Sunday, August 30, 2009

Fannie Mae @ $2.04

This is a quick valuation of Fannie Mae (FNM).

Stock Performance

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The market value of Fannie has been almost wiped out by the Great Recession (who dubbed it?) .

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Recent performance has been strong however and it caught my attention – usually I like seeing plummeting stock prices because ascending price of stocks I don’t own feel like a loss. Greed…

The market cap was $2.4 bil as of last Friday.

What It Does and How It Makes Money

The short answer is I have no idea, but this is what I will tell you if I try: it buys mortgage loans from 1,000 banks, thrifts, credit unions, and other mortgage originators, packs them into MBSs (mortgage backed securities), and then distributes them back into the market (the so-called securitization process) as well as keep some on its own book.

It makes money in primarily two ways:

1) for the mortgage loans/securities it keeps on its own book, it earns the net interest yield, i.e., the interest spread between the interest it collects from the mortgages and the funding interest it pays.

2) for the MBS securities it distributes out, it collects a guaranty fee by presumably guarantees the return, as in an insurance policy.

In both cases, it has to face the default risk when borrowers cannot repay its mortgages.

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The above is a 5-year financial summary.

What’s worth noticing first is the sheer size of its mortgage book – around $800 bil held on the B/S and another $2.2 tril guaranteed, or $3 trillion in total. It represents earning power as well as risks, so that if 1% is written off, it’s $30 bil loss.

The next thing is the net interest yield and guaranty fee rate, both of which have been trending down before trending up. It’s a long story to explain the swing. But anyway, the 2008 net interest yield was 1.03%, and guaranty fee rate was 31 bps (or 0.31%).

2008 Losses

A key question of the valuation is how much losses Fannie would incur before the mortgage market normalizes. It’s hard to define what the norm is, but we shall look into the $60 bil loss in 2008 for some clues.

A break-down of the big item 2008 losses: $7 bil in Investment losses, $20 bil in Fair value losses and $30 bil in Credit-related losses.

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The 2008 A/R says that the $7 bil investment losses was all due to sub-prime and Alt-A. I will assume it would not happen again in the recent future.

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The $20 bil fair value losses was primarily due to interest rate swap, in which Fannie locked in the funding rate to mitigate interest rate risk before the market rate fell. It’s a loss on opportunity cost and it can be factored into the valuation through net interest yield.

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The true loss came from the $30 bil credit-related losses, caused by the recent housing market turmoil and reckless lending/borrowing. Though it was about 0.83% of total guaranty book, the 20.76% nonperforming loan ratio was frightening.

2009 1H Losses

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Fannie lost another $38 bil in the first half of 2009. Brutal as it was, the glimmer of hope is that the net interest yield improved to 1.69%, and credit-related losses stabilized in the second half.

Conservatorship

Fannie Mae is currently under conservatorship. Financially, it means that the Treasury Department owns $35 bil senior preferred along with warranty to purchase 79.9% of common at zero cost ($0.0001 to be exact).

Though I think the B/S allows Fannie to handle the senior preferred without too much difficulty, the warranty takes away 80% of the market value.

A Quick Valuation

Here’s a ballpark calculation of Fannie’s fair market value.

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As you can see, it is the worst case scenario. I assumed 1% net interest yield, 0.25% net credit loss rate that unfortunately cancelled out all of $2.2 tril mortgage guaranty business, and 2% earning growth.

Even under such circumstance, it would stand 2% net credit loss from the $3 tril mortgage book, the advantageous credit condition and a turning housing market notwithstanding.

Here’s a blog link for the U.S. historical foreclosure rate. And historically, 2% net credit loss seems high.

Fannie or Freddie?

Good question. I’m too tired to figure out.

Conclusion

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http://icecurtain.blogspot.com/

Sunday, May 24, 2009

ECB staff to strike over pensions

.. according to FT.

C’mon! Can never figure out the Europeans.

http://icecurtain.blogspot.com/

Friday, May 22, 2009

Norway: Another Socialist Welfare Monarchy, and More

Norway, symbolized by the cute lion with the ax, is yet another low-Gini, Nordic socialist monarchy, like Denmark.

King Harald V and his Council of State taxes 40% of GDP and takes care of his people’s healthcare and pension through the National Insurance Scheme mandate and provide almost free educations.

Even better, there’s oil backyard – life is never fair.

Instead of squandering the oil revenues, the Norwegian politicians decided to save all the money for rainy days in the Government Pension Fund, managed by Norges Bank Investment Management (NBIM), which is under but independent from Norges Bank (the central bank) and the account is somehow consolidated into and reported in the Norges Bank’s balance sheet.

The asset value today has reached NOK 2,300 billion, or around US$ 400 billion, or around 100% of Norway’s GDP. In comparison, the U.S. Social Security and Medicare Trust Funds are …

There’s a glitch, though. Once proudly claiming to owning 0.77% of global equity market – yes, they allocated 50% up into stock markets – the fund was struck hard recently (see chart below, or the report).

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Here’s the story: when you have a fund, you invest it in the market; when your fund is big enough (like a sovereign wealth fund), it becomes a market. In this case, national currency is involved (see chart below). A funny, mind-bogging story.

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See it as wealth, or a problem. If it’s a problem, China’s got a bigger one. China evidently is stockpiling into commodities – gold, oil, copper, zinc, etc. No fancy-pants derivative-based hedging, just go and buy up things.

 

P.S., the Norwegian must be some quite different species. Rich in oil, no Resource Curse, no Dutch Disease.

Monday, April 27, 2009

Denmark: A Socialist Welfare Monarchy

A lot has been said about how socialist some European countries are. Look at Denmark and you would know why.

The Welfare State

Her Majesty Margrethe II’s Denmark has 5.5 million people, with GDP per capita of $37,000, PPPed. GDP has been growing at around 3% in real term in recent years, and unemployment has been trending down to under 4%.

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Besides the wind turbines all over the country supplying 18% of energy use (above map), what sets the economy apart – as well as most other western European countries – is the heavy tax rate.

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The government collects and spends almost half of the GDP. The average personal income tax rate is 40%, with the top bracket being 65% (which is facing pressure recently).

BTW, there’s also a slightly less than 1% church tax for Folkekirken members.

Free Healthcare, Free Education, and Income Equality

If that doesn’t scare you away, I should tell you where the tax hike goes.

Healthcare is free

The government foots 81% of total healthcare expenditure. You can go see a doctor for free only with your health insurance card. The healthcare expenditure per capita is PPP int’l $3349 (9.5% GDP), half of the U.S.’s $6714 (15.3% GDP), while all health indicators – health life expectancy, child health, service coverage, etc. - are equivalent to that of the U.S.

According to the Ministry of the Interior and Health, 79% of the population, more aged and of a higher rate of use of alcohol and tobacco than that of the U.S., rated the nation’s healthcare service as “very good” or “good.”

Hospitals are run by the local authorities, and drug prices are reigned in by the government’s negotiation with drug companies and encouraging competition from other EU countries. From 1988-2000, the annual increase of total health expenditure was a mere 1.6%.

Education is also free

Free schooling starts from preschool. The State Education Grant and Loan Scheme grants 18+ student DKK 4400 (above $800) per month for student living away from parents.

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The Tertiary-type A (i.e., high school) graduation rates are among the highest of the developed.

More Equal Income

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The Danish Gini is the lowest in all OECD countries. In comparison, China is of the Mexican level.

Is It Socialism?

It depends on your definition of socialism.

If it means high-tax-rated, state-welfare type to you, you should add $10,000 family healthcare insurance, another $5,000 education expense per child, pension, unemployment insurance, and whatnot to your tax returns, and recalculate your tax rate.

Then we can talk, unless if you are now priced out from having a healthcare plan and can’t afford sending your kids to school.

http://icecurtain.blogspot.com/

Saturday, April 25, 2009

Denmark: Less Farmers, More Foods

A follow-up on the farmer post.

Denmark had over 50% population in agriculture in 1840. Today it’s less than 5% and running a trade surplus in food, under cold temperature.

http://icecurtain.blogspot.com/