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Cute Name, But Where's the Beef?

 

I've never understood the attraction of Fannie Mae to an investor. In fact, I don't really get its appeal as a business model.

I'm gonna keep this simple...

Today's going rate, per Wells Fargo: roughly 5%.

To fund a loan, Fannie borrows money from the US Treasury at about 3%.

That leaves it with about 2% after paying the Treasury.

So how is it that Fannie can offer its shareholders a dividend yield of 4.7%?

From Motley Fool in 2004:

Want to know why Fannie Mae is in trouble? It's simple enough: This company, more than any other in America, is run by, in the interests of, and with the protection from politicians, not businesspeople.
The advice at the end of the article: "Many people are getting interested in Fannie Mae for its rising dividend yield. Don't make this mistake -- that dividend is very much at risk." Again, this is from 2004.

Fannie still hides under government protection, it's still not run by businesspeople, and its accounting is a massive shell game. Rather than approach the problem squarely with accountability and transparency to strengthen our economy, politicians in Washington screech about bonuses to a few executives. They do this to obfuscate their role in this mess. Don't look at them stab the taxpayer... look at those greedy executives instead!

I ask you: what non-governmental entity competes against Fannie?

Answer: None.

Why is that? Because Fannie's impossible "business" model operates at a loss to give the power to Washington, creating a monopoly that is uncompetitive.

AIG is in insurance. That's the next industry. And Washington's acquisition will yield similar catastrophic results.

This is so not about bonuses.

 


by Brett Rogers, 3/18/2009 4:39:55 PM
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Comments

Something I know a little bit about since I worked for Fannie for 6 or 7 years...

No doubt the government - and particularly the democrats liked having FNM under their - shall we say "tutelage." Fannie invested many resources in protecting their Federal Charter - there was a symbiotic relationship there. In general though the basic business model was sound - the reason it fell apart - in my view is greed and politics. The politicians wanted to use the agencies as policy arms - you make too much money you need to do more low and moderate income housing - take more risk. FNM and FRE as publicly traded companies - wanted to show investors they could grow earning and show steady growth in order to earn a higher multiple on their stock and drive the price up. One of the things that disappointed me most was that FNM did not spend more time/ effort on contingency plans to shed the charter. Rather than suck up to the politicians to protect and preserve the charter - basically have the attitude of we can take it or leave it. Revoke the charter - ok we'll enter businesses we have been precluded from and earn more $. This tact was not seriously pursued. I do want to clarify something in your post above about the implied relationship of the interest spread and yield.

The dividend yield of a stock is based on the amount of the dividend and the price of the stock - thus if the dividend stays constant and the stock price goes down - the yield goes up. The 4.7% you refer to does not correlate to the spread between borrowing costs and note rate to the borrower on the mortgage loans Fannie buys. FNM current listed dividend is 20 cents - at their current stock price that's a yield of 25%. Yesterday the stock was near $1 per share and thus the yield was 20%. Should the stock climb back to $10 a share the yield would drop to 2%. None of this activity changes how much FNM would actually payout in terms of dividends (that remains 20 cents a share). FNM has approximately 550mm shares outstanding (this is based on a market cap of ~763mm at 70 cents a share). Thus their dividend payment is ~110mm per year. To cover the dividend with a 2% net interest margin (borrow at 3% and earn at 5%) FNM would need $5.5B in assets (that earned that net interest margin). They have $900+B. This is oversimplified on a number of fronts. For example, they would also have to cover loan losses, G&A and other expenses - and this way oversimplifies their business model to a very large degree. How they invest in the assets takes several forms (whole loans vs guarantee fees, etc....) According to Yahoo Finance (where the above numbers came from) FNM currently has (as of Dec 31) $51B in Revenue and $34B in interest expense and $900+B in assets. Of course they are not a healthy company right now because of non-performing assets and other things - but just wanted to clarify that yield and net interest margin are not directly comparable.

 

 

Posted by Rich, 3/21/2009 12:39:00 AM



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