Posts filed under “Taxes and Policy”
I am still working my way through the details of the GSE takeover by Treasury, but here is my initial read of the details:
• FHFA will act as conservator of the two firms — meaning the US government has day-to-day control of Fannie and Freddie;
• The conservator’s goals are to (1) put the company in a sound and solvent condition, and (2) carry on the company’s business and preserve and conserve the assets and property of the company.
• There is an immediate moratorium of the firms’ lobbying activities.
• New lending facility: "Treasury is taking today is the establishment of a new secured lending credit facility which will be available to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks;"
• Fannie and Freddie will increase their mortgage-backed securities portfolios through the end of 2009. (Treasury is initiating a temporary program to purchase GSE MBS).
• Treasury purchases the mortgage-backed securities from the firms; no word about any derivatives or swaps owned by the two;
• Starting in 2010, the portfolios must be reduced at the rate of 10% per year.
• Both CEOs (Daniel Mudd and Richard Syron) dpart after a transition period. TIAA-CREF Chairman Herb Allison will take over as CEO of Fannie; U.S. Bancorp Chief Executive David Moffett at Freddie.
• Senior preferred stock purchase agreement includes an upfront $2 billion issuance of senior preferred stock with a 10% coupon ($1B per GSE); Dividends are quarterly starting in 2010, and warrants represent an ownership stake of 79.9% in each firm.
• 3 Goals of the takeover: market stability, mortgage availability and taxpayer protection.
• The takeover is the result of a "detailed and thorough collaboration between FHFA, the U.S. Treasury, and the Federal Reserve;"
This looks like a 80% haircut for the common holders, I am trying to figure out if this is a haircut for the preferred holders . . .
UPDATE: It seems the Preferred Shareholders take an even bigger haircut than the common, as they lose the present dividend payments.
Regarding common and preferred losses: "With this agreement, Treasury receives senior preferred equity shares and warrants that protect taxpayers. Additionally, under the terms of the agreement, common and preferred shareholders bear losses ahead of the new government senior preferred shares . . . conservatorship does not eliminate the outstanding preferred stock, but does place preferred shareholders second, after the common shareholders, in absorbing losses."
On Moral Hazard: "Market discipline is best served when shareholders bear both the risk and the reward of their investment. While conservatorship does not eliminate the common stock, it does place common shareholders last in terms of claims on the assets of the enterprise."
Treasury Department, September 7, 2008
Treasury Department Reports:
FHFA Director Lockhart Remarks on Housing GSE Actions
Fact Sheet: FHFA Conservatorship
Fact Sheet: Treasury Preferred Stock Purchase Agreement
Fact Sheet: Treasury MBS Purchase Program
Fact Sheet: Treasury GSE Credit Facility
Here are the official statements on the Fannie & Freddie bailouts:
Statement by Secretary Henry M. Paulson, Jr. on Treasury and Federal
Housing Finance Agency Action to Protect Financial Markets and Taxpayers:
Good morning. I’m joined here by Jim Lockhart, Director of the new independent regulator, the Federal Housing Finance Agency, FHFA.
In July, Congress granted the Treasury, the Federal Reserve and FHFA new authorities with respect to the GSEs, Fannie Mae and Freddie Mac. Since that time, we have closely monitored financial market and business conditions and have analyzed in great detail the current financial condition of the GSEs – including the ability of the GSEs to weather a variety of market conditions going forward. As a result of this work, we have determined that it is necessary to take action. (continued after jump)
-Treasury Department, September 7, 2008
Treasury Department Reports:
September 5, 2008
The Honorable Henry M. Paulson, Jr.
Secretary United States Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, D.C. 20220
Re: Fannie Mae/Freddie Mac Restructuring
Dear Secretary Paulson:
We understand that a Treasury plan for Fannie/Freddie ("the GSEs") may be announced this weekend. We thought you might find useful some further thoughts on potential GSE solutions.
As you are likely aware, we had previously distributed a proposed restructuring plan for the GSEs. In that plan, under a prepackaged conservatorship, equity interests would be extinguished, subordinated debt would be exchanged for warrants, and senior debt would be exchanged for new senior debt and common equity in the newly recapitalized entities. The government would write a put to the new common equity holders which would expire in three years.
It appears, however, that the GSEs may need help more quickly, and conservatorship may not be triggered until the GSEs are formally determined to be undercapitalized. As such, in the event the government needs to inject capital immediately, we suggest you consider the following transaction ("the Transaction").
Last evening, we asked what are the costs and consequences, as well as the market reaction to, the imminent bailout of Fannie Mae (FNM) and Freddie Mac (FRE). Your responses were inspired and informative. (For a brief history of the GSEs, see this earlier commentary).
This morning, its page one news. Here’s what the major papers are suggesting is the likely outcome:
• Conservatorship: Fannie Mae and Freddie Mac will be brought under government control; The assumption is this is a temporary measure (12-24 months);
• Management: will be kicked out, starting with Fannie Mae CEO Daniel Mudd as well as Freddie Mac CEO Richard Syron. (No word if Charlie Gasparino is defending the two on CNBC). The current Board of Directors would also be fired;no word on other senior management;
• Shareholders: Speculation is that most (but not all) of the common stock would be diluted but not wiped
out; Company debt and
preferred shares are likely to be protected according to the Washington Post. A variation comes The New York Times, which stated that both the common and the $36 billion of outstanding preferreds "would be reduced to little or nothing."
In a typical recapitalization, preferreds, which are equity, receive little if anything.
• Mortgages: held by FNM/FRE would be guaranteed by taxpayers. This is approximately $5+ trillion dollars, the vast majority of which are sound. (Remember, Fannie was not allowed to buy subn-prime). If 3% of these go bad — a historically high estimate — that would amount to ~$150 billion dollars;
• Legislation: President Bush signed the law that gave the government the authority to inject billions of dollars into the companies through investments or loans. At the time, Treasury Secretary Hank Paulson said there were no plans to actually use the money, it was to help the firms raise capital.
• Foreign Holders: NYT: "With foreign governments increasingly skittish about holding billions of dollars in securities issued by the companies, no sign that their losses will abate any time soon, and the inability of the companies to raise new capital" forced the government’s hand;
Foreign central banks are key investors in Fannie and Freddie paper, and they have been losing confidence in the GSEs. Barron’s reports that "Fed data offer circumstantial evidence of, if not of a run, then of a steady walking away from Fannie and Freddie securities."
• Financial sector: With losses of about $500 Billion, and quite a few billion more to go, the hope is that the relief to FNM/FRE eventually finds its way to the entire sector.
Note that the Preferreds of both companies are primarily banks, many of which already are already suffering from the
effects of the credit crunch and mortgage debacle. A bailout of the Preferreds would amount to a $36 billion bailout of the entire financial
• Politics: With both conventions now over (were the GSEs even mentioned?) the Presidential election starts to heat up. The closer we came to November 4th, the greater the risk of political complications. Hence, the bailout sooner rather than later;
• Timing: Any Decision is likely to be announced Sunday, before Asian markets open. Some are speculating that this is an attempt to get out in front, rather than waiting for a "financial tipping point, as happened with Bear Stearns;" Delaying a rescue might also increase the "risks and costs."
• Insolvency: Armando Falcon Jr., who from 1999 to 2005 headed
the agency that oversaw the companies’ financial stability, believes the GSEs are already insolvent. "I would force the more accurate accounting of
their assets and liabilities, and that would show them to be
insolvent," Falcon said in an interview. He added that additional delay to receivership "only digs taxpayers into a deeper hole."
One more note: Anytime the government obtains authority to do
something — go to war, spend money on bailouts — it is identical to
actually authorizing the act. Meaning that yes, it will eventually occur. Claiming you are merely granting authority only serves to make the act more politically palatable, but don’t ever kid yourself — it is no different than the actual act.
In practice, the act of authorizing a fill in the blank (war, bailout, whatever) is the same as declaring (war, bailout). The two are identical.
More on the bailout to come . . .
As you add sources and links in comments, I will cull key data points and add above.
Full source list after the jump . . .
What this country really needs is less tranparency in earnings reports, and more wiggle room for corporate reporting:
We are governed by utter idiots . . .
Similarities and Differences: A comparison of IFRS and US GAAP
Click for PDF
"The Securities and Exchange
Commission signaled the demise of U.S. accounting standards, kicking
off a process Wednesday that could ultimately require all publicly
listed American companies to follow an international model instead.
in two steps, the shift could eventually cut costs for companies and
smooth cross-border investing. At the same time, investors worry it
will create confusion, especially during the transition. Other critics
worry that the international system offers too much wiggle room for
companies, compared with the more precise rules enshrined in U.S.
The SEC’s proposal would allow some large
multinational companies to report earnings according to international
accounting beginning in 2010. The SEC estimates at least 110 U.S.
companies would qualify based on their market capitalization, among
other factors. The agency also laid out a road map by which all U.S.
companies would switch to International Financial Reporting Standards,
or IFRS, beginning in 2014, at the expense of U.S. Generally Accepted
Accounting Principles, the guiding light of accountants for decades.
The proposals will be open for public comment for 60 days and could be finalized later this year."
Anything that artificially boosts earnings is great for America . . .
SEC Moves to Pull Plug On U.S. Accounting Standards
KARA SCANNELL and JOANNA SLATER
WSJ, August 28, 2008; Page A1
SEC May Let Companies Abandon U.S. Accounting Rules
Bloomberg, Aug. 27 2008