Fannie, Freddie Delisting Signals Firms Have No Value

By Jessica Holzer and Jacob Bunge
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--The regulator for Fannie Mae (FNM) and Freddie Mac (FRE) ordered them to voluntarily delist their shares from U.S. stock exchanges Wednesday, underscoring that the once-mighty mortgage behemoths no longer have value as private firms.
The move comes as the Obama administration begins to shift its focus to the future of the companies, which were seized by the federal government in September 2008 and are on track to becoming the largest recipients of bailout dollars in the financial crisis.
The company's regulator, Federal Housing Finance Agency Acting Director Edward J. DeMarco, cited stock-exchange rules related to minimum share-price levels as the basis for his action. But his hand was not forced by such rules.
"This is a positive step," Phillip Swagel, a former Treasury Assistant Secretary for Economic Policy during the Bush administration, argued. "It signals that these guys are going to come out [of conservatorship] in a different form and that the existing shareholders are not going to get anything."
Facing criticism from Republicans for not spelling out the fate of Fannie and Freddie, administration officials have indicated they will turn to the matter once Congress wraps up work on financial-overhaul legislation. Treasury spokesman Andrew Williams said Wednesday's action "does not imply any direction of any future reforms or preference of corporate form" for the companies.
Freddie Mac said it expects the delisting of its common and preferred stock will happen by July 8. Fannie Mae indicated it will be delisted in early July.
The companies' shares will now be traded in the over-the-counter market where they will be quoted on the OTC Bulletin Board, typically the domain of untested companies and more speculative stocks. They will still file disclosures with the Securities and Exchange Commission.
The companies' share prices plummeted on the morning announcement; Fannie's and Freddie's stock closed down nearly 40% to 56 cents and 76 cents, respectively, in Wednesday trading. Meanwhile, the roughly three dozen publicly-traded preferred securities issued by Fannie and Freddie were punished nearly as severely, posting declines of 14% to 46% in Wednesday afternoon trading.

Fannie's and Freddie's shares have limped along since the federal government seized them. The U.S. Treasury acquired ownership of 80% of each company's common stock and agreed to pump in capital as needed to keep the companies solvent. The government has so far injected $145 billion and losses at the company continue to mount. In exchange for the capital, the federal government has received preferred shares in the same amount carrying a 10% coupon.
Any money the companies make goes to paying the dividend on the government's shares.

Fannie's and Freddie's shares had become the province of day traders taking bets on the company's future after institutional investors fled the stocks and Wall Street equity analysts dropped them from their coverage. Trading has remained intense, however, with the shares often making the New York Stock Exchange daily list of most heavily-traded shares.
Since their federal takeover, Fannie and Freddie have functioned as tools of the administration's strategy to keep mortgage credit flowing and help homeowners avoid foreclosure. The Treasury's preferred stock agreements with Fannie and Freddie effectively guarantee the companies' debt.
The two mortgage giants have struggled mightily since the housing bust. In May, Fannie requested another $8.5 billion in government aid. Meanwhile, Freddie said it would need a $10.6 billion injection from the Treasury.
The shares of both companies first sank below the New York Stock Exchange's $1 30-day average price requirement in the fall of 2008. Companies that see their stock trade below that level for 30 consecutive days typically are given six months to correct the issue or face delisting.
When Fannie and Freddie slipped into the warning zone, they got a longer-than-usual period to buoy their stock price thanks to a temporary suspension of NYSE Euronext's listing standards in late February 2009. Those listing standards were reinstated in August 2009, but both companies traded above the minimum price at that time.
Over the past 30 days, Fannie Mae's average share price sank once again below NYSE's minimum requirement. Freddie's share price didn't violate the $1 minimum, however.
DeMarco, in a press release, said it "simply makes sense" for Freddie to delist because it "fits with the goal of a conservatorship to preserve and conserve assets."
Pulling their stocks off the NYSE will save the two companies $500,000 apiece in annual listing fees, as both companies paid the maximum amount due to the large number of shares outstanding, according to NYSE Euronext.
Fannie and Freddie watchers weren't surprised by the regulator's action. Rep. Spencer Bachus (R-Ala.), the top Republican on the House Financial Services Committee, said in a press release the move confirmed Fannie and Freddie weren't real companies anymore.
"De-listing is the appropriate message: That these companies have no value and they shouldn't be traded as if they're real companies," said Bose George, an analyst for Keefe, Bruyette & Woods Inc.
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; jessica.holzer@dowjones.com (Maxwell Murphy and Nathan Becker contributed to this report.) Al Rajhi personal loan

AIG And The Trouble With 'Credit Default Swaps'

With the government's $85 billion public bank loan to American International Group — and its controlling stake in the company — the United States is now in the insurance business.
AIG is the largest commercial and industrial insurer in the nation, NPR business correspondent Adam Davidson told Steve Inskeep. The company also offers lines for individual customers in the U.S. and around the globe. The more traditional aspects of AIG's business continue to perform fairly well.
But a few years ago, AIG got involved in a new aspect of the financial system: It joined in the selling of so-called credit default swaps. A credit default swap, or CDS, is essentially insurance on debt.
Gambling On The Future
Imagine a bank that has bought bonds from, say, the Port Authority of New York and New Jersey. That means the bank holds debt from the Port Authority. With any loan, there's always the risk of the debtor's failing to pay the money back. To protect themselves, bankers began buying credit default swaps. If the Port Authority failed to keep its end of the bargain, the bank could call up its insurer and cash in its CDS.
AIG treated its CDS business the same way it treated all the other lines. Insurers sell policies for lots of cars and houses, betting that only a few customers will have wrecks or devastating fires.
"Any one house burning down doesn't increase the likelihood that lots of other houses will burn down," Davidson said. "That doesn't apply to bond insurance."
In the case of bonds, one default can create a domino effect. Investors lose confidence in the market. Interest rates spiral. Borrowers can't find new capital to stay afloat.
"As far as we can tell, AIG didn't quite think this one through," Davidson said.
As AIG Goes, So Goes The Global Economy?
Why would a company as large as AIG gamble its future on a new twist in the financial system? The lure of money may have been too strong, Davidson said. The CDS market has grown into a $70 trillion annual business. Davidson likens the situation to AIG saying, "Hey, we know insurance better than anyone. We're going to get into that business."
The pure size of the CDS business is enough to make a failure of AIG a threat to the entire global economy. What's more, the CDS market is far from transparent. "Nobody knows exactly who has them and where they got them from," Davidson said. The fear is that AIG has insurance banks all over the world for trillions of dollars that would suddenly be at risk. If AIG collapsed, banks would stop lending money to each other.
"If that stops, global economic activity stops," he said. "We don't know that that would have happened, but it seemed like a real possibility. And that was why the government

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How a 'perfect storm' led to the economic crisis

(CNN) -- The U.S. economy is clearly in terrible shape. What is less clear is how we got here.

An index of home prices in 20 major metropolitan areas fell at a record annual pace in November of 2008, according to a recent report.

Opinions vary on when and where to begin the story, but many experts trace the origins of the current economic situation to the housing bubble that came about earlier this decade.
Housing prices jumped at a rate above 6 percent in 1999 and increased rapidly and steadily as the decade turned, according to a recent study by the Brookings Institution.
"After the mid-1990s ... real house prices went on a sustained surge through 2005, making residential real estate not only a great investment, but it was also widely perceived as a very safe investment," the study said.
The prices eventually moved "out of line with fundamentals like household income" and the bubble formed, the study said. Read the complete Brookings study
There were two trends developing at that time that contributed to the housing bubble, experts said.
The Federal Reserve Board, to combat the recession of 2000-01 and the economic effects of the September 11 terrorist attacks, began drastically slashing interest rates.
Consequently, it was very easy to borrow money, especially if you wanted to buy a home.
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In Depth: Money & Main St.
Meanwhile, global investors -- flush with cash from the worldwide economic boom of the 1990s and '00s -- were looking to the U.S. economy to make even more money.
"You have a group of people growing richer by leaps and bounds," said Peter Rodriguez, an economist at the University of Virginia. "And they liked the idea of parking some cash in the biggest, safest economy in the world."
Enter mortgage-backed securities
Wall Street firms sought to connect the rich investors with the rapidly expanding housing market with the help of complicated financial instruments.
These instruments -- such as mortgage-backed securities we've heard so much about -- made it easier to move the investors' funds into the housing market, which fed the extraordinary price sprial, Rodriguez said.
"It began to really take on a life of its own when people saw how much money they could make in housing," he said. "Before long, everybody was pushing along the momentum of this train."
So how do these mortgage-backed securities work and what role did they play?
Let's say there are three prospective homebuyers in a neighborhood. A local bank makes mortgage loans to all three, then bundles up the mortgages and sells the bundle to a big Wall Street firm, like the now-bankrupt Lehman Brothers.
The Wall Street firm takes its bundles of mortgages and offers them to investors. The investors make money off the interest payments from the original borrowers.
These instruments helped minimize risk for the local bank because it was no longer responsible for the loans it made to the local homebuyers.
"You didn't even have to worry about a loan once you made it. You didn't have to keep it on your books," Rodriguez said. "The only limitation was how fast you could turn the loans."
It was an intoxicating era when you could make a lot of money quickly through the housing market, and you did it through the "basic idea of leverage," Rodriguez said.
He provided an example: You take out a mortgage loan for $100,000 and make a 20 percent down payment, which would equal $20,000.
If the price of the house goes up to $120,000, you've effectively doubled your money. If you sell at that price -- assuming there are no transaction costs -- you walk away with an extra $20,000.
Leverage works the same way for banks. They borrow from other banks or other institutions so that they can hand out more loans and make more money.
"This encourages all sorts of risky behavior by individuals looking to buy homes, and it encourages banks to lend because, in an environment where prices rise, they're making lots of money, too," Rodriguez said.
The housing collapse
Economists say not everyone can -- or should -- buy a home, but that didn't stop many homebuyers, banks or Wall Street firms during the housing bubble, when the only way for prices and profits was up.
Some banks and other institutions were even eager to lend money to prospective homebuyers with poor credit and a spotty financial history who would not typically qualify for loans.
These transactions are known as "subprime" mortgage loans. They generally have interest rates that are above "prime" interest rates available to borrowers with good credit.
On its face, there is nothing devious or illegal about a high interest "subprime" loan. Its simply a case of lender taking on a higher risk and receiving a higher interest rate in return.
However, nearly half of the loans made in 2006 were of the subprime variety, which increased the risk of borrowers defaulting on many banks' balance sheets.
"Prime mortgages dropped to 64 percent of the total in 2004, 56 percent in 2005 and 52 percent in 2006," the Brookings study notes.
Even so, many banks and brokerage firms continued bundling the mortgages, many of them bad loans, and Wall Street kept buying them and selling them to investors. And the people who could have put a brake on the increasing amount of risk -- the agencies that regulate the U.S. financial sector -- weren't paying attention.
"As long as everyone was paying their mortgage, that was fine," said Ali Velshi, CNN's chief business correspondent. "[But] we didn't take into account with these mortgages that people might lose their jobs, the interest rate might go up and the housing prices may go down.
"Guess what? All three happened."
Housing prices started trending downward, and by 2007 the bubble had burst.
"You're a homeowner or a bank, and you're trying to sell your property, but everything else on the block is for sale, too," Velshi said. "Everything collapsed like we've never seen before."
The credit crisis
Knee-deep in bad loans, many banks and lending institutions panicked. Many of them were over-leveraged, experts say; simply put, they had borrowed beyond what was responsible and were now on the hook.
Another way to understand it is that for every dollar a bank may have had in the vault, it had $10 to $25 floating in the market in loans, and a good bit of that money was tied up in bad loans.
The banks sought to decrease that ratio by either getting rid of the bad loans or raising more money, Rodriguez said.
The problem with dumping the loans on the market is that "it lowers the price, and anyone else who has them is suddenly in even worse shape," he said.
It was a "death spiral of prices," and it spread like a virus across the financial sector, from legendary Wall Street firms like Bear Stearns and Lehman Brothers to local and regional banks and brokerage firms across the country, Rodriguez said.
As stockholders found out about the bad loans these firms were carrying, they pulled their money out. The markets plummeted.
Meanwhile, paralyzed by their bad assets and looking to hoard cash, banks stopped lending. It didn't matter if you were an individual with good credit, a healthy business or another bank.
The American financial system was effectively frozen.
"It was a perfect storm," Velshi said. "It was a lack of regulation, it was greed and creativity in the financial industry, and it was an American dream that got off track." personal loans
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IT IS no secret that Malaysia is intent on becoming a hub for Islamic
banking. As part of its strategy to enhance its financial competitiveness
and increase its links with other economies, it brought forward the
liberalisation of its Islamic banking sector to 2004, three years ahead of
the World Trade Organisation's deadline.
Currently, there are nine full-fledged Islamic financial institutions
operating in the country (see box story). However, before they go all out,
some quarters feel that there are many issues that need to be addressed.
For instance, isn't Malaysia, with a population of 25 million, too small
to support so many Islamic banks? Secondly, how will our local banks
(full-fledged banks as well as conventional banks with Islamic windows) be
affected by the presence of global players? Is our infrastructure ready to
absorb a second Islamic banking system, as opposed to conventional
banking? Will Singapore, which is also hoping to become an Islamic banking
hub, be a threat? Do these issues warrant immediate attention?
Malaysian Business takes a look at the upside and downside of these
factors that could hinder the growth of Islamic banking here and
regionally.
The Issues Debated
An expert on Islamic banking, Professor Bala Shanmugam says, `Only 10%
of Malaysian banking assets are in Islamic accounts and personal loan. The remaining 90% are
held in conventional accounts, serviced by 10 Malaysian banks, not
including the foreign banks.' He questions, `Does this not sound lopsided?
`Now that nine full-fledged Islamic banks have been given licences, how offering Islamic products. Many countries are only beginning to create an
Islamic infrastructure, while Malaysia has both a conventional and Islamic
system running concurrently. Not surprisingly, Malaysia is looked upon as
an Islamic banking role model.'
Bala puts it differently. He maintains that as far as separate
accounting systems are concerned, the conventional banks in the country
are not required by law to have two separate accounting systems as yet.
However, it is understood that the Malaysian Accounting Standards Board
will issue a set of Islamic accounting standards later this year, and more
will follow suit.
Meanwhile, Baljeet adds that the establishment of the Bahrain- based
Accounting & Auditing Organisation for Islamic Financial Institutions
(AAOIFI) encourages the standardisation of Islamic accounting.
As for Jesvin, she says, `The Islamic banking system, while able to
exist parallel to the conventional system, requires its own technical
infrastructure, regulation and set of principles. The separate accounting
principles are part of the requirements, given the nature of the
operations.' Jesvin may have her point. Although the cost of complying
with additional regulatory requirements could be expensive, what is
important is to look at the potential of Islamic banking as a whole, which
should more than offset the cost of compliance.
In BNM's view, while some areas of Islamic banking transactions may
require a different set of accounting treatments as dictated by the unique