Tomorrow is a big day here at Monkey Biz! Just like last week when Fannie Mae's earnings disaster came out, tomorrow morning, bright and early.....Freddie will lay its Q1 egg! I know we shouldn't be so giddy, but it's just so fascinating. Never before have two companies managed to screw up a perfect situation to such an extent. I know we use Godfather references a bit too much but allow me one more.
Think of Fredo, Don Vito's simple-minded son. Fredo was never given any responsibility in the family. The enemies of the Corleone family didn't even see him as a threat. The treated him like a civilian. All Fredo had to do was show up at a semi no-show job, chase cocktail waitresses around and live like a king. His brothers, who loved him dearly, took all the heat for him and never pressured him. So what did Fredo do? He went out and betrayed the family because his feelings were hurt that he wasn't made the boss and winds up getting himself kicked out of the family and eventually sleeping at the bottom of Lake Tahoe! He took a situation that 99% of his fellow humans would have found ideal, and screwed it up. This story is really a lot like Fannie Mae and Freddie Mac. In fact we refer to them here as Fredo Mae and Fredo Mac! They took a money making machine, doing the admirable work of essentially running the American home finance system, backed by the implicit guarantee of the U.S. Treasury and screwed the pooch!
Simultaneously in 1999, the Fredos declared both a war against each other and a war on the major mortgage banks and mortgage investors. They engaged in a brutal market share battle against each other that lowered the insurance fee they collected to guarantee conventional conforming mortgages to the point that they weren't collecting enough to cover the future losses! Guarantor fees were slashed over a 3 year period by over 50%. And at the end of the day no one really won the market share battle. Freddie remained in the low 40's and Fannie remained in the high 50's. If you want to know why both Fredos earnings are going to be hammered for many quarters to come, just ask an old soul at either shop about the great "Market Share Wars of 1999-2003" Sure they would be losing SOME money now even if they played it right, but nowhere near what they are going to be putting up for the foreseeable future.
Also in 1999, the Fredo's really started flexing their political and financial muscle to try to elbow the Countrywides and the Bank of Americas of the world out of the way. The way the Fredos saw it, they were essentially underwriting all the credit (all conventional, conforming loans used either Freddie or Fannie software to underwrite at the mortgage banker), AND they wanted to pick through the best mortgages first for their growing and gigantic RETAINED PORTFOLIOS. The best way to do that was to get to the loans before Countrywide. The Fredo's were trying to control the loans from the point of contact with the borrower, all the way through to investment! They were telling the big mortgage banks, the big Wall Street Firms, and the big money managers that they were the boss. Fredo goes first and whatever scraps are left over are yours. It was a level of arrogance rarely seen in the business world. So what did all these entities do? They started their own political lobby and hammered the Fredos relentlessly. What are there.. 535 congressmen? In 2002 you could divide them by "PRO-FREDOS" and "ANTI-FREDOS"! Also the big mortgage companies and banks consolidated in part to get pricing power over the Fredos, which they did! And that is another reason why these jokers are posting up such huge losses. The new monster banks like Wells Fargo and Bank of America, Citi, Chase, etc. started dictating to the Fredos (who were in the middle of their silly civil war) the price they would pay for the Fredos to guarantee the loans. Crazy? Moronic?? YOU BET!
I won't go through the accounting scandals, and risk blundering and just out and out incompetence that followed. I am sure you know it well. All of it was related to the story outlined above. So tomorrow, lets just sit back and watch Fredo Mac try to polish the turd they will lay. It should be a beauty. And a word of advice. Whatever you do don't let ANYONE sucker you in to buying that stock after tomorrows mess because "Its not as bad as we thought" or "Look at the new powers they have!" (like what happened at Fannies earnings release) If the stock gets a bounce, get in there selling with both hands...both feet too! SELL MORTIMOR SELL!!!!!!