Oh Freddie Mac

There were many who were clearly unhappy to see the bailout of Freddie Mac and Fannie Mae.

Jim Rogers was clearly annoyed. Published on the UK Telegraph, Jim Rogers attacks Fannie Mae and Freddie Mac bail-out

• Reaction to the Treasury and the Federal Reserve's bail-out plan was mixed but Mr Rogers was the most vocal. He argued that Fannie and Freddie, America's largest mortgage finance companies which own or guarantee some $5 trillion of mortgage debt, are "basically insolvent".
  
  He said: "I don't know where these guys get the audacity to take out money, taxpayer money, and buy stock in Fannie Mae." He added that the US government should instead have allowed Fannie and Freddie to go bankrupt.

And here is a link to a Bloomberg video, http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vIQvD7yNni2I.asf

George Soros wasn't too impressed either.

• "Freddie Mac and Fannie Mae have a solvency crisis, not a liquidity crisis," said Soros. "There's no problem in their borrowing. And in fact, insofar as there is a problem, the Fed is there to provide the liquidity."
  
  That said, both Fannie and Freddie are "extremely leveraged," he said.
  
  "The deterioration in the housing market, the foreclosures, are going to cause losses which exceed their equity," said Soros, whose famous bet against the British pound earned his Quantum Fund $1 billion in 1992.
  
  In afternoon trade on Monday, Fannie Mae shares were down 3.75 percent while Freddie Mac shares were down 12 percent.
  
  "This is a very serious financial crisis and it is the most serious financial crisis of our lifetime," Soros said. "It is inevitable that it is affecting the real economy. It is an idle dream to think that you could have this kind of crisis without the real economy being affected," he added.

The ideal dream mentioned by Mr. Soros, reminded me of the following passage I had read from iCapital.

• While the current US housing contraction has caused plenty of fears and worries, not just in the US but throughout the whole world, most do not realise that the direct impact of the housing contraction on the broad US economy has actually been rather limited. A lot of the damage has been at the psychological level. This is due partly to the fact that house prices, which have risen substantially, have been dropping recently. Another factor has been the constant media attention given to scary forecasts that the current housing contraction is the worst since the 1930 Great Depression and that this time round, it could be headed that way. Fortunately, the facts of the matter do not support such a negative view.

Facts of matter do not support such a negative view? Hmm.. I wonder if George Soros is referring to such ideal dreams from iCapital.

And yes, Warren Buffett used to own Freddie Mac. And the following passage from this past WashingtonPost article is most interesting.

• Buffett said he was troubled in part by a Freddie Mac investment that had nothing to do with its business.
  
  "I follow the old dictum: There's never just one cockroach in the kitchen," Buffett said.
  
  The government is trying to show that Brendsel's promises of double-digit earnings growth set Freddie Mac on a dangerous path, and Buffett said they were another key reason he sold.
  
  Sometimes, when executives offer earnings projections and cannot make the numbers, "they start making up the numbers," he said.
  
  Trying to deliver smoothly increasing earnings "can lead to a lot of trouble in any company," and it is "unachievable" at a company like Freddie Mac, whose business is inherently unpredictable, Buffett testified........
  
  Buffett said he bought stock in Freddie Mac in the 1980s because "it looked ridiculously cheap." He said his company became one of Freddie Mac's largest shareholders before it began liquidating its stake in the late 1990s at an eventual profit of about $2.75 billion.
  
  Buffett said he met with Brendsel and former Freddie Mac president David W. Glenn five or six times over the years at Brendsel's request, initially at a summer house Buffett had in Laguna Beach, Calif. Brendsel requested and followed some of his recommendations on whom Freddie Mac should appoint to its board, Buffett said.
  
  Buffet said he became troubled when Freddie Mac made an investment unrelated to its mission. He wasn't clear on the specifics but said he "didn't think that made any sense at all" and "was concerned about what they might be doing . . . that I didn't know about."
  
  Achieving "mid-teens" earnings growth "seemed to become more and more a mantra of the organization," giving him greater cause for concern, Buffett said.
  
  Buffett said he reviewed Freddie Mac's annual reports every year he held stock in the company. Presented with excerpts from reports for as early as 1992, he agreed with Brendsel's lead attorney, Kevin M. Downey, that he held onto his shares while Freddie Mac repeatedly affirmed its earnings goals.
  
  Buffett said he thought he expressed his concern to Brendsel in several conversations but added that he didn't keep notes or a diary and couldn't recall details.
  
  Downey said the specific wording about mid-teens earnings growth did not appear in a disclosure Freddie Mac filed in 2001, but Buffett rejected the implicit suggestion that Brendsel was responding appropriately to his concern.
  
  "He may have seen the writing on the wall," Buffett said.
  
  Downey suggested that Freddie Mac properly tempered its projections, pointing to warnings in an annual report that its earnings could be affected by various adverse developments. Buffett said the cautionary words were merely legal boilerplate.
  
  "I would not be particularly impressed by them," he said.
  
  Asked by the judge, William B. Moran, whether he felt his concerns were vindicated, Buffett said, "I think they were fully vindicated."