logo
  Join        Login             Stock Quote

Paulson tops Gross, Greenspan and Ackman in the Mortgage Battle

 August 11, 2008 09:49 AM
 



The most powerful man in Washington, Treasury Secretary Hank Paulson has shown himself to be quite a shrewd politician. The prevailing wisdom is that he accepted the $300B FHA housing bill so that he could create the Fannie Mae (FNM), Freddie Mac (FRE) and Federal Home Loan Bank (FHLB) backstop. The much talked about unlimited power of the Treasury to lend and buy equity, which will never be needed. I disagree. I believe that Paulson created the heightened GSE anxiety for the express purpose of passing the Frank-Dodd FHA mortgage refinancing bill.

Paulson's high-wire balancing act involved appeasing the Administration's need for moral hazard by feeding the Republicans Bear Stearns (JPM), and then feeding the Democrats the GSE backstop to tack onto their FHA bill. A setup that made the FHA bill veto proof. President Bush showed his distain by signing the bill privately. From Paulson's and Bernanke's perspective it is the FHA component that will provide the most benefit to the banking system. Paulson's pragmatism triumphed in a tough political environment.

This giant combo bill brings difficulty to PIMCO's Bill Gross and Pershing Square's William Ackman. Both are betting that the GSEs will be nationalized by the Treasury and have used the backstop to plead their case. Nationalization would benefit Gross by increasing the value of GSE notes and bonds, and Ackman by making the shares he is shorting worthless. Both are pressuring the Treasury to buy GSE equity in the name of expanding GSE support for the mortgage market.

Gross has engaged Alan Greenspan to plead his case in public. Several Wall Street analysts are also preaching the dire consequences of a reduced GSE role in the mortgage market. They cry that without a Treasury takeover, no one is out there to pick up the reduced GSE demand for mortgages. Therefore, it is unconscionable for the GSEs to strengthen their balance sheets by reducing their portfolios.

Too bad for Gross and Ackman, Paulson has another point of view. Fannie and Freddie can reduce their portfolios and the FHA will pick up the slack. What Gross and Ackman lost sight of is that many banks own GSE equity (mostly preferred) and the failure of GSE equity would reduce banks' capital adequacy. Paulson and Bernanke don't want that to happen.

Disclosure: Author is long FNM, FRE and JPM.
iOnTheMarket Premium
Advertisement

Advertisement


Comments Closed


rss feed

Latest Stories

article imageBuffett's Market Indicator Flashes Red, Prepare To Sell

With each passing month, it's becoming evident that the current bull market has slowed from a gallop to a read on...

article imagePBoC joins other major central banks with unconventional monetary policy action

Softer than expected economic growth in China (see discussion) has finally spurred the PBoC into action. read on...

article imageA Buyback Boost?

Are stock buybacks the only thing keeping this bull market read on...

article imageGold Slides On Perfect Storm For Dollar

For all the anticipation surrounding the delivery of the Fed’s statement in the run-up to the September read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center

Related Articles:

Gold hasn’t lost its allure in my portfolio
More Articles on: Finance



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.