Introduction

I recently purchased shares of Primerica, which is a life insurance and mutual fund marketing company. Primerica was recently IPO’d by Citigroup (C) as part of Citi’s balance sheet reduction program. It has been one of the best performing IPO’s of the year so far. I believe Primerica’s shares are undervalued because investors are not factoring earnings growth that will be stronger than published Street expectations.

Company Background

Primerica provides financial products and services to middle-market America through a salesforce of independent producers. The company’s two main products are term life insurance and 3rd-party mutual funds. The company was formerly run by the legendary salesman A.L. Williams, who used inspiring motivational speeches to energize the salesforce. Sandy Weil bought the company in the early days of creating his Citigroup empire.

Main Investment Thesis

My main investment thesis is the current valuation does not factor earnings growth that will be stronger than the Street’s published expectations.

Why do I think earnings growth will be stronger than the Street estimates?

Prior to the IPO on April 1, 2010, Primerica entered into a reinsurance transaction with Citigroup that took about 80% of Primerica’s existing term insurance book off of its balance sheet and put it onto Citi’s balance sheet. This dropped the existing term life in-force block to drop from $650 billion to $130 billion. This also caused a one-time step down in Primerica’s earnings from to a $500 million annual run-rate to a $150 million annual run rate. Going forward, Primerica still has the same salesforce that was selling enough term life policies to grow a $650 billion term life block 3% annually. This salesforce producing the same amount of business can grow a $130 billion term life block at 51% annually.

How does 3% growth become 51% growth?

Primerica’s reinsurance transaction with Citigroup reduced the company’s existing block of term life insurance from $650 billion to $130 billion, but it did not diminish the capabilities of the company’s salesforce from adding new policies. In 2009, Primerica had a 10% lapse rate on its term life policies and added $80 billion in new term life policies. This led to a 3% growth rate.

In 2010, if will assume a continuation of the 10% lapse rate and another $80 billion of new term policies, the new $130 billion block of term life policies will grow to $197 billion or a 51% growth rate.

How does this growth translate into earnings?

The term life insurance division accounts for about 60% of the pre-tax earnings. I think this segment can grow 40% in 2011. The mutual fund sales can grow 5% a year, which assumes no in-flows and 5% market appreciation. Combined, I believe earnings in 2011 can be north $2.40 for a growth rate of over 20%.

Why don’t investors see this potential earnings growth?

Primerica’s potential earnings growth is hard to see because the reinsurance transaction with Citigroup is confusing and not what investors normally encounter.

Does Primerica have the capital available to support this level of growth?

Yes, Primerica has extra capital currently. The risk-based capital ratio is estimated to be north of 450%. Plus, the mutual fund savings division generates capital equal to its net income because it does not need capital for growth. Lastly, Primerica is only going to pay a token dividend while it is in this high growth mode.

Other Positive Parts of the Primerica Story

Plain vanilla business with no legacy issues – Primerica’s business is simple to understand. It is mainly a salesforce distributing straightforward term life insurance and a 3rd party mund funds. Term life insurance is one of the easiest forms of insurance for a life insurance company to manage on its balance sheet.

Potential for management to respond to improved incentives – Primerica’s management team should be motivated to show good results out of the gate from the IPO. This is an organization built on motivation and financial incentives. When the company was a subsidiary of Citigroup, I’m sure management had financial incentives, but the were still paid partly with options on Citigroup overall. It was impossible for them to move the needle on Citigroup’s stock. Now as an independent company, Primerica’s management team can directly impact the stock price by delivering strong results.

Ownership presence of Warburg Pincus – As minority shareholders, we are helped by Warburg Pincus’s ownership stake and presence on the board of directors. We can expect Warburg Pincus to focus on shareholders returns. With Warburg’s presence, we also expect management compensation to be under control and expect no value destroying acquisitions.

Leverage will add to returns – As part of the spin-off from Citigroup, Primerica took on some modest leverage at the holding company level that will improve equity returns. Since Primerica’s business seems stable and cash producing, I am comfortable the modest leverage will enhance returns without adding to the risk of financial distress.

Valuation

I believe Primerica is undervalued. At $21 per share, Primerica trades at 1.4x tangible book value and 9.5x the Street’s 2011 EPS estimates. These valuations are in-line with their life insurance peers. However, I believe the Primerica story is cleaner than the rest of the industry because they have fewer legacy issues (such as the investment portfolio at Aflac (AFL) or commercial real estate at Principal (PFG)) and are not dependent on the stock market for earnings growth (such as Prudential (PRU), Ameriprise (AMP), Hartford (HIG) or Lincoln (LNC)) Plus, with the reinsurance transaction with Citi, Primerica will have attractive growth for the next 5 years.

In addition, I believe Primerica could earn as much as $2.40 (or 22 cents more than consensus estimates) in 2011 as they regrow their term life book. As analysts increase estimates, the stock may attract attention from investors attracted to companies with rising estimates. The stock’s multiple could rise to 12x leading to a $29 stock price.

Risks

The main risks to my investment thesis on Primerica are: 1) I am overestimating the potential for earnings growth and 2) the market already recognizes the potential earnings growth and has appropriately priced the stock.

Primerica does have at least one potential issue with a reinsurance company facing financial difficulty. It has about $50 million reinsurance recoverable exposure to Scottish Re, which is in run-off. If they had to write-off this amount, it would be equal to a quarter of earnings. I believe the market would look through this issue if it happened.

I discount some commentators’ views that the Primerica salesforce is a risk. I believe the Primerica salesforce is a vital asset of the company. Yes, they recruit heavily and have high churn, but financial sales is not easy and not every recruit is able to make in sales. I think of Primerica’s salesforce as similar to Aflac’s. Both are high energy, depend on multi-level principles and have high turnover. While I wouldn’t succeed as a Primerica salesman, I admire the results of the organization. As Phil Fisher wrote, you want to own companies with outstanding salesforces.

Conclusion

I purchased shares of Primerica recently because I believe the shares do not factor in the potential earnings growth of the company. The business is a plain vanilla term life insurance business with some 3rd-party mutual fund sales. The earnings growth is not dependent on the stock market improving, rather, it just depends on Primerica’s salesforce delivering similar results to the recent past.

Disclosure: Long PRI, PFG

We had several strong stocks in the portfolio to start the year. Tivo is up 63% year-to-date on the back of a favorable court ruling awarding the company monetary damages for continued infringement of its patents by a competitor. Brink’s Home Security is up 29% after a larger competitor agreed to acquire the company. Also, DineEquity, the franchisor for IHOP and Applebee’s, is up 46% so far in 2010 after reporting stronger earnings and a better than expected outlook for the rest of 2010.

The Gator Small Cap Portfolio holds a concentrated portfolio of 30 stocks of companies with market capitalizations under $3 billion at the time of purchase. We attempt to own smaller companies with strong franchises and business models with favorable economics. We want to hold onto the shares for multiple years to allow the management teams time to compound the strong economics of their businesses. During 2009, we had 30% turnover portfolio holdings.

We believe the Gator Small Cap Portfolio is a unique offering because it is a small cap portfolio offered in separately managed account form. In addition, the portfolio is concentrated which is unusual for a small cap portfolio. Lastly, our account minimum is $100,000, which makes the portfolio available to individuals with modest assets. Our clients may choose any broker or custodian to hold their account. If the client does not have an existing relationship, most of our clients take advantage of our relationship with Fidelity Investments.

Due to the Gator Small Cap Portfolio’s investments in small company stocks and the portfolio’s concentration of holdings, we expect the portfolio to have a much higher degree of volatility than the overall stock market. Please only invest money which you will not need for five or more years. Past performance is not indicative of future results.

Let me know if it feels like the political rhetoric has died down regarding the GSEs.

March 12, 2010

The Honorable Timothy Geithner
Secretary of the Treasury
U.S. Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220

Dear Secretary Geithner:

On behalf of the 5,000 members of the Independent Community Bankers of America I urge prompt Treasury action to remedy the status of preferred shareholders of the Government Sponsored Enterprises Fannie Mae and Freddie Mac. As the Administration and Treasury continue to control Fannie Mae and Freddie Mac in conservatorship and seek resolution to this unique GSE status, it is imperative that community bank GSE preferred shareholders are made whole to bolster capital and lending levels in this challenging financial and economic environment.

The abrupt action by then Treasury Secretary Henry Paulson to seize Fannie and Freddie through conservatorship was unjustly done in a way that needlessly crushed the value of GSE preferred shares, injuring over a thousand community banks that purchased these shares as a safe AAArated investment at the encouragement of their bank regulators. Since banks received special regulatory capital treatment for them and since banks are generally prohibited from investing in stock of other corporations, Fannie and Freddie preferred stock were important investments with full regulatory blessing.

Shockingly, Secretary Paulson fully acknowledges in his new book On the Brink that this action constituted an “ambush.” It took place shortly after he and the GSE regulators issued statements that supported the ongoing viability and capital levels of the GSEs in their current form as “shareholder-owned companies,” in order to “calm the market fears of a government takeover that would wipe out shareholders.” Now there is no doubt the government’s action was indeed an unjustified “ambush” structured in a way that continues to have detrimental consequences on many community banks that relied on the guidance of Treasury and bank regulators and were intentionally deceived on their Fannie and Freddie preferred holdings.

Americans expect and demand much better from their government and leaders. The lCBA urges the Treasury to help restore the value of the Fannie and Freddie community bank preferred share holdings to levels prior to the abrupt conservatorship of Fannie and Freddie. Preferred Fannie and Freddie shareholders should be compensated for the government’s action of eliminating all dividend payments and placing the preferred shares in a second position.

Rather than help stabilize the financial sector and boost lending, this government “ambush” further hurt banks’ capital levels, weakened the banks and reduced available credit. Such rogue changing of the rules governing preferred stock contracts also sent the entire market for financial preferred shares into a freefall, making it even more difficult for financial firms to raise needed capital. Notably, nearly $36 billion in Fannie and Freddie preferred stock was outstanding prior to their conservatorship. An estimated $15 to $20 billion was held by the banking sector and almost one-third of banks reported holdings including many Main Street community banks.

The Troubled Asset Relief Fund devoted $700 billion to help restoring financial sector credit and to increase lending with mixed use and results to date. However, if we truly want to help stabilize the financial sector, boost small business credit and economic growth, Treasury must also restore a reasonable value to GSE preferred stock so that affected banks can again increase their lending.

ICBA urges immediately restoring the dividend payments on Fannie and Freddie preferred shares and paying injured holders the amount of suspended dividends from September 7, 2008 on an estimated $20 billion in GSE preferred holdings. As the Administration works to remove the GSEs from conservatorship ICBA urges it be done in a way that will restore a reasonable value to the preferred shares. Helping restore the $15 to $20 billion in community banks capital value crushed by the unwarranted Treasury actions perpetrated on preferred shares can foster $150 billion to $200 billion in new lending as banks can leverage this capital.

Sadly, the Treasury and policymakers were forewarned of the distress and fallout that lmnecessarilv crushing GSE preferred shares would cause. For example, the attached letter dated August 271h, 2008 specifically warned of the community banks’ significant GSE preferred holdings that typically pay a fixed dividend and take priority over common stock. Unfortunately, Treasury chose to ignore the warnings when they turned the GSE preferred stock upside down when placing Fannie and Freddie into conservatorship on September 7, 2008. Mr. Paulson acknowledges in his book that he ambushed Fannie and Freddie shareholders in part to help satisfy the Chinese government, which owned billions of dollars in Fannie and Freddie bonds. Mr. Paulson notes that he called “my old friend Zhou Xiaochuan,” the head of the Central Bank of China, and China’s key financial leaders and said: “I always said we’d live up to our obligations.” ICBA believes it is now time to live up to United States obligations and help spur lending by compensating Fannie and Freddie preferred shareholders for the unjust actions of the government.

Sincerely,

/s/

Camden R. Fine
President and CEO

cc: The Honorable David Axelrod, Assistant to the President and Senior Advisor
The Honorable Lawrence Summers, Assistant to the President for Economic Policy and
Director, National Economic Council
The Honorable Eric Holder, Jr., U.s. Attorney General
The Honorable Michael Barr, Assistant Secretary for Financial Institutions
The Honorable Herb Allison, Jr, Assistant Secretary for Financial Institutions
The Honorable Barney Frank, Chairman, House Financial Services Committee
The Honorable Spencer Bachus, Ranking Member House Financial Services Committee
The Honorable Chris Dodd, Chairman, Senate Committee on Banking
The Honorable Richard Shelby, Ranking Member, Senate Committee on Banking

“I subtly indicated that I was older and wiser…I was just older.”

“If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit.”

“We shouldn’t expect our regulators to live up to their end of the bargain unless we live up to ours.”

“It’s clear that I failed you in letting NetJets descend into this condition. But, luckily, I have been bailed out.”

“There were three ways to cure this overhang: (1) blow up a lot of houses, a tactic similar to the destruction of autos that occurred with the “cash-for-clunkers” program; (2) speed up household formations by, say, encouraging teenagers to cohabitate, a program not likely to suffer from a lack of volunteers or; (3) reduce new housing starts to a number far below the rate of household formations.”

“Our first venture was also christened Berkadia. So let’s call this one Son of Berkadia. Someday I’ll be writing you about Grandson of Berkadia.”

“It’s been an ideal period for investors: A climate of fear is their best friend.”

“In the end, what counts in investing is what you pay for a business – through the purchase of a small piece of it in the stock market – and what that business earns in the succeeding decade or two.”

“It has not been shareholders who have botched the operations of some of our country’s largest financial institutions.”

“In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control.”

“Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy.”

“our recommendation in respect to the use of advisors remains: ‘Don’t ask the barber whether you need a haircut.’”

“P.S. Come by rail.”

If you didn’t see your favorite Buffett one liner from this year’s letter, please tell me yours and why in the comment section below.

I find this article interesting because there is a growing realization that the path of least resistence for resolving the GSEs Conservatorship is to simply allow them to exit in their current form when they return to profitability.

http://www.linkedin.com/groups?home=&gid=2780934

The purpose of the group is for shareholders to network with each other and to discuss ways to increase shareholder value. The group is open to common and preferred shareholders of both companies.

Kilpatrick Stockton’s Financial Institutions Team Adds Prominent Partner

WASHINGTON, DC (February 16) - Kilpatrick Stockton announced today that Paul S. Pilecki and Michael A. Mancusi have joined Kilpatrick Stockton’s leading Financial Institutions Team. Mr. Pilecki and Mr. Mancusi, who will be resident in the Washington, DC office, are joining from Winston & Strawn.

“We are thrilled to have attorneys of Paul and Michael’s caliber join our nationally-recognized practice serving the financial services industry,” stated Paul Aguggia, Chair of Kilpatrick Stockton’s Financial Institutions Team and Member of the Executive Committee. “Their combined practice, which provides deep bank regulatory expertise for both top foreign and domestic banks, is a perfect complement to our existing practice and will provide clients with another outstanding resource. Their expertise will help keep Kilpatrick Stockton on the cutting edge of this constantly changing area of law.”

“Michael and I are excited to join one of the leading practices in bank M&A and capital transactions,” stated Mr. Pilecki. “The Kilpatrick Stockton Financial Institutions Team is well-positioned for what should be an active period in corporate transactions in the banking industry.”

Paul S. Pilecki concentrates his practice in the representation of foreign and domestic banking organizations on regulatory and corporate matters, and has extensive experience in helping banking organizations plan new activities and corporate structures for their U.S. activities.

Mr. Pilecki’s experience includes matters under the Bank Holding Company Act, the Federal Reserve Act, the Federal Deposit Insurance Act, the International Banking Act, and other federal and state banking and securities laws. He also represents financial institutions on supervisory and enforcement matters, including conducting internal investigations, fashioning remedial programs, and advising on compliance with formal enforcement actions and supervisory agreements. Mr. Pilecki advises diverse clients on compliance with the Bank Secrecy Act and implementing anti-money laundering and anti-terrorist financing measures. He has served as an expert witness on bank regulatory issues, including matters under the Bank Holding Company Act, the Edge Act, and the Bank Merger Act. Mr. Pilecki began his professional career as a bank examiner for the Federal Reserve Bank of Philadelphia and was a member of the Legal Division of the Federal Reserve Board in Washington.

He currently chairs the Executive Council of the Federal Bar Association’s Banking Committee and is an active member of the International Banking Subcommittee of the American Bar Association’s Banking Law Committee. Mr. Pilecki is a contributing author to the multi-volume treatise Banking Law and is a frequent speaker on bank regulatory issues. He was named a Client Service All-Star for the second time in 2010 and is included in Who’s Who of Banking Lawyers.

Michael A. Mancusi represents foreign and domestic banking organizations in regulatory, compliance, and enforcement matters, and has substantial experience representing clients in government and corporate internal investigations.

Mr. Mancusi counsels diverse clients on corporate issues that relate to banking organizations and structures, including corporate governance, national banking associations, operating subsidiaries, and holding companies under the National Bank Act, the Federal Reserve Act, the Bank Holding Company Act, the Federal Deposit Insurance Act, and the Bank Merger Act. He also has experience with issues related to interstate branching and main office relocations as well as merger-related activities, including bank/thrift combinations, antitrust issues, and affiliate transactions.

In addition, Mr. Mancusi’s experience includes matters related to preparing for, and responding to, examination issues, and compliance with anti-money laundering and foreign assets control requirements. His internal investigations experience involves the Bank Secrecy Act as amended by the USA PATRIOT Act, Office of Foreign Assets Control compliance, the Foreign Corrupt Practices Act, accounting improprieties and misleading financial disclosures, compliance strategy, and civil antitrust issues. Mr. Mancusi has served as an attorney for the Comptroller of the Currency, where he handled federal banking law enforcement actions such as civil money penalties, suspensions and removals, and temporary cease and desist orders.
He currently serves as Chair of the American Bar Association Banking Law Committee’s Enforcement, Director Liability, and Problem Banks Subcommittee. Mr. Mancusi also serves as a member of the Federal Bar Association’s Banking Committee Executive Council. He served as the Chair of the District of Columbia Bar Financial Institution Committee.

About Kilpatrick Stockton
Kilpatrick Stockton LLP is a full-service international law firm with nearly 500 attorneys in nine offices across the globe: Atlanta and Augusta, GA.; Charlotte, Raleigh and Winston-Salem, NC.; New York, NY; Washington, D.C.; Dubai; and Stockholm. Kilpatrick Stockton’s delivery of innovative business solutions provides results-oriented counsel for corporations, from the challenging demands of financial transactions and securities to the disciplines of intellectual property management. Collaboration among Kilpatrick Stockton’s corporate, litigation and intellectual property attorneys provides knowledgeable and proactive guidance for companies at every stage of the business life cycle. For more information, please visit www.kilpatrickstockton.com.

This over-reserving made Freddie’s net income statement look weaker than necessary. Freddie added $5.3 billion to its loan loss reserve in Q3. In its most recent quarter, Wells Fargo only added $0.5 billion to its loan loss reserve. Freddie would’ve reported a profit in Q3 had it not overly added to its loan loss reserve.

The over-reserving also hides Freddie’s balance sheet strength in the loan loss reserve, instead of the capital account. Freddie’s loan loss reserve now stands at 3.28x their run rate of net charge-offs. This compares to Well Fargo’s loan loss reserve which only stands at 1.16x charge-offs or JP Morgan Chase’s at 1.01x charge-offs.

This raises the question in my mind whether the regulator is forcing Freddie to over-reserve for loan losses to make the company look weaker than it really is. They may be doing this to hide the fact that the company should not have been placed into conservatorship. Or maybe, the regulator knows that over-reserving will deplete the company’s capital accounts and force it to take-down more of the Treasury’s senior preferred stock at the usury 10% rate.

Negative comments about the GSEs must be taken with a heavy grain of salt. The relentless pounding of these companies is part of the big bank/Wall Street agenda to control the mortgage market. Here’s an example of poor the analysis behind the criticism of the GSEs: http://blog.gatorcapital.com/126/rebuttal-to-gse-worthless-analysis/

This Reuters article is the rare GSE journalist piece that calls it like it is. Let’s review the options laid out and see what’s what.

In religious wars, there are no innocent bystanders. This is certainly true for the multi-year tussle over the GSEs (Fannie Mae/FNM, Freddie Mac/FRE) and how they might fit or not fit in the US economic fabric going forward—and trust me, almost every journalist has an ax to grind one way or the other. In their heyday the GSEs were so big, so popular, and so powerful, that they swept skeptics and opponents out their way with ease—creating long-lasting enemies, including among the press.

Thus it is hard to find an unbiased viewpoint. Many journalists openly root for the GSE concept to fail and never raise its egotistical head again. Others take the contrarian view for sport. But finally there’s a piece that lays it out, with no agenda, and no ax. Let’s go over the Reuters piece in some detail.

Reuters: “That timeline (the unlimited backstop announced Dec 24) gives the Obama administration time to figure out what to do with the two entities since any changes are politically difficult and most analysts see the process taking years.”

Analysis: Dead on. The complexity of the secondary mortgage markets, combined with fear of yet-to-come exploding Option ARMS and weakening CRE markets, means there is no rush to “resolve” the GSE model legislatively. Washington policymakers want low interest rates and more modifications, and the conservatorship model is delivering them.

Reuters: “FULL NATIONALIZATION -This might be the easiest option and would return the companies to their origins as a government tool to nurture the housing market. Some analysts see the Obama administration’s Christmas eve move as a signal this is the direction they are leaning, but top White House economic adviser Lawrence Summers told the Wall Street Journal in late December “that certainly would not be the direction I would expect.” “

Analysis: Correct again. The “public option” didn’t work in the health care arena, and it won’t work here, especially as Republicans will undoubtably gain seats in the 2010 elections. And no one wants to further balloon the US budget deficit, which would happen if the GSEs were to be 100 percent nationalized. (Investors owning 20.1 percent of the companies, take heart! The US government can’t afford to take you out.)

Reuters: “PRIVATIZATION WITH PAYMENT FOR INSURANCE - Policy-makers might return the companies to investors and offer to insure Fannie Mae and Freddie Mac investments.
Washington could charge the companies a fee to underwrite their debt and some of their mortgage securities as a way to nurture the housing finance sector without standing squarely behind the companies. This idea, aired by Federal Reserve Chairman Ben Bernanke, would be akin to the Federal Deposit Insurance Corporation’s protection of banks.”

Analysis: Yes, an idea in play. This option recognizes that no one will ever believe going forward that the government wouldn’t step in again in times of debt market crises. So why not make the GSEs (and their shareholders) pay for the backing?

Reuters: “COOPERATIVES WITH LOOSE GOVERNMENT TIES - Fannie Mae and Freddie Mac could be run by the companies that sell them home loans. In such a cooperative arrangement, Fannie and Freddie would focus on long-term, stable business rather than maximizing profits. The federal government might still offer to insure the companies against the most catastrophic losses. This arrangement could be akin to the Federal Home Loan Bank system where a dozen regional lenders are jointly and severally liable for any one member’s losses and the federal government acts as guarantor of the entire system.”

Analysis: Dead wrong. The capital dedicated to cooperatives is not viewed as sufficiently flexible to support a dynamic mortgage market. More importantly, constituencies such as the Realtors and small bankers use the GSEs as a bulwark against the ever-larger, Federal-Reserve-leveraged, TARP-assisted Wall Street banks (does anyone believe THEY wouldn’t be bailed out again in a debt crisis?) that increasingly control the US mortgage market origination business—and these constituencies won’t tolerate the big banks controlling Freddie and Fannie via a coop model.

Reuters: “UTILITIES MODEL - Just like power and water companies that provide vital services, Fannie Mae and Freddie Mac could be run as private entities that have strong government oversight. The companies would aim to turn a profit and would have no government backing, but a conservative board would set earnings payments and customer fees.”

Analysis: Can’t rule this out. Stronger government oversight would have saved the GSEs from over-extending themselves in the bubble years, and a controlled ROE wouldn’t be the end of the world. And even guarantee fees could be subject to public rulemaking.

Reuters: “PRIVATE MORTGAGE-FINANCE COMPANIES - Although Fannie and Freddie are in government hands, their regulator is still trying to keep their shares trading. The agencies could emerge as large mortgage finance companies that bundle home loans for investors and raise funds in the traditional capital markets. Without government ties, though, the companies would not have lower funding costs and so would not enjoy the competitive advantage they do now. The federal government would also lose one of its most powerful tools for helping low-income home buyers. GAO said privatizing or terminating Fannie Mae and Freddie Mac would disperse mortgage lending and risk management through the private sector.”

Analysis: Not a chance. Full privatization would result in mortgage rates rising across the board by 50-100 basis points, and long-term, fixed-rate mortgages would be more difficult, if not impossible, to obtain. How many politicians want to get in front of THAT wagon? As for the GAO’s optimism of the private sector filling the space…really? Last time we checked, those guys checked out at the first sign of market instability. Anyone who has worked a day in finance knows that pure financiers are herd animals, which works well in most finance markets, but not the mortgage one.

Reuters: “COVERED BONDS - Covered bonds could become a mortgage finance tool to rival the influence of Fannie Mae and Freddie Mac. Unlike traditional mortgage-backed securities, which are frozen blocks of home loans, covered bonds allow banks to manage a dynamic pool of mortgages. This financing tool is popular in Europe but has a weak foothold in the United States because of regulatory constraints and the competitive advantages of Fannie Mae and Freddie Mac. The fate of those companies will have a direct impact on the future of covered bonds. “

Analysis: Covered bonds certainly have a place in the market going forward, but for reasons beyond the scope of this article, they can’t replace the securitization and retained portfolio model of the GSEs entirely. They will supplement, not replace, the function of the GSEs.

Conclusion: The Reuters piece is an excellent piece of reporting. With an overlay of basic political analysis, we can further narrow the scope of the ultimate options that will be debated by policymakers in Washington. And someday—believe it or not—the religious wars over the GSEs may actually reach an end. And we’ll all be better off for that ending.

Robert W. Zimmer is Principal at TVDC, a Washington-based financial services consulting firm.

My problem with Tivo is the company is missing a no-brainer innovation: a web browser.

A web browser for Tivo would be awesome. I could surf the web on my large flat screen. It would be much easier to watch web videos, such as TV shows on Hulu, on my TV. I wouldn’t have to bring a laptop into the family room when I’m relaxing after putting the kids to bed.

I know, I know…Tivo doesn’t have a keyboard and the menu for typing letters in Tivo is clunky. A solution would be to add a software patch, so users could use their own wireless keyboard with their Tivo. The more recent versions of Tivo have a couple of USB ports in the back, so one could be used for the wireless network adapter and the other could be used by a wireless keyboard.

Are there any outside forces preventing Tivo from including a web browser in their software? One possible answer may be the Tivo’s corporate strategy of trying to get the cable companies to license the Tivo software for their DVR offerings. The cable companies may not like a web browser embedded in the Tivo software if it would hasten consumer adoption of direct web video watching. By waiting to unveil a web browser, Tivo may be trying to make negotiations with the cable companies easier. Maybe the big cable companies, like Comcast or Time Warner think a Tivo box with a web browser might encourage their customers to give up through cable subscriptions.

Although a the web browser within Tivo would improve my Tivo experience and would drive me to get a second Tivo box, Tivo’s management may not think it would be enough of a game changer to improve their Tivo-owned subscribers. Tivo’s original business model of marketing to consumers directly and through retial distribution enabled them to acquire customers who were deemed “Tivo-owned.” They also acquired a ton of customer through a relationship with DirecTV. Tivo earns a higher monthly revenue for the Tivo-owned subs, but the cost of acquiring these subs is very high. Tivo seems to be focused on growing its subscribers through MSO/Broadcasters because the acquisition cost of these subscribers is so much cheaper and more scalable. I think consumers are looking for devices to help surf the web through their TV. If Tivo had a web browser integrated into its software, it would make a Tivo purchase more compelling.

Another reason for not introducing a web browser is to wait until the court case with the Dish Network is resolved. Some market commentators think DISH will have to buy Tivo to rid itself of its legal liability. If this is the case, it makes sense for Tivo to keep costs down until there is more legal clarity.

I am simply guessing at reasons why Tivo hasn’t rolled out a web browser is because they don’t want to anger the cable companies. If I am wrong, Tivo is missing out on a large opportunity to extend their lead in best customer experience among set-top boxes by not incorporating a web browser.

Disclosure: I own shares of Tivo for client accounts.

Companies mentioned: TIVO, DISH, DTV, CMCSK, TWC, CVC, VZ and T.