So it looks like Fannie Day is finally approaching. The Wall Street Journal is reporting that a plan to shore up Fannie Mae and Freddie Mac could be announced as early as this weekend. No details of the plan are available, although the Journal says it is “expected to involve a creative use of Treasury’s new authority to make a capital injection into the beleaguered giants.”
Anyone want to take a guess about what the “creative use” might involve? Whoever gets it right will win the admiration of DealBreaker’s readers and lunch with Bess Levin. (Yes, we’ll pick up the tab.)
Update: Pimco’s Bill Gross, who has been urging the Treasury to act, just said he couldn’t comment about whether he’s been asked about buying new debt or preferred stock that might be issued as part of the rescue plan. We’ll take that as a yes.
Update II: Here’s what Pershing Square Capital Management’s Bill Ackman suggested the Fed do to rescue Fannie and Freddie.
Fannie Mae
Institutional buyers have no more appetite for the debt or preferred equity of financial companies, the manager of the world’s biggest bond fund said in an interview with CNBC’s Erin Burnett. Bill Gross, who manages the $130 billion Pimco Total Return Bond Fund, added that he didn’t expect retail investors had very many funds left to make further investments either.
After the interview Jim Cramer and Burnett speculated that Gross was trying to force the hand of Hank Paulson, who was authorized by Congress to use federal money to bail out government chartered mortgage giants Fannie Mae and Freddie Mac but has held back. If Fannie, Freddie and other financial institutions find themselves unable to raise money, the Treasury may believe it has to begin the bailout.
Gross this morning called for an even broader bailout of the housing market, calling on the Treasury to use funds to bail out mortgages as well as financial companies. And he seems to be betting on that bailout, saying that Pimco finds distressed mortgages an attractive investment.
Combined with word from HSBC that wealthy individuals are moving into cash and away from both stocks and bonds, this could put enormous pressure on the Treasury to act. Paulson colorfully explained that the authority to bail out Fannie and Freddie could be enough to forestall their collapse by saying that if you carry a pistol you might have to use it but if you carry a bazooka you probably won’t.
Gross seems to be saying that it’s time to take out that bazooka.
“Rob Levin has touched virtually every part of this company,” CEO Dan Mudd said.
Fannie Mae CEO Dan Mudd Announces Management Restructuring to Drive Capital Management and Credit Loss Reduction Plan [Fannie Mae]
The plan to bolster Fannie Mae and Freddie Mac by talking up the Treasury’s ability to bailout their debt while talking down the possibility that the two government sponsored mortgage companies could nationalized seems to be working.
Reuters reported early this morning that the Treasury Department believes that the two companies should remain “shareholder-owned,” something that Merrill was reportedly telling clients on Friday. We reported earlier that regulators have recently become concerned that wiping out the shareholders of the companies could damage the balance sheets of regional banks and insurers, who hold vast amounts of the preferred shares of these companies.
This morning Freddie Mac easily placed $2 billion of debt with investors, which will also be taken as a sign that the companies can continue to fund their ongoing operations without a government takeover or bailout. Of course, the ease of debt sale already reflects the “bazooka bailout” that occurred when the Treasury was granted powers last month to extend credit lines to Fannie and Freddie and buy their debt and equity.
The term bazooka bailout, of course, comes from Treasury Secretary Hank Paulson’s description of his unlimited power to bailout Fannie and Freddie. “If you have a bazooka in your pocket and people know it, you probably won’t have to take it out,” Paulson told lawmakers when asking for the bailout powers.
The Federal Reserve has been quietly pressuring the Treasury Department not to adopt a rescue plan for Fannie Mae and Freddie Mac that would wipe out the value of their preferred shares, according to a source familiar with the matter. The Fed fears that any move that hurt the preferred could worsen the crisis in regional banks that is already under way.
At issue is $36 billion of preferred stock issued by Fannie and Freddie. Under several versions of widely discussed rescue plans for the mortgage giants, the US government would take a new preferred stake in the companies, subordinating or perhaps wholly eliminating the existing preferred. Critics of Fannie and Freddie believe such a move would be necessary to punish excessive risk taking by the companies and avoid creating additional ‘moral hazard.’
The situation is complicated, however, by the large share of preferred stock held by regional banks, many of which are viewed as possible candidates for failure in these credit crunched times. As the Financial Times reported over the weekened regional banks and US insurers hold the majority of Fannie and Freddie’soutstanding preferred stock. The Fed has begun advocating against wiping out these shares, saying the threat to stability of the banks is greater than the ‘moral hazard’ argument, a source familiar with the matter says.
“The fear is that this bailout, if done in a punitive manner, could be costly, resulting in even more bailouts,” the source said.
Last week Moody’s cut Fannie and Freddie’s preferred stock ratings from A to Baa3 on based on the uncertainty of how they would be treated in a rescue plan from the Treasury. That move could add to the need for the Treasury to take action soon, before banks are forced to report write-downs on the value of these lower-rated preferred shares. At the same time, the new pressure from the Fed to avoid wiping out the shares may stall an agreement on what form the intervention should take.
The supporters of the current structure of Fannie Mae and Freddie Mac appear to be winning the debate at Treasury. “Merrill Lynch is telling its that a source within Treasury says they want to keep the GSEs in their current form, as in shareholder owned. That implies no ‘takeover’ any time soon, ” finance blogger Accrued Interest tells us.
Yesterday’s frantic activity at the Treasury produced no news but there is widespread speculation that an announcement about Fannie Mae and Freddie Mac will be made in the near future. What do you think?
After the jump, take the reader poll.
As investors continue to dump shares of Fannie Mae and Freddie Mac, the debate over a possibly government bailout of the two mortgage giants is raging inside the Beltway. One camp of free market oriented Fed officials is arguing that any rescue plan must wipe-out shareholders and include severe regulatory restrictions on future activity while others, who are viewed as long-time supporters of the GSEs, are arguing that the government should act now to shore up the banks and save regulatory restrictions for a legislative debate later.
We’re told that the debate has become heated, with the two sides scrambling to build alliances and strong pressure from powerful lawmakers and lobbyists seeking to influence the outcome. The free-marketeers at Treasury fear that if they do not reign in the mortgage giants now, while they are at their weakest, Fannie and Freddie will continue to distort markets and put taxpayers at risk once the credit crisis has passed. The supporters of the current structure at Fannie and Freddie more or less agree, believing that if they are able to weather this storm they can emerge newly strengthened.
CNBC’s Jim Cramer yesterday claimed that the stocks of both companies were being pushed down by people with inside information. He called for the SEC to halt all trading in the companies, basically freezing current holders in place. “This is an outrage,” Cramer said shortly after the market closed yesterday. “It’s very clear that someone knows what’s happening.”
Cramer’s call, however, seems misconceived. The situation in Washington DC is still fluid, so it’s not clear that any could know what’s happening. There’s nothing to know beyond the range of possibilities and the widely known fact that the two companies are in trouble.
Cramer expressed outrage that someone apparently leaked to Barron’s earlier this week but leaking information to a newspaper is not insider trading. In fact, it’s closer to the opposite of insider trading, making formerly secret information available to the public. Would investors be better off if they were surprised by moves coming out of DC? Surprise regulatory moves seem unlikely to bolster investor confidence.
Over the weekend the Senate overwhelmingly passed a the mortgage bailout bill that includes a government rescue plan for mortgage finance giants Fannie Mae and Freddie Mac, grants to states to subsidize local real estate markets and extends government protections for refinancing troubled mortgages. The legislation amounts to one of the most far-reaching government expansions in the real estate and financial markets in decades. Surprisingly, there has been very little public discussion of the details.
So what does the 700 page bill do? We’re not sure anyone knows since hardly anyone–perhaps no one at all–has read the entire thing or had a chance to evaluate how it will interact with existing laws. Here at DealBreaker we’ve discerned a few of the lowlights at Bailout Bill. (If you want to read the bill, click here and God bless you.) After the jump, we run through them.
SEC Chairman Christopher Cox Cox told the Senate Banking Committee that the agency was putting in place an emergency order limiting short sales in Fannie Mae and Freddie Mac with a requirement that the shorted stocks be “preborrowed.”
It’s not immediately clear what this “pre-borrowing” requirement entails, or what sort of authorization short-sellers would need to certify the shares had been preborrowed. Naked-shorting, the practice of shorting a stock without borrowing it first, is currently disallowed in many circumstances. It’s possible the new rule would require investors to show concrete evidence that the shares had been borrowed or eliminate a loophole allowing broker-dealers to accept short trades from other broker-dealers.
Cox didn’t cite any evidence that naked-shorting has become more common in the market for shares of the GSEs. It’s possible that federal officials hope that making shorting more costly, basically weighing down short interest with red tape, they’ll be able to lift the stocks. Yesterday, one prominent Wall Street analyst called for a complete ban on shorting the stocks of these entities.
Cox added that he might go further. “In addition to this emergency order, we will undertake a rule making to address the same issues across the entire market,” Cox said.
I don’t think I’m alone here when I say we’re all still waiting for Jimmy Cayne’s sage counsel on how to save FNM and FRE, but, in the meantime, here are Pershing Square manager Bill Ackman’s recommendations. Seemingly missing from the plan is a part for David Blaine, but we assume it was left out in order to preserve the element of surprise.
How to Save Fannie and Freddie [Pershing Square, PDF]
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