Professional Documents
Culture Documents
LatentEvents
Credit
that is implemented through a variety of disciplines: Convertible arbitrage Capitalstructure arbitrage Eventdriven strategies Volatility
Equity
that looks for latent and explicit catalysts to unlock value that maximizes asymmetry through credit/equity derivative hedging overlays
ExplicitCatalysts
Explicit hedges through CDS and ETFs can be used to maximize asymmetry both at the individual trade level and at p portfolio level
HistoricalPricePerformanceofFNM5.375%ConvertiblePreferred
100,000
80,000
60,000
40,000
20,000
Face:100,000 0 t05 Oct t06 Oct t07 Oct t08 Oct t09 Oct Apr r05 Apr r06 Apr r07 Apr r08 Apr r09 Apr r10 t10 Oct Jan n06 Jan n07 Jan n08 Jan n09 Jan n10 Jan n11 Apr r11 Jul05 Jul06 Jul07 Jul08 Jul09 Jul10
TalkingHeads
Unchecked abuse of quasigovernment guarantee led to overwhelming market dominance; that, coupled with a departure from the original mandate, led us to the present state
FannieMae
M t Mortgage B Book k+MBS($MM)
3,500,000 3,000,000 2 000 000 2,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500 000 500,000 500,000 0 19 990 19 992 19 994 19 996 19 998 20 000 20 002 20 004 20 006 20 008 20 010 0 19 990 19 992 19 994 1,500,000 2,500,000
FreddieMac
M Mortgage B Book k+MBS($MM)
1,000,000
19 996
19 998
20 000
20 002
20 004
20 006
20 008
Source: FHFA 2009 report to Congress, 5/25/2010, company filings with the SEC and Akanthos estimates
Source: FHFA 2009 report to Congress, 5/25/2010, company filings with the SEC and Akanthos estimates
20 010 9
SeniorDebt:$788.4Bn
SeniorDebt:$776.5Bn
$1,564.9Bn
SubDebt: $11.1Bn Preferred: $21.7Bn Equity: $19.5Bn
1. 2.
10
Strong historical housing market Overreliance on rating agencies Poor incentive alignment Poor judgment Massive fraud at the ground level Weak regulators Pressure to maximize profits
Manyenablingfactorsweretoblame,notjusttheGSEs
11
12
13
There is no moral hazard existing with shareholders of Citigroup (NYSE: C), with Freddie Mac, with Fannie Mae, with WaMu, with Wachovia. Those people lost anywhere from 90% to 100% of their money. The idea that they will walk away and think, "Ah, I've been saved by the federal government!" [is wrong]. There's at least half a trillion dollars of loss to common shareholders. Now, there's another question of management. But in terms of moral hazard, I don't even understand why people talk about that in terms of equity holders. WarrenBuffett
14
15
FinancialPreferredIssuance*($MM)
20000
15000
10000
5000
0 Jan0 06 Mar0 06 May0 06 Jul0 06 Sep0 06 Nov0 06 Jan0 07 Mar0 07 May0 07 Jul0 07 Sep0 07 Nov0 07 Jan0 08 Mar0 08 May0 08 Jul0 08 Sep0 08 Nov0 08 Jan0 09 Mar0 09 May0 09 Jul0 09 Sep0 09 Nov0 09 Jan1 10 Mar1 10 May1 10 Jul1 10 Sep1 10 Nov1 10 Jan1 11 Mar1 11
*Excludesmandatorypreferreds andGSEpreferreds
GSEs were the leading cause of the crisis GSEs are black holes for taxpayer funds GSEs moral hazard issues are not fixable due to inherent problems with a public/private model
GSEs must be abolished to avoid a repeat of the crisis GSEs abolition must be absolute, with either full nationalization or full privatization
17
yNationalizedSystem y Fully
$6Trilliongetsaddedtothe $14.5TrillionNationaldebt S&P & already l d h hasTreasury bondsonnegativewatch Noprivatecapitaltoabsorb initiallosses Nomarketcontrols,reduced scrutiny
WhereDoWeGoFromHere?
18
GiventheopportunitytheGSEscan recapitalizethemselves
19
20
21
U.S.TreasuryYieldCurve(4/13/2011)
45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Source:FHFA2009ReporttoCongress,SECfilings,Akanthosestimates
GSEsarecurrentlymintingmoneyintermsofnetinterestmargin
22
2010
CombinedGSESeniorPreferredDividend
1Q10 2Q10 3Q10 4Q10
SeniorPreferredDividend PreDividendEarnings
Punitive10%governmentpreferreddividendpreventsrecapitalization
23
LoanLossReservesvs.Charge g offs
TotalLoanLoss Reserves QuarterlyNet Chargeoffs Quarterly Provision
FreddieMac: LoanLossReservesvs.Chargeoffs
$40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 24
Lossreservesgreatlyexceedactualchargeoffs(sofar)
Total realized mortgage losses since 1Q08: FNM $59.1Bn and FRE $23.4Bn
FreddieMac($Bn)
ActualdrawsarelowerthanFHFAsmostoptimisticscenario!
Source:FederalHousingFinancialAuthority(FHFA)ProjectionsShowingRangeofPotentialDrawsforFannieMaeandFreddieMac,October21,2010
25
WhatDoWeSuggest?
26
Benefits: Allowsorganicrecapitalization Reopensdoorstopubliclytradedpreferredtoreplacegovernmentpreferred Preventstransferofvaluetothebigbanks EnablesFNM/FREtoearnbackwhattheyowetothetaxpayers Avoidsmaking gthebig gbanksevenmoresystematically y yimportant p RestorescapitalatregionalbanksandtheFDIC,producingamultipliereffect
27
28
29
FNMRemainingLosses
$180,000 $150,000 $120,000 $90,000 $60,000 $30,000 $0 BaseCase1 BaseCase2 BadCase
LoanLossReserve $61.9Bn
LoanLossReserve $39.9Bn
BaseCase1
BaseCase2
BadCase
Source:CompanyreleaseddataandAkanthosestimates
Source:CompanyreleaseddataandAkanthosestimates
1. 2.
3.
Loss experience assumption for all cases: 20% for 2010/2009/2004, 40% for 2008/2005, 50% for 2007/2006. This is on top of ~20% subordination p y released cumulative default curves to date and our estimates. Base Case 2: Based on company For FNM, 2010/2009: 1.5% cumulative defaults, 2008/2006: 8.5%, 2007: 9.5%, 2005: 5.5%, 2004: 2% For FRE, 2010/2009/2004: 1.5% cumulative defaults, 2008/2006: 8.0%, 2007: 9.0%, 2005, 4.0% Bad Case: For FNM all loans with CLTV >125% and 50% of loans with 100% < CLTV < 125% are assumed to default For FRE, 75% of loans with CLTV > 110% and 50% of loans with 100% < CLTV < 110% are assumed to default
30
FRE $16,856 (7,080) 7 300 7,300 17,076 (1,800) 15,276 (1,500) 13,776 0 $13,776
$16,409 (5,743) 9 500 9,500 20,166 (2,500) 17,666 (2,500) 15,166 0 $15,166
1. 2. 3.
31
FreddieMac
Senior GovernmentPreferred PubliclyTradedPreferred Earnings Multiple1 CompanyValue TotalGovernmentValue2 PubliclyTraded PreferredValue
1. 2.
$70,000 (assumedamountatequitization) $14,100 $13,776 $13,776 8 0x 8.0x 9 0x 9.0x $110,208 $123,984 147% 164% 131% 147%
Financials trade at 8x10x earnings (JPM is at ~8x). As GSEs should have more recurring earnings, they should trade at a premium. In addition, in a world with stable GSEs, all financials should be trading at higher multiples Includes assumed dividend paid to the date of equitization
32
33
34
Q&A
35