He Said What

 

What Did Sen. Corker Say About them,

And Will the “Preferreds” Get Happy?

 

I know that public official obfuscate, prevaricate, spin, “gild the lily” and, occasionally, just lie.  

But, a funny thing happen this week at a hotel near the Senate, when Senator Bob Corker (R-Tenn.)-- appearing on a mortgage finance panel, hosted by the Financial Services Roundtable—seemed to suggest there is merit to the claims of F&F preferred stock holders and that Congress would have to address those demands. 

Here is Corker’s statement answering a question about F&F preferred stock investors.

 

Senator Corker

``A lot of those folks are my friends although they are temporarily on vacation.''

``I'm sure a good deal of money has been made in that investment meaning its run up, profits have been yielded. I'd like to point out that there would be not one single dime of earnings at Fannie and Freddie if it were not for the government taking them over… it's a minor detail that people continue to forget. On the other hand, I think we recognize that somehow or another, that has to be dealt with. We've been working on language. Actually in the beginning wanted to use the word receivership in our bill. There were some issues on the executive branch relative to that language. We've begun to look at things like… relative to fair value so we understand that there is going to be an appropriate settlement here. We've looked at things like how would a bankruptcy court handle these things so we understand that there's some fine tuning that will need to take place. At the end of the day, I just want to triple underline, these entities would not have had one penny of earnings had the taxpayers not have stepped in.''

(Listen to the exchange at @46.00 minute mark of the video linked below.)

http://www.youtube.com/watch?v=_y2B9SV1hqg

 

Unless I missed something and am grossly misinterpreting Corker, that’s the first time any public official involved in the mortgage reform legislative process adopted such an accommodating stance vis-à-vis GSE preferred stock investors.

Currently, they are some 17 court cases pending against the Treasury over claims by the preferred investors (many of them hedge funds) that the federal government illegally took Fannie and Freddie assets from the companies when, in 2012, Treasury changed the method of dividend repayments each had to meet, from 10% of earnings to all revenue generated by each, minus minimal capital.

F&F stock, both common and preferred, jumped, but that was a day before Corker’s very pregnant statement. 

Someone may want to go back to the Senator and ask him to flesh out or expand the thought he shared with Wednesday’s Roundtable attendees.

 

What About the Common Holders?

 

(I wrote the following segment three days before Senator Corker spoke to the FSR. It was prompted by a question--at Tim Howard’s very successful book signing event at DC’s Politics and Prose--from a former SEC employee, who asked me if I was aware of anybody was organized to support F&F’s “common stock” shareholders. My answer then and still is “no,” beyond Bill Ackman.)

 

Is Bill Ackman ahead of his time with his major investments in Fannie Mae and Freddie Mac common stock?

I am betting (not with money, but with words) that he is and wisely.

We know that F&F have paid back the government more than they received in 2008, even though technically that’s impossible. But in layman’s understanding, it’s happened. 

The taxpayers’ return from their F&F investment will only get larger and quickly (like as soon as their Q4 2013 earnings get announced). 

Most are aware of the well-organized efforts on behalf of the “preferred shareholders,” largely hedge funds which picked up their investments at pennies on the dollar from small community banks, who had been maced into buying those securities by then Treasury Secretary Paulson.

When Paulson led the takeover of F&F, the value of those preferred shares he touted to the little guys went south faster than Paulson’s reputation for honest dealings. 

Back to my point: there is almost no organization among common F&F stock owners. 

Bill Ackman owns about a tenth of each entities outstanding common shares, but there doesn’t appear any other concentrated owners or advocates who have organized into advocacy groups, hired lawyers and lobbyists or spend much time in DC or on Capitol Hill.

But, in my humble opinion, for the stock value to rise, there doesn’t need to be.

I have no earthly/technical/practical reason to predict the following, just an instinct. 

With greater attention to the utility F&F represents and the chance that others see the incredibly long and obstacle filled path that Corker-Warner (or its reported clone Johnson-Crapo) faces, interest in owning Fannie/Freddie common stock will grow. 

Like the junior preferred stock, there seems to be an active market for the common shares.

Legislative uncertainty, combined with F&F 2014 earnings, should boost the value of the common beyond where it is now, which will make Mr. Ackman (and other common holders) happy and wealthier, if I am right. 

Caution: When asked, I’ve always told both current preferred and common investor that before there is a final resolution of any kind, there will be “peaks and values for both,” so watch and sell when it makes sense. 

If the value and use of “bitcoins’ can flourish why not the common stock of two entities which seem to have things working for them, a confused Congress which doesn’t know whether to “s*** or get off the pot,” billions flowing to the Treasury from F&F earnings, and a looming court case which could throw a velvet monkey wrench into everything.  

And, I haven’t even mentioned the possibility that some smart Senator (s) still might realize that totally junking Fannie and Freddie makes little practical sense and opt, instead, to move in a more positive direction for the American public and the mortgage finance system. 

I’ve written this before and will restate it, virtually every legitimate operational complaint about the former GSEs has been addressed by current regulation. 

These aren’t the “bad” PLS-buying Fannie's and Freddie's which existed after 2004 and before 2008. 

Congress doesn’t do omnibus, earthshaking, market moving legislation well, especially over a period of years when partisan feelings are running so high, and with this year’s congressional elections looming and 2016’s presidential candidates already preening. 

Approving simple and understandable legislation is easier than trying to secure complex and radical proposals.

 

Mark Warner, Deserving a Rebuke

 

Let me throw an earned brickbat here.

To Senator Mark Warner (D-Va.), who thinks no amount on top of total F&F repayment is enough, I should ask, how much was it worth to the government and its taxpayers (who also are consumers) for F&F’s execs and employees to keep the nation’s mortgage finance system alive and functioning through the mess which those in Congress, as well as many of the federal financial regulators created? 

 

Have you ever tried to monetize 5 years of efficient mortgage markets, satisfied consumers, and even happy and productive mortgage professionals which F&F produced? 

If it was such a slam dunk to operate, why didn’t Treasury do it on its own or maybe employ HUD? Why didn’t the GOP turn to its big bank friends allies to take on those responsibilities?

Wasn't going to happen, everyone leaned on F&F and—for the most part—bitched the whole time, while the two did the job at no cost and repaid the Treasury all that was invested in them. 

So why, when weighing the past five years do you only look at one side of the scale, Senator “I could have gotten 30-1 return” Warner? 

Gee, weren’t you a venture capitalist for a while. Can you show us other “30 baggers” you produced? 

How about a 20 or even a 15, maybe a 10?

Shock to Me

Thanks to Inside Mortgage Finance--and my friend publisher Guy Cecala—who told me, based on a quarterly F&F mortgage business report they did, that Fannie Mae’s business in the last quarter of 2014 was almost twice the volume of Freddie Mac’s, although both were down from the same quarter a year ago. 

I had no idea that the disparity between the two was that great, although even in my day, Fannie almost always had higher business volumes than the guys in Virginia, but the gap never was that gargantuan.

 

What Others Are Saying 

The Columbia Journalism Review lambasts the New York Times for printing tired AEI mortgage propaganda, “The Big Lie,” which has been rebutted so often that Ed Pinto and Peter Wallison have permanent tire tracks pressed into their suits. 

http://www.cjr.org/the_audit/the_nyt_spread_the_big_llie_of.php

 

Two separate pieces from CNN’s Donna Brazille and the Washington Post’s Post Kathleen Parker on the political and social perils of the GOP dividing into factions and attacking each other. 

http://www.cnn.com/2014/01/03/opinion/brazile-gop-civil-war/index.html?hpt=hp_bn7

 

http://www.washingtonpost.com/opinions/kathleen-parker-tea-party-challenges-threaten-gop-control-of-senate/2014/01/03/11c54a7c-74c2-11e3-8b3f-b1666705ca3b_story.html

 

Yahoo Finance sounds alarm on TBTF banks, again!

http://finance.yahoo.com/news/time-break-big-banks-152900958.html

 

The New York Times says banks will pay $50 Billion for their mortgage meltdown responsibilities.

http://mobile.nytimes.com/blogs/dealbook/2014/01/09/wall-street-predicts-50-billion-bill-to-settle-u-s-mortgage-suits/?partner=yahoofinance

(Imaginary: Corker to Warner, “Hey I have this great idea. Let's give the US mortgage markets to the big banks.”)

Maloni, 1-10-2014