New LinkedIn Group for Fannie Mae Shareholders
Feb/100
I formed a new LinkedIn group for Fannie Mae and Freddie Mac shareholders. Please join the group by following this link:
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.
Paul Pilecki Moves to Kilpatrick Stockton
Feb/100
Paul Pilecki moved to a new law firm, Kilpatrick Stockton, last week. He specializes in bank regulatory law. If you know any bankers who need help dealing with their regulators, Pilecki can help them. Here’s the press release from Kilpatrick:
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.
GSE Critic Ed Pinto Has No Idea on GSE Loan Losses
Feb/101
There was a Fox Business news article criticizing the Obama Administration for lowering its loss estimate on the GSEs. Mr. Pinto has no factual basis behind his claim that the Obama Administration is just being “optimist” in lowering its projections of losses for Fannie and Freddie. He has no how well or poorly the credit losses of the GSEs are going to play out over the next few years. The critics of these companies continue to spread negative propaganda that the mainstream press is too happy to publish. The reality is the companies have built up massive loan loss reserves that they’ll never fully utilize. For example in the 3rd quarter of 2009, Freddie Mac provided for $7.6 billion of credit losses, but the company only charged off $2.3 billion of loans.
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/
So Where is GSE Reform Going, Anyway?
Jan/101
by Robert W. Zimmer
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.
Tivo Needs a Web Browser
Nov/090
I love my Tivo. I love the functionality. I love the design. The fast-forward speed is just right to still see the action on the ball games I missed. The Season Pass feature works flawlessly. The search function is great. I love being able to purchase TV shows from Amazon and have them downloaded directly to my Tivo. My Tivo is hands down better than the cable company DVR offering.
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.