The apparent end of the Fannie Mae and Freddie Mac uncertainty, following the de-facto government takeover in September, sent shares in the two quasi-governmental mortgage lenders tumbling, further decimating the considerable holdings of US pension funds in the mortgage giants.
This new ‘conservatorship’ raises immediate questions about the fate of European investors who own shares or bonds issued by Fannie and Freddie, as it now appears that also many pension funds on this side of the Atlantic have holdings in the companies.
At the end of 2007, the book value of many larger European pension funds’ combined Fannie and Freddie stock still exceeded several tens of millions of euros per mortgage book fund. But as the share price of the two has declined from $60 and $55 just a year ago to $0.74 and $0.46 respectively in mid-September, things must look very different now.
News broke after the event suggesting the Irish National Pensions Reserve Fund (NPRF) could lose up to €30m on its equity investments in Fannie and Freddie, which still stood at around €40m at the end of last year. The fund told reporters its external managers had been reducing its holdings in the two companies since the beginning of this year.
Swedish occupational pensions company Alecta saw its holdings in Fannie and Freddie more than halve to €4.2m at the end of the first half of this year. A spokesman stressed this is equivalent to one hundredth of a per cent of the total portfolio.
And the €205bn Dutch civil service pension fund ABP confirmed its stake in the two lenders is now “virtually zero” compared with the end of last year, when the fund had €45.1m worth of Fannie Mae stocks, and €29.2m of Freddie shares.
ABP had announced in July it had cut its mortgage-backed securities (MBS) holdings in the mortgage financiers, but revealing its holdings in Fannie and Freddie MBS stood at €8.611bn, down from €11bn last year.
In the long term, though, some commentators think the US bailout of the two companies could bolster pensions funds as debt held in bonds now comes under guarantee of the US government.
Moreover, “the decision to place the two government sponsored enterprises (GSEs) into conservatorship amounts to defacto nationalisation by the federal government ensures that Fannie Mae and Freddie Mac will not face liquidity problems”, said Pioneer Investments in a market outlook. Schroders chief economist, Keith Wade, said more certainty about the value of MBS should increase confidence in bank balance sheets, reducing interbank borrowing costs.
Money managers throughout stated they had become more confident that the takeover could be a turning point in the continuing credit crisis, hoping for a ‘Fannie and Freddie effect’ that would be the beginning of a new balance heralding new opportunities.
Neil Dwane, chief investment officer Europe at RCM, the active equity company with Allianz Global Investors (AGI), gave a more sober view. “This conservator solution will merely bide time until a new administration is in place and a firmer solution will materialise only into the second quarter next year. Will there be more credit available to arrest the decline in US housing? Not really, except that the recent intervention has lowered the cost of 30-year mortgages by just less than 0.5%, so that some Americans will find the cost of home ownership easier to afford.”
The apparent buoyancy quickly evaporated when investment bank Lehman Brothers filed for voluntary Chapter 11 bankruptcy, and Merrill Lynch, the third-largest investment bank, sold itself to the Bank of America for $50bn, shaking the world’s stock markets even further.
The optimists had so far gauged that a much longed-for period of recovery is probably going to arrive next summer, but it was a great week for pessimism so an upturn seems even farther away than it did before.
While fears of higher inflation are slightly easing, pension funds are replacing them with renewed worries about economic growth and downside surprises to corporate earnings estimates. Considering the turbulence of mid-September, those fears are well-placed. The credit crunch has changed from being a US-centric financial crisis into a global economic downturn.
Pension funds cannot do anything other than observe the Fannie and Freddie effect, and cling on to their long-term commitment. A blessing in disguise perhaps, as pension funds do not have to meet short-term claims in liquidity or return.
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