Interest Rate Roundup

Tuesday, May 06, 2008

Fannie Mae, UBS take their turn in the stocks

Both Fannie Mae and UBS are taking their turn in the stocks this morning. The news:

* UBS lost a whopping $10.9 billion in the first quarter. It also announced plans to slash 5,500 jobs, or about 7% of the company's overall workforce. It's also backing away from the muni bond business and selling $15 billion in assets to a fund managed by Blackrock.

* Fannie Mae, for its part, lost $2.19 billion, or $2.57 a share. That's much worse than the 64 cent-per-share loss that analysts were expecting. The company is once again going hat in hand to the market, looking to raise $6 billion in capital via the sale of common and convertible preferred shares. It sold $7 billion in preferreds back in December.

* Speaking of Fannie Mae and Freddie Mac, the New York Times had a good story today on the government sponsored enterprises. It highlights the conflict between what management would like to do to preserve shareholder value -- and what the government would like them to do to bolster the housing market as a whole. Here's an excerpt:

"The companies, which say fears that they might falter are baseless, have recently received broad new powers and billions of dollars of investing authority from the federal government. And as Wall Street all but abandons the mortgage business, Fannie Mae and Freddie Mac now overwhelmingly dominate it, handling more than 80 percent of all mortgages bought by investors in the first quarter of this year. That is more than double their market share in 2006.

"But some financial experts worry that the companies are dangerously close to the edge, especially if home prices go through another steep decline. Their combined cushion of $83 billion — the capital that their regulator requires them to hold — underpins a colossal $5 trillion in debt and other financial commitments.

"The companies, which were created by Congress but are owned by investors, suffered more than $9 billion in mortgage-related losses last year, and analysts expect those losses to grow this year. Fannie Mae is to release its latest financial results on Tuesday and Freddie Mac is to report earnings next week.

"The companies are sitting on as much as $19 billion in additional losses that they have not yet fully acknowledged, analysts say. If either company stumbled, the mortgage business could lose its only lubricant, potentially causing the housing market to plummet and the credit markets to freeze up completely.

"And if Fannie or Freddie fail, taxpayers would probably have to bail them out at a staggering cost.

"'We’ve taken tremendous risks by loosening these companies’ purse strings,' said Senator Mel Martinez, Republican of Florida and a former secretary of housing and urban development. 'They could cause an economywide meltdown if they got into real trouble and leave the public on the hook for billions.'

"Concerns over the companies’ finances have prompted a fierce behind-the-scenes battle between nervous government officials and the two companies. Bush administration officials, the Federal Reserve and lawmakers all believe that the companies’ financial safety cushion is far too thin and have pleaded with them to raise more capital from investors.

"Freddie and Fannie, which are enjoying new growth and profits, have largely resisted those pleas, people briefed on the talks say, because selling new shares could dilute the holdings of existing shareholders and drive down their stock prices. Though executives have promised to raise money this year, they refuse to specify how much and when.

"Moreover, the companies are using their newfound clout to push Congress and their regulator to roll back the limits that were imposed after recent scandals over accounting and executive pay, according to participants in those conversations."

It'll be interesting to see how this whole "public mission vs. shareholder obligations" debate sorts itself out.


  • BTW, the June futures (Long Bond) are trading just above 115, and the September futures have dropped below 115 - close to 114.

    Do you anticipate a steep decline in prices aka sharp rise in rates?

    - Shankar

    By Blogger Superbear, at May 6, 2008 at 12:41 PM  

  • How far are we from this "Crisis" being over?

    I have been thinking that we should be near the end of writedowns (but I have thought that for a while also).


    By Anonymous Anonymous, at May 6, 2008 at 1:13 PM  

  • How far from this crisis being over?

    Its more like we are going to get run over by a fast train many times over during the coming months.

    Just my thoughts.

    - Shankar

    By Blogger Superbear, at May 6, 2008 at 2:57 PM  

  • Shankar -- from my comments, it should be pretty clear that I'm bearish on bonds. I think Treasury prices are too high given the economic fundamentals, and therefore the possibility of a sharp break (down in price, up in yield) is very real. In fact futures prices are at the day's low as I write.

    Banker -- I have maintained for some time that this was never just a subprime/residential mortgage crisis. There was plenty of recklessness in several other credit markets (LBO financing, auto loans, CRE lending, and so on). So I believe we're likely to see rolling write-downs, capital raisings, increases in loan loss allowances, and so on, for some time.

    The question is: How does the market react? Since the Bear Stearns bailout, investors have reacted differently to bad news -- buying, rather than selling it. That's another reason why I feel Treasuries are going to fall -- the "flight to safety" bid is going away.

    By Blogger Mike Larson, at May 6, 2008 at 3:00 PM  

  • Yup. I have been quite bearish on bonds as well as equities.

    Just out of curiosity, how low do you think TLT (since that's what you seem to monitor) will reach over the next year or so?

    - Shankar

    By Blogger Superbear, at May 6, 2008 at 3:17 PM  

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