Freddie Mac

BlackRock's role in the crisis

Jim Kim — Fri, 31 Oct 2008 11:39:06 -0400

BlackRock CEO Larry Fink is dominating the headlines like he did a few months ago, when it seemed like he was a candidate for every high-profile open CEO position. His firm is playing an active role as the bailout industry gears up. BlackRock has been hired by AIG, Lehman Brothers, Fannie Mae and Freddie Mac--not to mention the Treasury Department.

Fortune notes the irony: "Keep in mind that 25 years ago [Fink] was an early and vigorous promoter of the CMO (collateralized mortgage obligation). Today the CMO and other asset-backed securities have become the monsters responsible for the credit crisis."

In some ways, that's unfair. You can't blame him for the recent decisions at some investment banks. He has his company poised to profit from the bailout process, and that strikes some as an enviable position.

For more:
- here's the article

Regulators change tune, bail out AIG

Jim Kim — Wed, 17 Sep 2008 09:10:12 -0400

Lehman Brothers wasn't worth any public money. But AIG? Well, that's another story. After the Bear Stearns, Fannie Mae and Freddie bailouts, people applauded when Treasury Secretary Henry Paulson said there was no more public money available. But he has already been forced to change his tune. AIG, which underwrote a lot of protection on mortgage-related securities, is much more of a systemic risk. A credit downgrade could have serious repercussions for the many firms that bought bond protection from it. So the Fed and Treasury are once again scrambling to put together a bailout in the form of a bridge loan of $85 billion, the Financial Times reports. The quid pro quo here is that the government will assume control of the enterprise. All this is nothing short of stunning. The New York Times called it "the most radical intervention in private business in the central bank's history." A private sector bailout plan put together by Goldman Sachs and JPMorgan Chase failed to materialize given the precarious nature of AIG's credit rating. That left taxpayers on the hook.

For more:
- here's a Financial Times article
- here's the New York Times article

Bill Gross wins big on Fannie, Freddie

Jim Kim — Wed, 10 Sep 2008 21:21:56 -0400

The credit crunch has been cruel to some fund managers, notably Bill Miller of Legg Mason, who kept on buying as financial stocks kept on tanking. On the other hand, Bill Gross of on-fire Pimco, went long on Freddie and Fannie bonds, switching out of Treasuries and corporates. With the bailout by Uncle Sam, these bonds got a huge bump, which made Gross's big bet a winner. He's up $1.7 billion in his Pimco Total Return fund, reports the Financial Times. Gross was an early proponent of some sort of government action. He put his fund's money where his mouth was. His reputation is burnished. This is yet another in a string of savvy moves, which has boosted his fund 9.2 percent in the 12 months prior to Aug. 1.

For more:
- here's the FT article

Who's next to crater? WaMu?

Jim Kim — Wed, 10 Sep 2008 21:20:43 -0400

The spotlight shifted a bit from Fannie Mae and Freddie Mac right back to Lehman Brothers, leaving little room for others. But the New York Times managed to squeeze in Washington Mutual, whose stock has also been in free fall. It now hovers around $2.30 a share. Recall that TPG invested at more than $8 a share. So this is Lehman Brothers all over again in that its CDS spreads have widened, deal talks have fallen through and losses have mounted. Standard & Poor's cut its credit ratings this week, as well. The consensus is that WaMu has a pitifully weak portfolio of mortgage assets right now. Options ARMs face a wave of resets over the next two to three years. Investors are right to question the future.

For more:
- here's the article

Regional banks at risk due to GSE preferred stock

Jim Kim — Tue, 09 Sep 2008 11:13:37 -0400

The bailout of Fannie and Freddie has been a rank disaster for common shareholders of the two companies. They are clearly the big losers. The preferred shares are not as widely owned, but regional banks tended to be big owners. Hey, they sounded like a great idea when people assumed that Fannie and Freddie would live forever. According to a table from Goldman Sachs posted by the Financial Times, tiny Gateway Financial has 22 percent of its "tangible equity at risk" in GSE preferred shares. Midwest Banc Holdings is at 20 percent. The biggest regional banks with the most exposure are Westamerica and Sovereign; they have 10.6 and 8.5 percent of their respective tangible equity at risk in these securities. As the FT notes, the big question is Wells Fargo, which has not disclosed how much GSE preferred shares it owns. But it did say it will take a charge for the third quarter.

For more:
- here's the post

Opportunity costs high for Morgan Stanley in GSE project

Jim Kim — Tue, 09 Sep 2008 11:12:49 -0400

We've discussed Morgan Stanley's behind the scenes role in the bailout of Fannie and Freddie. You've no doubt heard that Morgan Stanley stars Bob Scully and Ruth Porat headed a team of 39 executives that worked round the clock on the project. All for just $95,000--the maximum allowed by the government on a pro bono assignment. Fortune reports that there were more explicit costs to the image-burnishing project, which ultimately recommended drastic action. Morgan was "set to receive at least $20 million in fees from Freddie for helping to raise billions of dollars in capital. The firm was also lining up potential advisory work for Fannie, which could have inflated Morgan's total take to some $40 million."

For more:
- here's the Fortune article

The rise of a new Fannie, Freddie?

Jim Kim — Tue, 09 Sep 2008 07:56:10 -0400

For all the mismanagement that plagued the GSEs, they really did what they were supposed to. They expanded homeownership in America. And by moving into subprimes and other non-prime loans, they ended up greasing the wheels of the real estate economy a bit too much. Of course, they were pressured to do this, but shouldn't they still have raised more capital? All of which begs the question: Should they exist at all? Is this sort of "insuring" and "backing" activity something that ought to be purely the domain of a private company? Is the mixed economy, public-private approach still the best? Should a pure government agency take over this function? It's tempting to argue that the GSEs worked well but lacked oversight. Good management is hard to come by. But I'm not sure the fact that they were poorly managed means they should not exist going forward. What do you think?

For more:
- here's a New York Times article
- Treasury Secretary flexes his muscles. Article

Wall Street, the final blow to Freddie

Jim Kim — Mon, 08 Sep 2008 07:51:34 -0400

We've discussed the role of Morgan Stanley in the meltdown of Fannie and Freddie. The firm advised Henry Paulson, and in some sense helped cement the Secretary's decision to sound the death knell for the mortgage GSEs. But the New York Times also notes that Paulson's alma mater firm, Goldman Sachs, also played a big role in the ultimate demise of the troubled giants. Freddie chief Richard Syron apparently made a last-minute plea to Goldman Sachs executives in New York, effectively begging for a private bailout plan. But did he really think Goldman would save him? There was just so much uncertainty out there. If the firm invested billions and the Treasury took over the firm, they would lose everything. But when you're desperate, you have no choice. Fannie chief Daniel Mudd did some begging as well--he pleaded with Paulson to spare his firm, which he argued was in better shape than Freddie.

For more:
- here's the New York Times article

Winners and losers in the Fannie, Freddie mess

Jim Kim — Mon, 08 Sep 2008 07:50:45 -0400

The news of the federal takeover of Fannie Mae and Freddie Mac spells really bad news for value investors--notably Bill Miller, who just couldn't believe that a beaten down stock wouldn't bounce back. He never learned his lessons, averaging in as financial stocks plummeted. Last week, when Freddie Mac stock was trading at about $5, he bought 30 million shares, according to the New York Times. All shareholders--and Fannie and Freddie ranked among the most widely held stocks--got burned, including employees who owned a lot of shares. The big winners are the shorts, the most vocal of which was hedge fund guy William Ackman. All in all, this is extraordinary news. As for Daniel Mudd, the departing head of Fannie, and Richard Syron, his counterpart at Freddie, they will make out well with severance packages in excess of $10 million; which will not make them popular.

For more:
- here's the article

Morgan Stanley finding leads to Fannie, Freddie drama

Jim Kim — Sun, 07 Sep 2008 09:01:50 -0400

Morgan Stanley was the low bidder in the Treasury's auction to find a top Wall Street adviser on GSE-related issues. It ended up making a stunning discovery: Freddie Mac's capital position was worse than initially thought, reports the New York Times. The GSE made decisions that were legal, but also ended up overstating its capital situation. That pushed the Treasury to conclude that more than a one-time capital infusion would be required. The decision to put Fannie and Freddie into conservatorship is as necessary as it is shocking. But something had to be done. Top executives of both companies will be pushed out. But they may have a bit more to answer to as people seek to understand all this.

For more:
- here's the article