Thursday, August 8, 2013

Nothing Happens in DC in August, Redux

Summer Fun! 



I still am pissed at the wobbly and disingenuous Obama housing performance the past few days.

And my next few blogs will reflect that emotion and anger, but this came to me today from another longtime friend who has fought many F&F battles and I thought it was wonderfully humorous and too logical, whether his numbers add up or not.  

If you can’t laugh at some of these political hijinks, you’re dead from the neck up. So, I’ll save my vitriol for another day. 

With the author’s explicit permission, I want to share his meanderings with you.


A Summer Daydream and Dialogue





August is a good time for mental relaxation and exercise.  And opening the windows at night, on vacation, for cool night air.


Which leaves one time for chimerical thoughts that have little grounding in reality.


Let's try this mental exercise--just for fun.


Freddie and Fannie just had a quarterly profit run rate, annualized, of $60B based on 2Q.   This won't keep up for a host of reasons, including the ending of the refit boom and the shrinking of the retained portfolios.   (At the same time though, g fees will continue to rise.)   So let's say the companies make a much smaller amount quarterly and annually.  Call it not $60B, but half that--$30B.   Give it a P/E multiple--let's say 9, which is uber-conservative for steady, utility stocks (no more "growth stock" Fannie and Freddie--that was clearly an error.)  That gives us a total capitalization of the two at 9x$30B, or:


$270 billion.


Bear with me. 

Yes, I know, the political current thinking is they ain't going back to anything that they were.  (This is an August mental exercise only, not an expression of any current Washington reality.)   


But here goes:  the Feds, the US taxpayers, us folks, are about to get their money back, early in 2014 ($187B), and they (us) will STILL have a claim on 80% common stock warrants of the two.   This means, again just for fun, that if the government spun the companies back out, a la AIG, taxpayers could have a claim on 80% of $270B, or:


$216 billion.


Which means taxpayers would receive, all in, $187B plus $216B, or over $400B.


"It's not going to happen, Padre."


Fine, fine.   But Washington policy decisions have costs.  And this one, apparently--the decision to snuff bad Fannie and Freddie, will end up "costing" we the taxpayers $216B.  Of foregone money we could have had in our hands.  Real money.


"They're bad.  We have to kill them."


Why are they bad now?   They need reform, of course.  And real shrinkage.   But they still had lower default and delinquency rates than Wall Street or the prime market overall, all through the downturn.


"Well, among other reasons Padre, because they cost us $187B.  Maybe you forgot that."


Well fine.  But killing them will cost us $216B.  Which is larger than the original losses that made them "bad."


"You know, you just don't get it.   And besides, it's too late.  We're gonna kill 'em.  You're not grounded in reality."


Don't I know that.  I live inside the Beltway, after all.


Key the birds calling outside the vacation open window.  It's time for a swim, following baseball scores.  Surf fishing?

This is only an illustration of cost/benefit thinking.  Was the Iraq invasion worth it?   Maybe.  Setting aside the human lives, was it worth an expenditure of $1.5 Trillion?   It's a good question--what else could the US have done with that money? 

Is killing Fannie and Freddie worth it?   Could be.  But is it worth $216 billion of real money?

Don't ask me.  I'm on vacation.


The only thing I’ll add to my friend’s wonderful fantasy is that the real cost will be far greater when a politically riven Congress tries to implement its “square peg in a round hole” untested mortgage finance model, and scrambling all of the mortgage finance eggs, while the President wistfully talks about all of the new family formations who will need housing.


The F&F fix is simple, examine that thoroughly before junking the whole model.


Maloni, 8-8-2013

(I am exercising my blogger's prerogative by adding, post facto, a link to a well argued piece on the implications of the President's Phoenix speech. I am doing so because, it was sent to me by the guy whose thought piece is above and the article makes a lot of points I've made previously. The first 70 or so of those who read the initial blog didn't have access to this link.)








Anonymous said...

This is not a fantasy, it is simple financial arithmetic!
I cannot understand why the Obama Admin seems to be brain dead when it comes to financial markets reform.
Freddie and Fannie are the most successful government businesses in existence. Why kill them?
Yes, reform them and regulate them properly and protect the fixed rate mortgage.

Anonymous said...

They are risking financial Armageddon by trying to completely overhaul something that is getting the job done. It is clear that the risk profile of their assets is being controlled and is of very high quality. Now that it is known how substantial losses will be during a housing crisis it makes sense to increase their capital ratios in the future to account for black swan events. Although the amount of capital should reflect the risk profile of their assets as well so that they are not over reserving on their balance sheets. Then it is simply a matter of increasing the G fees to a level that compensates for the risk of the loans.

Bill Maloni said...

Anonymous 1 and 2, first thanks for reading and commenting, but you are being "logical" in an arena where little is allowed or exists.

Too many people--in both parties--seem invested in the "big lie," which casts Fannie and Freddie as wrong doers.

As I suggested, maybe the R's just will throw sand in the legislative gears and learn to live with F&F for a bit longer.

Robert Mae said...

I've said it once and I will again: It's not FnF the GOP has a problem with, per se, it's their being a metaphor for... I need a word here ... their being a tool of those in govt who would declare that 65% of FnF mortgages go to the underprivileged.

Have them rent! -Wallison