Posts Tagged ‘Freddie Mac’
Ackman Spares Lehman, Sounds Off on “Frannie”
Friday, September 12th, 2008
Make sure you watch this interview from September 10, 2008, when Bill Ackman guest hosted CNBC’s Squawk Box following the Frannie Bailout:
William Ackman, activist-Hedge Fund Manager of Pershing Square Capital Management, appearing on CNBC’s ‘Squawk Box’ expressed compassion for Lehman’s woes, stating that they had been picked on enough. He has been a big winner in this year’s credit market debacle, having been short Freddie and Fannie paper and investing in credit default swaps in both throughout the turmoil, as well as being short Lehman Bros., via put options, more recently.
Pershing bought put options on Lehman as a market hedge rather than a bet against the company.
Ackman has been outspoken critic, crusader, and speculator, putting his neck and reputation on the line, while blowing the whistle on the subprime mortgage, and credit default swap mess at the monolines and banks. We have followed Ackman’s views and actions during the “Nightmare on Wall Street.” Seems only a few people have wanted to listen while guys like Ackman and GreenLight Capital’s David Einhorn, have gone against the grain of those who claimed the “end of the crisis was in sight”, or that we had “rounded the corner on the problem.”
The pair have been vilified at times for outing discrepancies in moneycenter bank financial reporting, as hundreds of billions of dollars were bring written down.
Watch this video from June 5, 2008, where Ackman and Einhorn make a rare appearance together on CNBC’s Squawk Box.
The “Frannie” Bailout was also discussed. Earlier this year, Ackman proposed a solution for Freddie Mac and Fannie Mae that was strikingly similar solution to the government’s bailout plan, with a few differences.
Ackman used his hour on “Squawk Box” to also sound off about federal regulators’ seizure of Fannie Mae and Freddie Mac. While he praised regulators’ move to look beyond financial statements in determining Fannie’s and Freddie’s solvency, he said the bailout is only a temporary solution, which he said was reflected in the market’s extreme volatility over the past two days. He said where the regulators went wrong is that the restructuring involves the government investment taking junior status to an insolvent capital structure. He added that the “equity is deeply out of the money” because Fannie’s and Freddie’s assets are not greater than their liabilities. He reiterated his plan to eliminate subordinate debt at the mortgage intermediaries and convert some portion of the senior debt to equity, creating for solvency.
Ackman took his plans for Freddie and Fannie a step further, calling for a merged “Super GSE”, which CNBC’s Carl Quintanilla coined “Frannie.” Ackman said merging the mortgage giants would create economies of scale and improve their liquidity. And where would Frannie live? Ackman proposed Frannie move out of the Beltway and onto Wall Street in close proximity to the major investment houses where it could potentially poach talent.
Ackman has not only been a recipient of winfalls from the fallout in financials, he has also been incredibly successful on the long side of the market. Ackman is reported to have earned a $600-million gain this week, resulting from his investment in Longs Drug Stores by CVS Caremark. In the following video segment from September 10, 2008, Ackman, who makes a point of saying that he “rarely talks about stock recommendations,” discusses what he deems instead to be an “interesting opportunity.” Make sure you watch this; its very interesting.
Ackman also advised investors to go long on Longs Drug Stores, which had agreed to be acquired by CVS Caremark Corp. for $71.50 per share, or $2.9 billion, including debt just a week after Ackman filed a 13D with Longs disclosing that he had purchased a roughly 8.8% stake in Longs in common stock between the end of June and the end of July, paying between $40.47 and $45.92 per share and boosted his stake in the company to 23.6% through total return swap arrangements.
If you haven’t seen these interviews, make sure you do. They’re highly informative.
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Tags: Banks, Credit, Credit Market, Dollar, energy, Fannie Mae, Fed, Financials, Freddie Mac, Grain, GSE, liquidity, Mining, Mortgage, Value, Video
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Few Gain, Many Lose from Frannie Bailout
Monday, September 8th, 2008
UK bank shares are having a huge day (above are the 9:20 a.m. (Eastern Time) prices of UK bank stocks, September 8, 2008), following this weekends Frannie bailout announcement.
It appears that the short squeeze in bank stocks is in this morning’s trading.
Here are some excerpts from the saavy folks at DealBook.
Over the years, Fannie Mae and Freddie Mac showered riches on many winners: their executives, Wall Street bankers and Washington lobbyists. Now the foundering mortgage giants are leaving some losers in their wake, notably their shareholders, rank-and-file employees and, in the worst case, American taxpayers.
Golden Parachutes all around:
Daniel H. Mudd, the departing head of Fannie Mae, stands to collect $9.3 million in severance pay…
Richard F. Syron, the departing chief executive of Freddie Mac, could receive an exit package of at least $14.1 million
Its not clear that these former Frannie executives will actually get compensated.
But worst of all, long investors in either are getting killed:
The shareholders of Fannie Mae and Freddie Mac, including many employees, will not be so lucky. The companies’ share prices have plunged about 90 percent this year, wiping out about $70 billion of shareholder value. The shares are likely to be worth little or nothing under the government’s rescue plan.
As a result, Wall Street money managers and everyday investors alike stand to lose big. Bill Miller, the star mutual fund manager at Legg Mason, increased his bet on Freddie Mac even as the company’s shares plummeted this year. Last week, when Freddie Mac stock was trading at about $5, Legg Mason disclosed that it had bought an additional 30 million shares. Other value-oriented investors, including Rich Pzena, David Dreman and Martin Whitman, also placed big bets that the mortgage companies would recover. None of these money managers returned calls for comment.
“I am just shocked how they missed this, and why, when it became completely clear that the problem was snowballing, guys like Bill Miller doubled down,” Douglas A. Kass, head of Seabreeze Partners and an outspoken short-seller, told The Times.
And the few investors that gain:
Among the most vocal short-sellers betting against the companies is William A. Ackman, who runs a hedge fund called Pershing Square Capital. Mr. Ackman was among the earliest to warn of the credit crisis, and he is believed to have landed a windfall after shorting both companies, according to The Times, which cited a person with direct knowledge of a recent investment letter.
In the end, American taxpayers have been handed the bill, helping the rest of us around the world sleep a little better at night, now that a great deal of credit risk has been been mitigated.
Thank you Secretary Paulson.
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Tags: Banks, Fannie Mae, Financials, Freddie Mac, GSE, Paulson
Posted in Banks, Credit Markets, Economy, Financials, Investment Strategy, Markets | No Comments »
Pershing Square Capital Management Releases Letter to U.S. Treasury Department Regarding Fannie Mae and Freddie Mac
Sunday, September 7th, 2008
Pershing Square Capital Management, L.P. sent the following letter September 6, 2008 (courtesy: BusinessWire) to the U.S. Treasury Department regarding Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE):
The Honorable Henry M. Paulson, Jr.
Secretary United States Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Re: Fannie Mae/Freddie Mac Restructuring
Dear Secretary Paulson:
We understand that a Treasury plan for Fannie/Freddie (”the GSEs”) may be announced this weekend. We thought you might find useful some further thoughts on potential GSE solutions.
As you are likely aware, we had previously distributed a proposed restructuring plan for the GSEs. In that plan, under a prepackaged conservatorship, equity interests would be extinguished, subordinated debt would be exchanged for warrants, and senior debt would be exchanged for new senior debt and common equity in the newly recapitalized entities. The government would write a put to the new common equity holders which would expire in three years.
It appears, however, that the GSEs may need help more quickly, and conservatorship may not be triggered until the GSEs are formally determined to be undercapitalized. As such, in the event the government needs to inject capital immediately, we suggest you consider the following transaction (”the Transaction”).
In order to minimize risk to tax payers while being equitable to other constituents, we suggest that the Treasury consider purchasing senior subordinate debt in the two companies in an amount sufficient to address their capital needs in the short to intermediate term. This senior sub debt would be junior in right of payment to the outstanding senior unsecured debt and senior to the outstanding sub debt, preferred stock, and common equity. We refer to the outstanding sub debt, preferred and common stock as “the Subordinate Securities.”
The issuance of senior sub debt is permitted under the GSE legislation and under the existing terms of the outstanding debt and equity securities of the two entities (please see the attached memo for further details). As a condition of Treasury’s purchase of senior sub debt, the GSEs would defer the interest payments on the outstanding sub debt (which can be deferred for as much as five years), and the dividend payments on preferred and common stock. All of the Subordinate Securities would continue to remain outstanding according to their existing terms.
The new senior sub debt should have a market-based coupon and Treasury should receive low-strike price warrants (penny warrants) for a substantial portion, i.e., 49% of the two companies. The coupon and warrant structure should be as close to fair-market-value terms as possible. The ultimate determination of fairness would be the willingness of non-government investors to purchase the Transaction securities on the same basis as Treasury. As part of the Transaction, the GSEs would deleverage their capital structures by paying down senior debt from the free cash flow generated by their core businesses further improving the position of the new senior sub debt.
The benefits of the Transaction are as follows:
- The Transaction can be accomplished under the existing terms of the outstanding GSE securities without any required consent other than from the GSEs.
- The new security would be senior in right of payment to the existing sub debt and preferred stock minimizing the risk to tax payers while providing substantial support to the outstanding senior debt that has been deemed implicitly guaranteed by the government.
- The new debt interest payments would be tax deductible, reducing the after-tax cost of capital to the GSEs, particularly when compared with preferred stock.
- In the event the outlook and performance of the GSEs and their assets were to improve dramatically, the senior sub debt could be redeemed, distributions to the Subordinate Securities could resume, and their values would increase accordingly.
- In the event that the GSEs’ fundamentals continued to deteriorate and they became undercapitalized, the GSEs could be placed in conservatorship. In conservatorship, their balance sheets could be restructured along the lines of our original plan or another plan with the Treasury’s senior sub debt treated preferentially to the Subordinate Securities, again minimizing risk to the tax payer.
- The Transaction would be fundamentally fair to all constituents and would respect the existing terms and corporate hierarchy of all outstanding GSE securities.
- The Transaction would minimize moral hazard issues for sub debt, preferred, and common stock investors.
Most importantly, we believe there are serious negative implications for other large financial institutions in the event the Treasury were to bail out Subordinate Security holders. The Treasury and OFHEO have done substantial research on the benefits to capital market discipline from large financial institutions’ issuance of subordinate debt, and the destructiveness of the government implicitly or explicitly guaranteeing such obligations.
See: Report to Congress “The Feasibility and Desirability of Mandatory Subordinated Debt“, Board of Governors of the Federal Reserve System and United States Department of the Treasury (December 2000), available at: www.federalreserve.gov/boarddocs/rptcongress/debt/subord_debt_2000.pdf
“Subordinated Debt Issuance by Fannie Mae and Freddie Mac“, Valerie L. Smith, Office of Federal Housing
Enterprise Oversight, OFHEO WORKING PAPERS, Working Paper 07 – 3 (June 2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1000264;
“Signals from the Markets for Fannie Mae and Freddie Mac Subordinated Debt“, Robert N. Collender, Samantha Roberts, Valerie L. Smith, Office of Federal Housing Enterprise Oversight, OFHEO WORKING PAPERS, Working Paper 07 – 4 (June 2007), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1000240&rec=1&src abs=1000264;
(Due to its length, this URL may need to be copied/pasted into your Internet browser’s address field. Remove the extra space if one exists.)
“Subordinated Debt and Bank Capital Reform“, Douglas D. Evanoff, Federal Reserve Bank of Chicago, Larry D. Wall, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper No. 2000-24 (November 2000), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=252754.
To the extent the Treasury were to bail out the GSEs’ subordinate debt – which was: (1) never implicitly guaranteed by the government, (2) always rated below Triple A by the rating agencies, and (3) held by investors who knowingly took on the risk of loss in exchange for a substantial credit spread above the GSEs’ senior debt – it would endanger the systemic benefits from subordinate debt issuance for every highly leveraged banking institution in the world and the capital markets at large.
Furthermore, we do not believe that the Treasury can purchase GSE sub debt, preferred stock or common stock without incurring an immediate loss to tax payers because of the enormous amount of existing debt senior to these instruments. At a market coupon or dividend yield (to the extent that one were to exist), any debt issued pari passu to the existing sub debt, or preferred stock issued pari passu or even senior to the existing preferred stock would require a yield that would be uneconomic for the GSEs. No third-party investor would purchase these securities regardless of their terms in light of their junior position in the GSEs’ capital structure.
Please note that Pershing Square and affiliates own CDS on the subordinate debt of the GSEs. We also note that nearly all participants in the capital market debate on the GSEs are either long or short the outstanding GSE securities.
We are contemporaneously releasing this letter to the public in the interest of market transparency.
Respectfully,
William A. Ackman
Contacts
Pershing Square Capital Management, L.P.
William A. Ackman, 212-813-3700
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Tags: Bail Out, CDS, Credit, EFU, Fannie Mae, Fed, Federal Reserve, Freddie Mac, GSE, Markets, Paulson, SMI, strike price, Value
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Let Fannie, Freddie Fail: Jim Rogers
Monday, September 1st, 2008
Fannie Mae and Freddie Mac should not be saved if they go bankrupt, and economic stimulus packages do more harm to economies in the long run than good in the short term, Jim Rogers, CEO of Rogers Holdings, told CNBC Friday, August 29, 2008 at 3:15AM from Singapore.
View Part 1, Click Play
View Part 2, Click Play
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Tags: Derivatives, Fannie Mae, Financials, Freddie Mac, Jim Rogers, Mortgage
Posted in Banks, Credit Markets, Economy, Financials, Geo-political, Gold, Markets, Monetary Policy, Strategy, US Stocks, wisdom | No Comments »
Video: Faber Says Fannie, Freddie Should Split Up, Not Get Aid
Friday, July 25th, 2008
Investor Marc Faber, publisher of the Gloom, Boom & Doom Report, talks about the future of Fannie Mae and Freddie Mac, the global economy, and the outlook for stocks and commodities. Faber said Freddie Mac and Fannie Mae should close down their business or split into private companies and not get government aid.
click for video
00:00 “The world is in recession already.”
01:35 Earnings to “decelerate”; technology stocks
02:59 Need to close down or split Fannie, Freddie
05:11 Concerns about technology stocks
05:41 S&P 500 forecast; outlook for interest rates
07:50 “The Fed is totally ineffective.”
08:39 Outlook for oil prices, commodity markets
10:35 Credit crunch, impact on economy
11:24 Overseas interest in U.S. assets; China
13:46 U.S. resource companies “attractive” to Asia
14:47 Worst case: “colossal bust with inflation”
Source:
Faber Says Fannie, Freddie Should Split Up, Not Get Aid
Bloomberg, July 23, 2008 07:22 EDT
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=af89KR4uyEGI
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Tags: Bail Out, Credit Crisis, Fannie Mae, Freddie Mac, Marc Faber
Posted in Banks, Commodities, Credit Markets, Financials, Geo-political, Gold, Markets | No Comments »
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