Unstructured Finance

Berkowitz, Ackman bets on Fannie and Freddie puzzle investors and policy buffs

On Thursday, the United States threw cold water on Bruce Berkowitz’s daring proposal to recapitalize mortgage finance behemoths Fannie Mae and Freddie Mac, saying the only way to revamp the home loan market is through proper housing finance reform.

Berkowitz’s Fairholme Capital Management said it wants to buy the mortgage-backed securities insurance businesses of Fannie and Freddie by bringing in $52 billion in new capital, in a bid to resolve the uncertain future of the mortgage financiers by freeing them from U.S. government control. For its part, the government said the way forward would be to create a new housing finance system in which private capital would play a pivotal role.

Up until a few days ago, the idea that the government would hand Fannie and Freddie back to private investors seemed unlikely. Now, the idea appears all but dead. This appears to be bad news for a number of well-known money managers – the most prominent of which are Fairholme and Bill Ackman’s Pershing Square – which recently scooped up shares in both companies.

“When you talk to anybody in Washington, there is an almost universal view that Fannie and Freddie should be a part of the past, that it is a broken model, and also that private investors in Fannie and Freddie shouldn’t realize any returns from those investments,” said Colin Teiccholtz, the co-head of fixed income trading at $14 billion Pine River Capital Management, in New York this week at the Reuters Global Investment Outlook Summit. He described a bet on a stock that relied on taking Fannie and Freddie private as “extreme optimism.”

On Friday, Ackman told Bloomberg TV that he sees “greater opportunity” in Fannie and Freddie common shares than their preferreds. He also said that his firm does not support Berkowitz’s plan.

M & A wrap: S&P chief downgraded

The chief of Standard & Poor’s will step down next month, to be replaced by a senior Citibank executive, in a move announced a few weeks after the credit rating agency downgraded U.S. government debt and sparked a row with Washington.

Australian brewer Foster’s Group put pressure on SABMiller to raise its $10 billion hostile takeover offer on Tuesday, unveiling a $521 million capital return to shareholders.

Deutsche Bank AG knew in 2006 that a mortgage company it was preparing to buy lied to the U.S. government about its mortgages, yet went ahead with the purchase and should be held financially responsible, the Justice Department said on Monday.

Einhorn: Moody’s broadside lacks usual punch

einhorn

David Einhorn again sent markets scurrying last week when he told investors he was shorting Moody’s Corp, but the Greenlight Capital manager’s latest thumbs down packed a weaker punch than his past, celebrated broadsides.

To be fair, Einhorn had a tough act to follow. A year ago, he boldly said Lehman Brothers was in much worse shape than its management would admit. Four months later — the bank went bankrupt and the shares were wiped out. It took more than six years, but his warnings about business lender Allied Capital also proved accurate and ultimately very profitable.

Last week, the soft-spoken Einhorn turned his sights on the parent of credit rating agency Moody’s Investors Service. Investors dutifully followed Einhorn’s lead and sent Moody’s shares down as much as 8 percent before they closed at $26.89.

Batten down the hatches

It’s fashionable now for leading economists and financial wizards to claim that they saw the credit crunch coming and the kind of dislocation it would create. But how many have predicted where the next implosion will occur?

bad-building1Dr Andrew Lo, founder of hedge fund firm AlphaSimplex, and director of the MIT laboratory for financial engineering, has spent his career studying market behaviour, publishing papers examining why quant funds imploded in August 2007, and trying to reconcile behavioural economics with efficient market theory.

He sees the next big meltdown in commercial mortgages, but this time it’s pensions funds that will bear the brunt of the losses rather than banks. Lo points out that commercial mortgages have been packed and sold in the same way as residential mortgages – different levels of risk exposure sliced and diced and wrapped up together in one package with a triple A rating slapped on top.

Chicken Little was Quite the Optimist

By Martin de Sa’Pinto

 

If the sky falls, at least you know how far it can go – the worst case scenario is that it will hit the ground.

 

That’s not the case for the hedge funds, asset managers and banks exposed to toxic assets.

 

rtr22p3jAt the onset of the subprime crisis (identified in early 2007 although it began way before that), pundits who offered a worst case scenario of $200 billion in mortgage losses were accused of alarmism. That was in June 2007.

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