and activity. It won't happen right away but the market's discounting mechanism will impute it into equities fast. That means a solid rally this week that may self-perpetuate. But we'll see more downdrafts and hiccups and perhaps an infarction between now and next fall.
Posted by: devalera | Sep 7, 2008 12:25:44 PM
Another good site for discussion is nakedcapitalism.com
I'm jumping between here and there right now as Yves and Barry keep updating.
Posted by: karen | Sep 7, 2008 12:28:01 PM
Berry-- Been a reader for years and just wanted to thank you for posting the information on a SUNDAY (God's day of rest)! I truly appreciate you and admire your resolve for the facts. While a Harvard MBA, they sure didn't teach us all this invaluable stuff. Thanks brother, you are in my prayers.
Posted by: David Block | Sep 7, 2008 12:30:09 PM
Allison was a bagman for Enron while at Merrill. Come on guys read your history.
One among many:
http://articles.latimes.com/2002/jul/30/business/fi-merrill30xjul30
Posted by: MW | Sep 7, 2008 12:35:12 PM
the best part is the note in the "budget" section of the release where it says that since the Treasury can hold the GSE MBS till maturity, there is little risk of loss to the taxpayers...
this is EXACTLY the beef Einhorn has with Allied Capital - their failure to mark losses to market.
I guess the treasury can get away with it - they just print more moolah if they need to.
Posted by: Kid Dynamite | Sep 7, 2008 12:38:53 PM
This is "Mark to MARX"
Posted by: mw | Sep 7, 2008 12:41:45 PM
Little off topic, but I notice that Ike's path on the FoxNews update this morning projects this hurricane to go through most of the gulf oil rigs around Friday. Unlike Gustav, which stayed to the east of the greatest density...also the hurricane should be about 115-120 mph when it reaches the west Louisiana east Texas area..for all you oil bugs....
Now back to your regular program..
Bruce in Tennessee
Posted by: Bruce | Sep 7, 2008 12:47:48 PM
Ok, I am calming down now. I guess that since this move was inevitable, the ONE saving grace would be if the taxpayer actually came first for a change...i.e. not one dime for any preferred or common equity holders (especially dividends) if the taxpayer loses....other than that we are still talking about a major American tragedy but at least we avoid the stick in the eye of having to bail out "investors"
Posted by: Rich Shinnick | Sep 7, 2008 12:49:29 PM
I don't see spreads narrowing because of this fucadoo. Who in their right mind things that this really fixes anything except if inflation is a monetary event, boy are we ever going to have a big episode of hyper-inflation coming down the pike.
Posted by: JustinTheSkeptic | Sep 7, 2008 12:59:33 PM
>>On Moral Hazard: "Market discipline is best served when shareholders bear both the risk and the reward of their investment.<<
And what about creditors bearing both the "risk and reward" of their investment? Once again, this looks like a creditor bailout just like we saw with Bear. The politicians(which includes the Fed) will talk about the losses of the shareholders and conveniently avoid mentioning the FACT that they are bailing out the creditors. Simply absurd.
Posted by: Myr | Sep 7, 2008 12:59:38 PM
KidDynomite, "inflation is the cruelist tax of all."
Posted by: JustinTheSkeptic | Sep 7, 2008 1:01:38 PM
Agree with JohnnyVee- Seems to me that the "forced selling" of 10% a year, will insure lower prices. Anyone who has ever bopught a home knows that if the owner has to sell, you don't pay retail.
Posted by: larster | Sep 7, 2008 1:02:03 PM
with a 1 year time horizon, would you think is a good ideia, to invest in MBS mutual fund?
How much of a % valuation is "expectable"? 10%?
12%
Posted by: In cash | Sep 7, 2008 1:03:46 PM
Forgot to include a question regarding Federal Home Loan Banks. Is their mention indicative of problems with the amount of money they have been throwing into the system?
Posted by: larster | Sep 7, 2008 1:04:56 PM
I wonder where Freddie and Fannie stocks are headed?
According to this article, Fannie and Freddie stock remains untouched by conservatorship, and will trade as they always. This comes directly from Treasury, so I'm quite confident the stocks will trade as normal:
http://www.ehow.com/how_4503604_mac-fre-stock-during-conservatorship.html
How to Trade Fannie Mae (FNM) and Freddie Mac (FRE) Stock During Conservatorship
Whether they trade higher or lower remains to be seen!
Posted by: david | Sep 7, 2008 1:05:20 PM
VennData's Law of Unintended Consequences:
The unintended consequences of any government solution are proportional to the number of points on the cover page.
Posted by: VennData | Sep 7, 2008 1:12:13 PM
David Block: re Herb Allison Enron and Merrill
Fair enough
I had better luck finding the article at the following url:
articles la times 2002 jul business merrill30xjul30
It would also be fair to say that after Allison left Merrill in 1999, and joined Tiaa in 2002, that Tiaa managed to avoid the CDO problems that plagued the rest of the market place.
Posted by: alnval | Sep 7, 2008 1:19:53 PM
The XLF rallied 3.6% on Friday. No doubt this was insider trading by those in on the bailout deal.
I assume we get another rally in the XLF on Monday, and maybe Tuesday also. If the XLF can make it up to 23, it might be worth playing from the short side, at least for the next few weeks.
Posted by: D.L. | Sep 7, 2008 1:20:23 PM
If there was a God in heaven, would Franklin Raines et al. be in jail?
Posted by: John A | Sep 7, 2008 1:28:19 PM
