Fannie Mae and Freddie Mac Rebuttal

Sheila Bair (former FDIC Chairwoman) recently posted (October 31st, 2013) an article on CNNMoney/Fortune magazines website on Fannie Mae and Freddie Mac basically berating and lambasting them. So I decided to repost an analysis I did before the collapse of Lehman Brothers in 2008 to perhaps offer a reappraisal of what exactly the situation was at that time:

Lehman Brothers Breakup Testimony FOMC

September 14, 2008

Kevin Miller

The recent acquisition of Freddie Mac and Fannie Mae, in the way in which it was done, has left very little room for productive asset liquidation. Cash cows they are not. And though the P/E Price to Equity ratio has been severely eroded in the stock price there are still monies that can be ascertained for not only U.S. treasury savings, but also, I believe, Freddie Mac common shares, and Lehman Brothers Neuberger as a whole. The estimated 690,606,185 common shares outstanding of Freddie Mac as of the cooperation date went uncompensated in the takeover. And although the price of the stocks declined rather sharply, rather quickly the Price to Equity Ratio in Freddie Mac should still remain relatively high given the circumstances. This is because Freddie’s financial obligations which were leveraged by the sale of stock in the company were relatively few as they chose to leverage mostly in the bond markets, or notional securities, thus mitigating the sustained losses on the balance sheet from the lowering in the stock price rather effectively. However this by no means means that there is a net positive swap on the asset to asset debt obligations ratio. This is what accounted for the losses in the previous quarters of this year and the over $3 billion dollars in losses on the balance sheets last year. However there is still capital which can be utilized once all is said and done. There are U.S. dollar reference note securities that are now liquid in nature due to the fact that this was money that the U.S. government owed Freddie Mac through its bond markets. However now that the U.S. government owns Fannie Mae and Freddie Mac through its cooperative agreement these funds totaling $51 billion dollars should now be considered liquid in nature due to the fact that investors and are no longer obligated to expect maturity in these notes. These monies therefore can be to cover the sustained losses in the common shares due to the nature of the cooperative. If out of the estimated $51 billion dollars available we use $20 billion to buy back or compensate the estimated 690,606,185 shares outstanding at the time of the acquisition we will have given the common shares stock holder $28.96/ common share. That is a current price increase of $28.49/ common share. In addition the retained portfolio for the obligations of available for sale securities of states and political sub divisions equates to $14.578 billion dollars. These additional funds (potentially totaling $45.578 billion)  can be used further to help bailout Lehman brothers, and also cover the expenses of any future write downs which may occur in the financial sector due to the housing market woes. Though the implications for the bond markets are substantially minimal from the government using it’s own reference notes to alleviate the governments financial woes it’s imperative to recognize that a buy back would not be the order of the day for everyone else in the markets though it’s reasonable for them to have reason to expect possible future cash injections into the bond markets and elsewhere as the housing woes continue. In the retained portfolio of obligations to available for sale securities of states and Political subdivisions  there’s a possible net negative mitigating short term loss to outstanding municipal bonds for the state on down. This could have an adverse effect on the budgetary decision making of States and cities around the country that Freddie Mac may have been invested into, and though the relative size of the subsequently divested amount of 14.578 billion dollars of the estimated $8 trillion dollars in outstanding Municipal bonds. Should we proceed down these lines, steps should be taken to make sure that the budgets of states and cities would not be impacted in any obscenely objectionable way for any one state entity. In the equity markets we can expect a marked increase in the price of Fannie Mae and Freddie Macs stock as investors are compensated for the fallout from the cooperative agreement. This will raise capital for the government’s savings. If we were to initiate the Fannie Mae, Freddie Mac common stock bailout and the stock price were to increase to $30.00/share we will have raised in excess of $24 billion dollars for the federal government. That means that if we apply $20 billion dollars to common stock compensation and the price of the stocks increase by $34.53 we will have saved a total of $4 billion dollars. This will bring the stock price back up to pre February 18, 2008 levels. 

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