September 14, 2008
Fannie, Freddie Struggle To Save Shotgun Marriage
There’s an old dictum that should be remembered when dealing with the government: “Heads I win, tails you lose.”
Consider Wall Street woes as leading home-mortgage corporations struggle to stay afloat -- like that of Lehman Brothers investment broker as this is written on Saturday.
Timothy F. Geithner, president of the New York Federal Reserve, called a meeting of the Board on Friday night to consider plans to liquidate Lehman Brothers in an orderly fashion.
Also attending were U.S. Treasury Secretary Henry M. Paulson, Jr., and Christopher Cox, chairman of the Securities and Exchange Commission.
It doesn’t get more serious than this.
Both Geithner and Paulson are reported to have emphasized that an “industry solution” was needed – rather than government intervention. That is: purchase of Lehman Brothers by another bank.
Leading contender for buying Lehman Brothers is Barclays Bank of London, England. However, Barclays wants the U.S. government to contribute working capital via the “Fannie Mae” and “Freddie Mac” programs.
GREAT DEPRESSION REMEDY
When Congress set out in 1938 to micro-manage the mortgage market -- as an escape hatch of the Great Depression -- the natural law of unintended consequence set in.
Fannie Mae Headquarters
and Freddie Mac logo
Banks and stockbrokers had loaned money for mortgages and corporate stocks with little or no supporting assets. The “crash” of 1930 was the consequence.
Our lawmakers took charge of the “secondary mortgage market” (big banks serving little banks.)
This service was established as a monopoly by the Federal National Mortgage Association – familiarly known as a colloquialism of the initials FNMA – “Fannie Mae.”
As a government department, Fannie Mae cost big bucks.
To help balance the national budget and provide some competition, Congress in 1970 chartered part of Fannie Mae to a private corporation. That is termed the Federal Home Loan Mortgage Corporation (FHLMC) familiarly known as “Freddie Mac.”
FOR SALE, CHEAP
Lehman Brothers is said to be asking $5 billion for a majority ownership in the present contretemps.
If no buyers come forward, Lehman is said ready to set aside $30 billion of “troubled” commercial property loans into a “bad bank” account to be owned by Lehman shareholders.
Major entities in this drama of capitalism are nervous about the long-range stability of Lehman.
In view of Fannie Mae, Freddie Mac and U.S. commercial bank reluctance -- it seems most likely that Lehman Brothers is a goner.
"WE’RE HERE TO HELP YOU"
There is stormy weather ahead for investors tempted to gorge on Lehman Brothers bones.
Fannie Mae and Freddie Mac were taken over by the Federal government September 7 to shield those government companies from a run on its funds.
Fannie Mae’s stock declined from a 52-week high of $68.60 -- to a close of just 73 cents on September 8.
Freddie Mac plunged from a 52-week high of $65.88 -- to 88 cents during that period.
Holders of these common stocks are last in line for claims on assets. If a company files for bankruptcy -- or conservatorship protection as Fannie Mae and Freddie Mac have – there is the possibility those shares will become worthless.
Fannie Mae and Freddie Mack are protected as a conservatorship -- not under bankruptcy regulations. The government never goes broke – just taxpayers and private investors.
CONSERVATOR APPOINTED
Conservators are persons or entities granted “preferred stock purchase agreements” to put a shaky company to solvency.
James Lockhart
James Lockhart is the newly appointed, “independent,” director of the Lehman Brothers assets. He asserts the preferred stock-purchase agreement is “necessary to provide security for debt holders.”
There is no guarantee that current shares will be worth anything “when or if” Fannie Mae and Freddie Mac come out from under the conservatorship.
“Under terms of the agreement, common and preferred shareholders bear losses ahead of the new government, senior, preferred shares,” says Lockhart.
"Market discipline is best served when shareholders bear both the risk and the reward of their investment.
"While conservatorship does not eliminate common stock, it does place common shareholders last in terms of claims on the assets of the enterprise."
Bye-by Lehman Brothers’ present stockholders. And, probably, the company itself.
By Lindsey Wilger Williams, retired newspaper publisher and syndicated columnist
