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Sunday, September 28, 2008

Fannie & Freddie - Part II

The Winners and the Losers...

Wow. So, much has happened since Part I after the Fannie/Freddie bailout. Lehman Brothers failed; AIG was bailed out; we witnessed the largest bank failure in history with the collapse of Washington Mutual; and Hank Paulson, George Bush, Congressional leaders, and the media have been warning us that if further action is not taken, then we are all doomed. There's so much to comment on regarding these latest developments; however, I'm going to focus back on the winners and losers of the Fannie/Freddie bailout and finish that series of articles first.

In the context of the world of the financial industry, money and power define the winners and losers. So, I've scoured some articles from the days after the bailout where this subject has been discussed. I'll summarize here.

Winners:

The Federal Government: Their power has increased. The Treasury Department and the FED are more powerful than ever. Congress is complicit.

Mutual funds holding Fannie/Freddie debt: Mutual fund holdings such as Bill Gross's PIMCO now have bonds whose implicit guarantees are explicit guarantees.

People's Bank of China: China's central bank, along with other major foreign investors, also hold large quantities of MBS and Fannie/Freddie bonds which have their values guaranteed.

Former Fannie/Freddie executives and board members: These guys made big money during the real estate boom over the last decade which led to big salaries, bigger bonuses, and healthy stock performance (provided they got out in time!).

Those who got out: Besides the executives mentioned above, thousands, if not millions of Americans made good money in the real estate boom. Real estate agents, residential and commercial speculators, and those lucky enough to benefit from home equity loans all made gains on the bubble. Provided they got out while they were ahead, they are certainly winners.

Losers:

Taxpayers: Yes, this one is obvious. No matter how you slice it, the taxpayers lose. It will come to us by either higher taxes, higher debt, and higher inflation. Actually, probably all three. This action alone is not the straw that will break the camel's back, but it brings us ever closer to the day of reckoning.

Shareholders of Fannie/Freddie: All those who held on to Fannie and Freddie stock until the end lost big. This includes rank and file employees, and those who hold pension funds heavy in Fannie and Freddie stock. In particular, Bill Miller, fund manager at Legg Mason, poured $150M into stock purchases not too long before they completely crashed.

There are few other possible losers as well, but it remains to be seen. Lobbyists in Washington have enjoyed tens of millions from Fannie and Freddie over the years. While they will lose that business, chances are there are plenty of others who will pay for their services. The housing industry will have mixed benefits. Probably ok in the short run, but the bubble has not yet burst. Their pain is just delayed. Theoretically, congressmen may lose out in their re-election campaigns, particularly those who were complicit in this such as Barney Frank (D-MA) and Chris Dodd (D-CT), but I'm not going to bet on that.

In the next installment, we'll take a closer look at the winners - in particular, the executives and board members of Fannie and Freddie and their connections to Washington.

If you are interested in further reading, here are a few news articles that I reviewed in looking at the winners and losers.

Fierce Finance
Reuters
Fox Business
New York Times
Wall Street Journal
Blogging Stocks

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