Board-Ansicht
Mix-Ansicht- Fannie Mae - Amanito, 15.10.2002, 21:01
Fannie Mae
-->From Chuck Plank (Editor of the Golden Touch Newsletter 818 346 2707):
Fannie Mae’s Stealth Strategic risk to PRICE SENSITIVITY ---
We have come across an interesting analysis that we will share with you in order that we may understand Fannie Mae’s financial architecture ; and their LEVERAGED EQUITY RATIO ; which relates to their PRICE SENSITIVITY.
*** “ The duration gap of a financial company is equal to the duration of assets minus the duration of liabilities. For Fannie Mae to have a duration gap of -14 months means that the duration of liabilities exceeds the duration of their assets by 14 months. This is because Fannie Mae makes mortgage loans, and as interest rates have declined, more and more individuals have refinanced or shortened their borrowing horizons. So these mortgages (assets of Fannie Mae) are now substantially SHORTER IN DURTION than Fannies liabilities. Since -14 months is --- 1.17 years, this means that a 1% drop in interest rates would cause Fannie Mae’s loan portfolio to lose about 1.17 % in value. Now that doesn’t sound like a lot. SO HERE IS THE PAYOFF BOTTOM LINE. When you now realize that Fannie Mae has leveraged its equity 40 to 1 (the highest leverage ratio in history ), and that its annual return on their portfolio is just --- 0.65 %.
In short, a further drop in interest rates of even 0. 5% here would cause an overall portfolio loss equal to about ( 1.17 x. 50 x a leverage factor of 40 equals ) 23 % of Fannie Mae’s book value, or equivalently, about (1.17 x. 50 /. 65 equals ) 90 % of Fannie Mae’s annual earnings. Accordingly, Fannie Mae appears to be scrambling to buy long term Treasury bonds (thereby lengthening the duration of its assets ) and is behind the substantial plunge in long term Treasury interest rates we’ve seen in the recent weeks. “
*** Fannie Mae trades without a substantial risk premium. Usually there are 3 features which are in common to nearly every risk financial bust:
>>> 1. Extreme leverage ;
>>> 2. A mismatch between assets and liabilities ; and a
>>> 3. Lack of disclosure
*** Accordingly, Fannie Mae must also be listed in the Critical Watch List having Mega Impact on the interest rate and equity markets. J. P. Morgan and other giant banking entities using derivatives should be added to the critical watch List.
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