Sunday, November 25, 2007

Freddie's Q3 transcript

Here's an interesting conversation between Freddie's CFO, Buddy Piszel, and BofA's Bob Lacoursie on the Q3 Conference call:

Robert Lacoursiere - Banc of America Securities

That is precise, I am just wondering why you have to rely on those quotes when there is no market, why can't you do a Level III approach and put your own assumptions like other institutions do?

Patti Cook

This is -- you want to take it Buddy?

Buddy Piszel

We have been there in the past and the feedback that we've received from our auditors is the market is a more reliable source of pricing and accordingly even in 10 markets, that should be our first line of defense whether it contradicts or models or not. Since we've made this change, we've only look to the market wherever possible, and we've always been able to get market prices. So, whether we like them or not, they are out there and if they are out we are using them to measure because the accounting literally says that you're supposed to use that what some one would pay you to take the obligation off your hands and if there is a market price out there, that is an indicator of the price that you would have to pay to have it taken off your hands.

Robert Lacoursiere - Banc of America Securities

If I could just bother you with one follow-up: if they are quoting, if these institutions are quoting you those prices, are they not obligated to reflect those valuations on their own positions on their own books?

Buddy Piszel

That's an interesting question, but we are not going go there.

Here's my point. Barron's this weekend had an article about FRE, and one line encapsulates the entire FRE case. Here it is:

Freddie's immediate future looks bleak, but the government has its back.

So we know FRE took conservative marks, and that a $5 billion preferred offering should be done this week, and the stock, at 26.47 doesn't reflect this upside. You may ask, "What about the prices that the ABX indexes reflect? Where are these losses?" Sorry, but those are the wrong questions!

Benjamin Graham said that the stock market is not a voting mechanism but a weighing mechanism over the long term. Buffett paraphrased this as a voting machine in the short run, and a weighing machine in the long run. But what happens when nobody shows up to vote?

You mark the mortgages to zero. Trading is about money. If you are prepared to buy something, you need to know what price someone will buy it from you. But if you don't know what makes up the bonds, CDO's or asset backed securities you bid at the price where the risk disappears.

So why buy FRE? Let's look to Goldman, who downgraded FRE to see why.

Goldman raised $20 billion for a corporate debt/mezzanine financing fund, $2.6 billion in Liberty Harbor for crummie credit, and $1.8 billion in GS Liquidity Partners for investing in leveraged loans on bank's books. Somebody wants this paper. Maybe they can get it if Goldman keeps downgrading the financial stocks.

It looks to me that Goldman's analysts seem to be using the voting machine, while the funds they manage would are using the weighing machine. In Q3 Goldman had $7.5 billion of principal business, $2.1 billion in investment banking and $1.2 billion in securities services. So what you see is what you get.

The beauty of Goldman is how they manage clients and their own money. So Goldman downgraded FRE. Big deal. At these prices the preferred will be a home run. And six months from now we'll hear how Goldman saved Freddie. Sort of like heating your house by throwing your furniture in the fireplace.

I'd vote against their downgrade. And buy the stock.


Anonymous said...

Russ Koesterich, head of investment strategy at Barclays Global Investors: "If the dollar starts to go down very quickly, it will impact monetary policy at a time when investors have a very benign view of how the Fed will behave."

Anonymous said...

Look at the 10 year. The bond market is trying to tell you something. The Fed will not cut rates in December.

Palmoni said...

I'll give you 10 to 1 that the Fed cuts in December!