Ackman on Saving The GSE's & Us
A: Short-seller Bill Ackman was on CNBC this morning with his plan to save the GSE's, whose leverage comes in at a stunning 129:1; doh. The jist of it goes against the recent plan by Paulson to buy equity in the GSE's or extend a line of credit and rather, brings Fannie & Freddie equity to zero. As he puts it, its "...a way for these institutions to be re-capitalized without the government writing a check!"
Disclosure: Ackman is SHORT the junior debt & equity of FNM & FRE
The PLAN: First off, Ackman says the plan announced by Paulson is NOT a bail out plan and rather, is Paulson building up the troops to potentially take action later on; which he ultimately disagrees with. He says that the balance sheets should be 'fortress balance sheets' as their core earnings power allows them to 'earn their way through this mess'.
Ackman proposes that Fannie can raise about $86 billion in capital by giving investors in $750 billion of senior unsecured notes 90 cents on the dollar in debt of a new company, with the balance in equity. The senior unsecured debt holders around the world will basically become the owners of this new company; with 99% of the equity going to these owners.
Subordinate debt holders would would be exchanged with warrants. The government would then put in place a "stand-by purchase commitment" for the new common stock for three years. Common equity shareholders will get wiped out as the stocks will ultimately go to zero. Ultimately Ackman believes the government will "...never write a check", and that he would "..be a buyer of Fannie Mae" under this plan.
CLICK ON THE VIDEO TO WATCH THE 10 MINUTE INTERVIEW
Quite intriguing. Ackman has a very smooth way about him and certainly the plan sounds logical, but I am in no position to criticize or applaud this plan because I just don't know enough about restructuring debt or the GSE's balance sheets. What you should know is that Ackman has been talking to Senators, fed officials, and senior officials at the Treasury about this plan.
In this plan, Ackman stands to benefit as his shorts on the common equity would fully pay off. Why not remove the conflict of interest? Well, according to Ackman, "...I need good shorts to offset my longs". Works for me!!
Thoughts on this?
Comments (2)
I watched that interview when he gave it, I thought he was very impressive and the plan sounded a lot better than the others I've heard and read over the last week. I see no reason for him to drop his shorts. I hope we'll hear more about this plan, as it seems a lot safer for the US taxpayer than anything else being considered.
Posted by MattJ | July 16, 2008 9:40 AM
Agreed Matt! Hopefully the plan is being reviewed without punishing him for his conflict of interest due to his positions.
Posted by UrbanDigs | July 16, 2008 10:45 AM