The Wall Street Journal citing “sources close to the matter,” reported after the market closed today that the Treasury is “close to finalizing a plan to help shore up mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).”
The Journal doesn’t have any details about a Treasury plan, but the paper is reporting that any plan likely involves a management shakeup at the government-sponsored enterprises (GSEs). According to the Journal, a meeting took place this afternoon at the office of the GSEs regulator, the Federal Housing Finance Agency (FHFA)*. In attendance were Agency chief Lockhart, Treasury Secretary Paulson, Federal Reserve Chairman Bernanke, Freddie CEO Syron, and Fannie CEO Mudd.
The Journal reports that CEO Mudd arrived at 2:50 PM. This means that the meeting took place when the Moon was Void-of-Course (“VOC”), since the Moon went VOC at 11:46 AM and will remain so until entering Sagittarius tomorrow morning. As I write in my Weekly Forecasts, VOC periods are best suited for anything where no action or specific outcome is desired, as actions taken during these times might not turn out as planned or receive the reaction you would like. Decisions made when the Moon is VOC stand a greater chance of requiring revision to be workable. In my own experience and observations, meetings that take place under a VOC Moon usually don’t reach a conclusive decision. The VOC time meeting is usually followed up by another meeting, the subject matter put on hold, or scrapped altogether. Apparently one meeting was not enough since Bloomberg is reporting tonight that catered food is scheduled for delivery to the FHFA throughout the weekend.
As I wrote in a post on “What Barron’s Is Not Telling You About Fannie & Freddie’s Survival,” if the Treasury takes any kind of action concerning the GSEs, it would most likely occur during the Virgo New Moon cycle (August 30 – September 29), with the strongest possibility around September 7-9.
With the Moon in Scorpio yesterday and today, PIMCO’s Bill Gross has been highly aggressive in whining for GSE nationalization. (Maybe UBS Vice Chairman and former McCain campaign co-chair Phil Gramm was really referring to Gross and his newfound buddy Jim Cramer, when he made his “nation of whiners” remark.) Gross gets a lot of face time on CNBC as PIMCO, the world’s largest bond fund, is a major advertiser on the network. In his latest monthly Investment Outlook called “There’s a Bull Market Somewhere?,” he fawns over Cramer’s “Mad Money” show and tries to get cutesy with the “booyahs.” Tell me it wasn’t pre-planned to have Cramer on the CNBC set when Gross made his satellite appearance yesterday. Now Cramer keeps repeating on CNBC that “we need the mortgage crisis resolved using the Bill Gross plan.”
Anyway, Scorpio and its planetary ruler Pluto rule bonds, debt, as well as the manipulation of such. And manipulation would be the appropriate word when Gross spends yesterday and today doing interviews with CNBC and Bloomberg and then its reported that Treasury is working on some kind of deal. As aggressive as Gross was previously, tonight he’s “declining to comment” to Bloomberg about whether he consulted with Treasury officials, but he commented “there’s probably a 95 percent chance that the moment that something will happen is Sunday or Saturday.”
As I wrote in “Greenspan & PIMCO: A Gross Conflict of Interest,” Gross wants Fannie and Freddie shareholders to be wiped out through a massive capital infusion by the Treasury so that PIMCO’s bonds would increase in value. Gross is the manager of PIMCO’s Total Return Fund that as of June 30 had almost 61% of its holdings in mortgage-backed securities mostly guaranteed by Fannie and Freddie. A majority stake in the GSEs by the Treasury would make PIMCO’s bonds equivalent to Treasuries.
Let’s look at the Treasury’s options. The GSEs could not continue to pay dividends on the preferred stock and the unsecured debt while at the same time wiping out the common shares. The Treasury’s main decision point is whether or not they want to own Fannie and Freddie. Any stake convertible to over 50% of the common stock makes them in fact owners of the companies. If Paulson does not want the government to guarantee 100% of the GSE debt, he would have to settle for a stake under 50% of the equity. There are many ways the Treasury can either guarantee a portion of the GSE debt or inject capital without taking ownership. It is unlikely that any private investors will participate in recapitalizing the GSEs if they are in fact owned by the government.
Bill Gross’ proposal that PIMCO would participate in a government takeover of the GSEs is illogical. How could private investors participate in a government-owned enterprise? Logic says that for PIMCO to participate, Treasury could not own more than 50% of Fannie and Freddie. It’s highly likely that common equity in the GSEs will be retained with less than 50% dilution by the end of this weekend.
The GSEs differ from Bear Stearns in that the common equity is far more dispersed. Once thought to be extremely safe, GSE equity is widely held by pension funds, retirees, and a fair share of “widows and orphans” - Main Street. Moral hazard on these groups of people would not endear the government in important constituencies, particularly in this election year.
Disclosure: Long FRE
* This is an new agency created by the Housing & Economic Recovery Act of 2008 that combined the FHFB with OFHEO.
Related Post: “What is Paulson Cooking Up for Fannie and Freddie?”; Wall Street Weather quoted in FT’s Alphaville on the VOC Moon and Bernanke’s “SocGen” rate cut.