NBR Transcripts September 8, 2008
Monday, September 08, 2008The Government Takes Control of Fannie & Freddie
SUSIE GHARIB: Stocks markets around the world today applauded the U.S. government bail out of Fannie Mae and Freddie Mac. Investors hope the bold action to rescue the two mortgage finance giants will help stabilize the housing and financial markets. The Dow surged 289 points, the NASDAQ rose 13. And major markets in Europe and Asia jumped by 3.5 percent or more. Financial stocks led the rally, but shares of Fannie plummeted 90 percent, and Freddie plunged 83 percent. Both now trade under a dollar a share. Also moving today, mortgage rates. The average rate of a 30-year fixed mortgage dropped today to 6 percent, down from 6.5 percent. We have two reports tonight looking at the impact of the government's dramatic move on the ailing housing market and the struggling stock market. We begin with Suzanne Pratt in New York.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: The bailout of Fannie Mae and Freddie Mac lifts at least temporarily a dark cloud that has been hovering over Wall Street for months. While many stocks gained ground today, the beaten-down financial sector was a big beneficiary of the government's decision to rescue the mortgage giants. Experts say investors were reassured that major U.S. financial institutions will not be allowed to fail. UBS floor trader Art Cashin viewed today's market activity as a relief rally.
ARTHUR CASHIN, DIRECTOR, NYSE FLOOR OPERATIONS, UBS: This looks like Bear Stearns on steroids. I'm not sure it's going to have a very long shelf life, and I'm not even sure that it's going to improve the mortgage picture around the nation.
PRATT: Market pros like Cashin almost universally view the bailout as a positive for stocks, but many are the doubtful the euphoria will last. They point to a list of worries that investors are likely to focus on. Not only is the housing market in the midst of its worst recession in decades, but U.S. economic problems are spreading around the globe. Lehman Brothers European economist Michael Hume thinks the U.S. plan will help economies across the pond.
MICHAEL HUME, CHIEF EUROPEAN ECONOMIST, LEHMAN BROTHERS: This should help to liquefy the markets slightly. It should provide, certainly, confidence through the impact on bank shares directly, but also just providing confidence across a whole range of financial markets.
PRATT: And while the bailout is likely to stabilize credit markets, it's questionable how quickly consumers here in the U.S. will feel more secure about their spending. Against that backdrop, portfolio manager Jim Awad says today's news does not alter his guarded opinion of stocks.
JAMES AWAD, CHAIRMAN, W.P. STEWART ASSET MANAGEMENT: I think the outlook for the market in the short term is uncertain. We have work to do. I think we are in the sorting out process. I would not expect any major progress for the markets in the next few months.
PRATT: Other experts, however, view the bailout as the beginning of a sea change in investor sentiment. Wachovia Securities strategist Scott Wren encourages equity investors to capitalize on that change by buying industrial and consumer discretionary stocks.
SCOTT WREN, SENIOR EQUITY STRATEGIST, WACHOVIA SECURITIES: The economy and the stock market are at important inflection points, and if you have been playing defense for the last couple of years, that has been good. But now is time to start to change your portfolio orientation. We've taken the initial steps, and I think over that multi-year period you're going to be very happy owning stocks.
PRATT: Many market pros were particularly encouraged that today's rally accelerated toward the close of trading. But it's also important to note that the major averages are still down about 13 and 14 percent for the year. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Stephanie Dhue in Washington. Fannie Mae and Freddie Mac hold or guarantee nearly $5.5 trillion in mortgages. Now, that's the U.S. government's responsibility. Treasury's deputy assistant secretary, Jeremiah Norton says the explicit government backing should provide stability to the mortgage market.
JEREMIAH NORTON, DEPUTY ASSISTANT SECRETARY, TREASURY DEPARTMENT: This announcement will help show the world that invests in the U.S. mortgage market that the U.S. government stands with the mortgage market with these entities. And so the reception from investors around the world will flow into the homebuyer and his or her ability to purchase a home.
DHUE: Mortgage rates fell today on the Treasury move, with 30-year fixed rate loans dropping from 6.5 near 6 percent, and could fall further. Analyst Jaret Seiberg says that trend, coupled with the new housing bill aimed at preventing foreclosures and boosting home sales and the takeover of Fannie and Freddie, could revive the housing market.
JARET SEIBERG, POLICY ANALYST, STANFORD GROUP: So we're certainly looking for signs that a turnaround could be in effect by early next year, whether that's sustainable once all this stimulus expires is the real question.
DHUE: While the government's action may continue to bring down mortgage rates, it probably won't ease the broader consumer credit crunch that has struck everything from home equity lines of credit to auto loans. ISI analyst Andy LaPerriere says it's unlikely to change the fundamental problems.
ANDY LAPERRIERE, MANAGING DIRECTOR, ISI: The primary driver of what has been happening is higher down payment requirements, higher credit scores required, documenting your income, real appraisals. This is the big shift that has taken place in the mortgage market. This plan does not fundamentally alter that, and so it's only going to have a limited impact.
DHUE: And it will have limited impact on consumers facing foreclosure or who are trying to sell a house in a saturated market. For them, the Treasury plan offers little relief. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
Federal Housing Finance Agency Director James Lockhart Offers His Expectations of The Fannie/Freddie Bailout
PAUL KANGAS: While the Treasury played a key role in engineering the federal takeover at Fannie Mae and Freddie Mac, the man directly charged with regulating the mortgage giants is James Lockhart. He's the director of the Federal Housing Finance Agency. NBR's Washington bureau chief Darren Gersh spoke with Lockhart, and began by asking if Lockhart was satisfied with today's reaction from the mortgage market.
LOCKHART: Well, what we have seen so far, I think, is good. I think it's what we were hoping for. That people would realize that Fannie and Freddie are back in the game, that some of the risk that was priced in the market is starting to fall. And we're going to see hopefully mortgage rates fall and get more affordable.
DARREN GERSH, NIGHTLY BUSINESS REPORT WASHINGTON BUREAU CHIEF: Fannie and Freddie had been trying to ratchet up their loan requirements on mortgages in order to cut their losses and protect themselves from losses. Now that the taxpayers are in charge, you face a choice, are you going to loosen lending standards in order to prop up the housing market or are you going to tighten lending standards to protect taxpayers? Which are you going to do?
LOCKHART: Well, I think we're going to look at those standards and make sure that they make sense. As a conservator obviously we are trying to conserve the companies and -- but at the same time they have a very, very important mission of stability and liquidity and affordability. In fact, one of our key reasons for taking this action over the weekend is because we felt they weren't doing their mission. And in fact, if they had to start selling assets, that would have really hurt the market. So we're going to balance the safety and soundness in the mission.
GERSH: Well, let's tuck about the taxpayers. The Congressional Budget Office estimated, when Congress passed the legislation that allowed you to do what you did, that it would cost taxpayers $25 billion. The Treasury later hired Morgan Stanley to look at the books of these two companies and came up with a much larger figure, maybe close to $50 billion. Is that the range of the loss that we are looking at here?
LOCKHART: Well, I don't necessarily think the taxpayers have to lose anything over the long-term in this. Certainly the liquidity facility they are providing and the mortgage-backed security investments should work out very well. And then the other issue is the preferred stock that they are putting in, if needed. And that stock is only going to be put in if they get a negative net worth. And the cash will only be put in, in that case. And even if it is put in, there is no reason why, as these companies work their way out of their problems, that that stock won't be able to be sold for reasonably good prices. But there is certainly a -- you know, there going to be up front costs, potentially, if the companies need it.
GERSH: It sounds like from what you just said, that you are looking at a conservatorship that is going to last for years.
LOCKHART: We don't know the time, it is really hard to predict. A lot will be what happens to the housing market, if the housing market starts to recover sooner, I think these companies start to recover sooner.
GERSH: Well, you are still regulating these companies a couple of years before.
LOCKHART: Still am.
GERSH: Still are. Morgan Stanley was brought in recently by the Treasury to look at the books. You have looked at these books before that, just a couple of months ago, and said that these companies were safe and sound. So what did Morgan Stanley learn that you didn't know?
LOCKHART: Not a lot, really. What I said is that they were adequately capitalized. And they were adequately capitalized according to the law on June 30th. The legal definition is -- I think I said yesterday is somewhat antiquated capital rules. They are much too low for a company exposed to this kind of risk. You know, we saw the Morgan Stanley review. But more importantly, we did our own review. And that was the key thing. We have ongoing examinations all of the time with these two companies. And there was with a significant deterioration over the last three months. Risks were just growing -- credit risks were growing. The losses on the private label mortgage-backed securities were growing.
GERSH: When I looked at the pay of the CEOs of these two companies, there were a lot of pieces to them. And frankly I gave up counting around $70 million over the last couple of years. Are you going to move to try to get some of that money back for taxpayers?
LOCKHART: Most of that payment was in the form of stock or options. And they are not worth very much at all at the moment. So you probably have to divide that number by three or four to get to really what they were paid.
GERSH: So a lot of that is cash, and they have exit incentives and things like that. So now that the taxpayers are on the hook, are you going to look at those payments and are you going to try to get some of that money back for taxpayers?
LOCKHART: We're not going to try to get part of the money back. In fact, as I just said, most of the money has come back by the fall of the stock prices and their options. We will certainly be looking forward, and as I think I said yesterday in my speech, the new CEOs will have salary and benefits significantly lower than the old CEOs.
GERSH: And, Mr. Lockhart, thank you very much for your time.
LOCKHART: Thank you.
One on One with Susan Wachter, Professor of Real Estate Graduate School of Business at Wharton
SUSIE GHARIB: Joining us now for more analysis of the Fannie and Freddie bailout: Susan Wachter, professor of real estate at the Graduate School of Business at Wharton. Hi, Susan. SUSAN WACHTER, REAL ESTATE GRADUATE SCHOOL OF BUSINESS, WHARTON: Nice to be here.
GHARIB: I'm just wondering, are you more confident about the outlook for the housing market today than you were last week before this bailout?
WACHTER: Absolutely. This shores up the market in two very important ways. First, it stops a disaster of a spike in mortgage rates. And secondly, as we've seen today, mortgage rates are down.
GHARIB: Well, do you see mortgage rates going even lower. I know they did go down today. How much lower do you expect them to go?
WACHTER: Well, they can go lower. But even the decline of today will be very helpful in making housing more affordable to those on the margin. So -- and it prevents this potential disaster of interest rates significantly increasing, which could have really been a potential meltdown of the housing market.
GHARIB: Susan, you say that you feel more confident about the housing market. Do you think that we will start seeing revisions and expectations for home sales, home prices, housing starts, that sort of a thing?
WACHTER: Yes, I do think so. But it's not just the news of today. The news of today helps. It also helps -- it helps really because we now have lower mortgage rates. It helped psychologically in terms of just general reassurance that financial markets will not seize up or that there will be response if they do. But also, we are lowering the inventory slowly over time. And that's, of course, key. Just getting back to fundamentals, it's going to take time but this is another positive.
GHARIB: What about in terms of the whole lending situation? Do you think banks are going to be more willing to lend? I mean, many people who have high credit scores have had a difficult time to get mortgages, do you see a change in that because of the government's actions today with Fannie and Freddie?
WACHTER: Well, I don't see necessarily a significant loosening of that. Of course, their decisions absolutely depend on the decisions of Fannie and Freddie, which today is in the hands of a conservator, James Lockhart. And they're going to be looking at those credit decisions for the long run. But most importantly, we're not going to see those tightening. So in terms of expectations going forward, that's a very good thing because we've had great uncertainty.
GHARIB: But are you saying it's going to be easier or the same or harder for people to get a mortgage?
WACHTER: Well, it will be easier to get a mortgage because straight off the top we have got a decline of almost 10 percent in the cost of a mortgage as of today. So that will make it easier for people who are on the margin to qualify for a mortgage. That's going to be reflected in housing prices, housing demand and housing prices, and what we need is for those house prices to stop declining. We're not there yet, but this will happen.
GHARIB: Is there anything about this bailout as it relates to the housing market that concerns you?
WACHTER: Well, of course there are always issues of bailout and moral hazard going forward. And Paulson just pushed those down the line, those are going to have to be thought through over the next six months or so. This was necessary, it is not a great thing that it was necessary, there were mistakes made and it made it necessary. But it was necessary. So from that perspective, yes, this was a good thing. It had to happen. We had to have Fannie and Freddie shored up so that they -- so that lending can continue in this market.
GHARIB: What do you think, bottom line, this all means for the economy and consumer confidence? We just came off of last week having some very bleak numbers about the employment and job market situation. What do you think this news today means for the outlook for the economy?
WACHTER: Well, what we are really concerned about is this potential vicious cycle of interaction with an ever-declining housing market and an economy on the precipice of a recession. If the economy stays where it now, in this almost recession, and this really shores up so that the fundamentals are improving in the housing market, then it looks like, you know, the consensus may hold -- the positive consensus -- the optimistic consensus of a bottom in 2009 and slow recovery, but recovery.
GHARIB: All right. We'll have to see what happens. Thank you so much for coming tonight and giving us your thoughts.
WACHTER: My pleasure.
GHARIB: We appreciate it.
WACHTER: My guest tonight, Susan Wachter, professor of real estate at the Graduate School of Business at Wharton.
Paul Kangas' Stocks in the News
PAUL KANGAS: The Fannie/Freddie rescue set off a euphoric opening rally on Wall Street which sent the Dow rocketing 320 points at the outset of trading. But then calmer heads soon prevailed and by noon, the blue chips had settled back to a 153-point gain. The market lost a bit more of its luster when the tech-laden NASDAQ market sank to an 18-point mid- afternoon loss, while oil prices edged a bit higher. Paced by the financials and a comeback in the techs, however, stocks rebounded to close near their highs of the day. The Dow Industrial Average ended up 289.78, at 11,510.74. The NASDAQ Composite gained 13.88, ending at 2,269.76. While the Standard & Poor's 500 rose 25.48 points to 1,267.79. Over in the bond market, the 10-year note rose 4/32 to 102 18/32, putting the yield at 3.69 percent.
In the belief that the Fannie/Freddie rescue will bolster the economy's financial base, the bank stocks rallied sharply, led by Bank of America (BAC), trading 36.4 million shares, and up $2.50 a share.
Then Citigroup (C) up $1.25.
Washington Mutual (WM) down $0.15. CEO Kerry Killinger has been ousted and replaced by Alan Fishman, who is coming over from Meridian Capital.
Wachovia (WB), another strong bank, up $2.24.
GE (GE) did all right, gaining $1.21 today.
And then Wells Fargo (WFC) with a gain of $2.36.
JPMorgan Chase (JPM) up nearly $2.
Ford Motor (F), a $0.14 gain there.
Lehman Brothers (LEH) lost $2.05. Company executives are reportedly talking with potential buyers for the company's asset management group, Neuberger Berman.
Then came Pfizer (PFE), 10th in volume, with a $0.63 gain. Fannie Mae (FNM), the big loser of the day, down $6.31, 90 percent drop. And Standard & Poor's downgraded it, hold to sell, has a price target of $0.50 a share. And it is almost there.
And then let's have a look at cousin Freddie Mac (FRE), which plummeted nearly 83 percent. And incidentally, on both of these agency stocks, the common and preferred dividend will be suspended.
Then Home Depot (HD) up $1.57. An improving mortgage market good for home improvement stocks. Lowe's (LOW), the rival to Home Depot, was up $1.61. And the housing stocks themselves rallying nicely. KB Home (KBH), MDC (MDC), NVR (NVR), and Pulte Homes (PHM), Toll Brothers (TOL), all substantial gains.
Regions Financial Corp. (RF) up $1.15. Friedman Billings Ramsey brokerage upgraded it from underperform to market perform. And then Annaly (NLY), which deals in mortgage securities, up $1.56, Credit Suisse upgraded that stock from neutral to outperform.
UST Corp. (UST), up $1.35, but last Friday, as we reported, the stock jumped $13.55 on reports that Altria (MO) was going to make a buyout bid and that report turned out to be true over the weekend. The takeover price is indeed $69.50 a share in cash. Altria's stock edged $0.02 higher to $20.97.
Huntsman Corp. (HUN), the chemical company, down $1.88. Hexion Chemical has sued Huntsman to get out of its $28 a share buyout bid. And that trial began today.
Apple (AAPL) topped the NASDAQ actives, down $2.26.
Research In Motion (RIMM) losing $4.28. As you can see, the high-techs didn't fare so well.
Google (GOOG) down $24.30.
Oracle (ORCL), an $0.81 loss there.
Microsoft (MSFT) bucked the trend with a $0.47 gain.
Cisco (CSCO) up $1.11.
Qualcomm (QCOM) fell $1.39.
Intel (INTC) up $0.36.
Baidu.com (BIDU) gained $3.72.
And then Amazon.com (AMZN) moving up $1.97.
UAL (UAUA) closed down $1.38, but it traded as low as $3 today before it was halted on a report it was declaring bankruptcy, which turned out to be a faulty story in The Florida Sun-Sentinel. It really had to do with a 2002 bankruptcy filing which did happen. But this story is completely untrue today, and way out of date. So the stock rebounded rather sharply.
Gehl Corporation (GEHL), which makes light machinery, up $15.86. The French company Manitou will acquire it for $30 a share in cash.
And then Dell (DELL) closed down $0.24. But after the close, it was announced that Chairman Michael Dell bought 4.8 million shares last week at an average price of about $20.50 per share. That's $100 million worth of Dell stock.
Those are the "Stocks in the News" tonight.
