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Fannie Mae: From Ward of the State to Cash Cow

Fri, 10 May 2013 02:54:20 +0000

When Fannie Mae was bleeding cash back in 2008, the government took it into conservatorship, which allowed Fannie Mae to draw funds from the Treasury to stay afloat. In return, the government took senior preferred shares of the company. Fannie Mae now has to pay nearly all of its profits, save a small capital cushion, to the government in dividends. This doesn’t pay back the draw; it is just a dividend.

The difference this quarter is that the dividend is huge. Thanks to the company’s new profitability, Fannie Mae is able to take a tax credit from years ago worth over $50 billion, according to its earnings release:

As a result of actions to strengthen its financial performance and continued improvement in the housing market, Fannie Mae’s financial results have improved significantly over the past five quarters. Based on analysis of all relevant factors, Fannie Mae determined that the release of the valuation allowance on its deferred tax assets was appropriate.

Therefore, Fannie Mae will pay the Treasury $59 billion by the end of this quarter, bringing its total tally of dividend payments to $95 billion—close to the $117 billion it originally drew. Again, the money does not go to pay back that draw. So where does it go?

(Read More: Fannie Mae Should Be Abolished, Says Barney Frank)

“It’s up to the Treasury to decide what to do with it,” said Fannie Mae CEO Timothy Mayopoulos in a conference call with reporters.

With Fannie Mae and its smaller cohort, Freddie Mac, turning so much profit, the push to dismantle them becomes far more complicated. Unlike several years ago, they are now making the government money at the same time that the feds should be winding them down.

“There is a risk that policy makers will look at our profitability and conclude that they don’t need to take action to reform the housing finance system,” said Mayopoulos. “That would be a mistake.”

As of now, Fannie Mae, Freddie Mac and the Federal Housing Agency—all government sponsored entities (GSEs)—provide the bulk of the nation’s housing finance. The private market has yet to dive back in with both feet. Fannie and Freddie are still crucial to the housing recovery, but should the government reap all the rewards rather than mortgage holders or investors?

“It seems strange that everyone else who borrowed from U.S. Treasury in the crisis is allowed to pay back, but the GSEs are neither allowed to rebuild capital nor repay. Shouldn’t we get to reform rather than use them as a budget tool?” asks Joshua Rosner, an analyst at Graham Fisher.

Lawmakers are busy debating how to create a private housing finance system with at least a modest government back-stop. Simultaneously, Washington is fighting a wider budget battle, owing to an enormous federal deficit. The two are now intimately connected, and Fannie’s new profitability is the link.

“If Fannie and Freddie this year effectively ‘pay back’ all the bailout money they received since late 2008, I think we need to think long and hard about the need to continue collecting money from the firms. Is it punishment for past sins? Or is it because the government needs cash cows?” asks Guy Cecala of Inside Mortgage Finance.

“And while it may sound like crazy talk, we probably also need to at least discuss whether Fannie and Freddie should be taken out of conservatorship once they pay back the money Treasury advanced them and they are in fact solvent,” he added. “Unfortunately, the current Treasury agreement treats them as wards of the state regardless of how much money they return to the government or how much money they earn.”

The housing crash was a game-changer for housing finance in the United States. That said, the recovery of both the overall housing market and the companies that fund it will necessitate new thinking as well.

—By CNBC’s Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

Questions? Comments? RealtyCheck@cnbc.com

Article source: http://www.cnbc.com/id/100724407

Bay Area non-tech companies were more profitable than their technology …

Mon, 22 Apr 2013 16:57:50 +0000

When it comes to profits, the Bay Area’s non-technology companies outdid their technology counterparts in the SV150.

The Bay Area 25 powered to a 7.3 percent gain in profits over the 12 months that ended in March. In contrast, profits for the SV150 slumped 12.4 percent during the same period, this newspaper’s analysis of the financial performance of hundreds of Bay Area companies shows.

Companies that are household names in Corporate America and the consciousness of consumers dominate the non-tech Bay Area 25.

Among them: San Ramon-based Chevron, Pleasanton-based Safeway, Oakland-based Clorox, Pleasanton-based Ross Stores, along with Wells Fargo, PGE, Gap and Visa, all based in San Francisco.

“These are some big companies that directly affect people’s lives,” said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy.

Yet the rising profits don’t necessarily mean sales were robust for the non-tech Bay Area 25.

While the SV150 as a group generated a sturdy 9.1 percent increase in sales over the one-year stretch, the Bay Area 25 eked out a puny 0.3 percent gain in sales.

“The non-technology companies were able to capture revenue without having internal higher labor costs and other overhead,” said Michael Yoshikami, chief executive and founder of Walnut Creek-based Destination Wealth Management. “That means increased profitability.”

The profitability of the companies in

the Bay Area 25 also appears to reflect what is happening in Corporate America in general.

“In the non-tech economy, hiring has been very tight,” Yoshikami said. “Non-tech companies have steadily increased their efficiency.”

The non-tech Bay Area 25 also includes numerous banks. And for a growing number of banks, the financial crisis and sour loans that accompanied the downturn have become specks in the respective rearview mirrors of the financial companies.

“With the rebound in the housing sector, banks have been working through some of their financial problems and bad loans,” said Jeffrey Michael, director of the Stockton-based Business Forecasting Center at the University of the Pacific.

Numerous banks have shifted money out of the reserves they had maintained to cover bad loans and allowed the money to flow onto their bottom lines. That has helped to bolster profits.

An analysis of the results shows that financial companies in the Bay Area 25 performed particularly well in the non-tech group.

Of the 11 companies that powered to double-digit increases, eight were in the financial, investment or real estate business. Chevron, Clorox and Pleasanton-based contact lens producer Cooper Cos. were the other three.

Two companies in the Bay Area 25 suffered an erosion in earnings. Profits tumbled 9 percent for San Francisco-based Diamond Foods, a supplier of nuts and snack foods; and by 2 percent for San Francisco-based Prologis, a real estate investment firm that owns numerous industrial properties.

The company in the group with the strongest results for sales was Walnut Creek-based Central Garden Pet, which provides pet, lawn and garden products. Central Garden produced a 73 percent increase in sales.

Santa Clara-based SVB Financial Group, Pleasanton-based Simpson Manufacturing, Chevron and San Francisco-based Digital Realty Trust rounded out the top five for gains in revenue.

“The performance of the non-tech companies shows there is a lot of stuff going on outside of Silicon Valley,” Levy said. “They employ a lot of people. They serve a lot of customers.”

Contact George Avalos at 408-373-3556 or 925-977-8477. Follow him at twitter.com/george_avalos.

Article source: http://www.contracostatimes.com/breaking-news/ci_23064540/bay-area-non-tech-companies-were-more-profitable