Fannie, Freddie $30 Billion IPO Being Weighed for This Year

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2:32Carol Massar:I don't know if you checked out shares of Fannie Mae and Freddie Mac. I mean, just soaring off the charts. It's incredible, too. And just given where they've come and gone and being in that conservatorship since the height of the global financial crisis. Yeah, it's a really good point. And it feels like we need a little bit of a history lesson. The news that's got them moving, we've got Fannie Mae, it's up about 20%. I'm looking at Freddie Mac up about 22%. And this is after the administration is said to be preparing to sell shares in an offering that could start as early as this year, again, according to that senior administration official.

3:08Carol Massar:With the latest on that and kind of, as I said, a history lesson, Bloomberg TV and radio, international economics and policy correspondent Michael McKee. Bring in the old guys in the history. Well, it's not the old guy. Like a fine wine, Mike, you just get better and better. But no, there is history behind these two names in a big way. Especially if you look at Fannie Mae, it was chartered in 1938. It's been around for a long time. Freddie Mac came along in 1970. Stepping back for just a second, here's what they do. They basically buy mortgages from banks and mortgage lenders and package them into securities and sell them to investors.

3:45And that way the banks have more space on their balance sheets to make loans. And because Fannie Mae and Freddie Mac have sold these off to investors who are anxious to get the yield on them, they can predict essentially what their mortgage costs are going to be. And so they can keep mortgage rates generally fairly stable. Along the way, from the time Fannie Mae was created, they created the 30-year mortgage, which is we're the only country that has something like that. But then, of course, they bought a lot of really bad mortgages in the run up to the great financial crisis and basically went bankrupt and the government had to bail them out.

4:28And they did and have put them into conservatorship is what they did. But the the way they did it was they still left shares outstanding. And so a lot of people who a lot of hedge funds got into the business of buying up Fannie and Freddie shares at pennies on the dollar. and have been sitting on them for 17 years now. And the Biden administration and the Obama administration had no desire to bring them out of conservatorship. But the Trump administration seems bound and determined to do that. They've been talking about it since he came back to office. It's complicated. It will be difficult. But boy, if you were Bill Ackman or John Paulson.

5:11Carol Massar:Pretty happy today. You're pretty happy today. Yeah. Yeah. Well, Trump also met with the CEOs of Bank of America Citigroup earlier this week. And then last week, Bloomberg News had reported that he met with Jamie Dimon and David Solomon over at Goldman Sachs Group. So I'm wondering, how difficult will it be to pull off a potential feat here when we're talking about an IPO? Well, it's not so much the selling the shares, although it has to be designed in a sort of specific way, because the government owns 80 % of the shares right now. And one of the big questions is, are you going to put the companies into receivership and basically bankrupt all the existing shareholders, which is what you normally do with a company that's going to come out of bankruptcy?

5:52Or do you leave them with equity in the new company and then they make a huge profit? But the biggest problem is that because they have been owned by the government and before that there was an implicit guarantee by the government rates were low you didn't demand an extra uh premium because you knew that they were insured and they were gonna get paid you're you were gonna get paid either way because the government would step in and so if the government steps out uh and lets this be a private company then maybe mortgage rates are going to go up. And things like the mortgage rate lock, when you lock in a mortgage, that could go away.

6:41So there are a lot of questions about how this would be handled, and that's one of the reasons it's very complex. Jesse, we're talking about the banks meeting with the president. They're looking, apparently, for a lead underwriter. Now, this is going to be a huge sale, so they would, I'm sure, have a consortium, but somebody's got to be the lead, and not just Paulson and Heckman are going to make money.

7:02Carol Massar:Mike, I feel like so many things this year we are saying are complicated, but I do wonder that it would be a very different entity, both of them would be different entities, if they are publicly held and it's not that quasi-public-private that we've seen, correct? Yeah, and nobody quite knows how this will play out because you would worry that rates will go up if they don't have a government guarantee, But does the government want to stay in the guarantee business if it's a private company? And we're basically subsidizing their low rates and their profits. So it's a tough call. The administration, this administration is very much a free market, you know, get the government out of business stuff.

7:44So they're in favor of this as are some of Donald Trump's biggest campaign donors. But it's not going to be easy to put it all together. And a lot of people in the mortgage industries have been concerned about this. I don't want to say they're worried, but they are concerned because they know it's a complex issue.

8:03Carol Massar:Complex, and so not a given that this ultimately plays out. Mike McKee, thank you, thank you. And not all, just smart. That's why we love to have him on. What if data didn't sit still? What if intelligence moved with us? Not buried in reports, but activated in real time. Where lives are being shaped. Where decisions are being made. It all starts with a question. Where is the potential? Cotality turns data into clarity. Intelligence into insight. Insight into action. Because when intelligence moves, we all move forward. Cotality. Intelligence beyond bounds. This is the Bloomberg Tech Minute brought to you by ChatGPT.

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11:06Carol Massar:All right, we're going to continue on the geopolitical because it really seems to be a major theme when we look at what's going on today. Joining us now is Wendy Cutler, vice president of Asia Society Policy Institute. She joins us from San Diego. Wendy, so good to have you here. We just did kind of a rundown from our agenda lowey in terms of all the stuff that is going on. You know, I want that whiteboard, U.S., China, India, Russia, Iran. talk to us a little bit about the news coming out of the news flow about geopolitics and the U.S. role and what they're trying to do. And maybe we start with Russia, because it is curious whether or not something will ultimately get done to end this war, because it does seem like President Putin is going to stand pretty pat when it comes to his demands.

11:55Carol Massar:Look, it's unclear how this is all going to develop, but it's clear that the president is very determined to use his office to try and broker a ceasefire. What I'm watching on the trade front, however, is how this may impact our relations with India right now, because we are in a 21-day period where the president has threatened to increase India's tariffs by an additional 25%, taking them to 50 % due to their purchases of Russian oil. But perhaps if indeed there's some progress made with Russia, that will provide an opening to remove this threat and impending tariff hike. Talk to us more about what this would mean for, say, India's relationship with Russia or maybe even China's relationship when it comes to Russia as well.

12:47Yeah.

12:48Carol Massar:So for India in particular, look, we've spent 20 odd years trying to strengthen our relations with India. The past two weeks, the relationship has been spiraling downward and it's going to be hard to rebuild. And I think in many respects, India is going to gravitate, you know, not in a major way, but gradually more towards China and Russia, viewing us as an unreliable partner. So that's what I want to ask you. I mean, I like to remind or have someone remind us about why it is so important that the U.S. continue to have positive relations and a positive relationship with India. Remind us about that and what would be at risk if India is much more aligned with China rather than the United States?

13:39Carol Massar:Well, we have looked to India as the counterweight to China, both on the strategic front, but also on the economic front. On the economic front, we have been encouraging our companies to, you know, to leave China. And one of the destinations they've been gravitating towards is India. So many U.S. companies now are expanding their operations in India. and, you know, if relations start going south, this is all kind of, you know, throws things up in the air. And the last thing the U.S. business community needs right now is more uncertainty. There's enough uncertainty with all of these tariff announcements coming out on a daily basis.

14:21Carol Massar:Do you think there's been long term damage with that bilateral relationship? Absolutely. Again, you know, you spend years and years building a relationship, building trust, but it can take just a matter of hours or days to break that trust. And so rebuilding it is not going to happen in a matter of hours or days. And we're not just seeing this with India. I'm just back from Japan. And I'm kind of hearing the same thing that, you know, the Japanese have been a very strong ally or looking at the past couple of months and how they've been, in their view, kind of jerked around in these trade negotiations and are also talking about like developing some kind of plan B where they become less reliant on the United States.

15:07Carol Massar:So this is long term implications. And again, hard to rebuild trust, you know, in a short period of time. You know, what has happened here? Because when the president came back to the White House earlier this year, he did look set to build upon kind of the warm ties he had with Prime Minister Modi during his first term. He had called the relationship the best it's ever been between two leaders of the two countries. And the prime minister called President Trump, my dear friend. Is this just, I don't know, gamesmanship? I try to kind of understand, you know, what we hear, what we see sometimes, and then what's, you know, a new set of headlines that shows something very different.

15:49Carol Massar:So should we take this at face value that the relationship really is breaking down? Or is it just the negotiating process between leaders of two really important countries? Well, look, a few weeks ago, everyone was saying we were on the verge of an early trade deal with India. And there was a lot of optimism about that. And somehow the trade deal got derailed. It could be that the U.S. was asking for more, but a combination of India couldn't meet our last few requests, particularly in the agriculture sector, which is very sensitive for them. But I don't think that's the whole picture. Obviously, something happened that made the president extremely frustrated.

16:32Carol Massar:Maybe he got the numbers of how much oil India continues to buy from Russia. And that, you know, somehow rubbed him the wrong way. But again, the words he's been using towards India, I don't think this is something that you just turn around overnight. It's pretty deep right now. And if you talk to the Indian officials or the Indian public, I think that there is a lot of deep-seated anger. And frankly, they don't really understand how this spiraled down so quickly either. What are your eyes on next when it comes to a timetable? I know August 12th, that's that deadline for the decision on Chinese tariffs coming up soon.

17:18Exactly.

17:19Carol Massar:Next Tuesday is key. I'm counting on that we will roll over the tariff truce that we achieved with China 90 days ago. And then I think we are going to see a continuation of negotiations with China to try and see if we can do some kind of deal with them in the lead up to a possible meeting or visit by the president to China around the Korea APEC meeting in late October. What I wanted to ask you is just to kind of wrap up here, Wendy, and again, devil's in the details. We'll see what ultimately happens and whether or not they come back to the table and they become friends again. But I guess if there is a broken relationship, which is how it seems right now, and that lasts longer term, what's the cost to the United States?

18:13Carol Massar:With India? Yeah. Yeah. Look, the cost is, you know, we have damaged a relationship with an extremely important partner that is only becoming more important on the global stage. And particularly at a time when we want to diversify away from China, this does present serious concerns. How much is China watching this in your view? Oh, very, very closely. And I would expect that China is going to make overtures to India right now in an effort to bring India more in their camp. Now, let's keep in mind, though, China-India relations historically have never been good. And so I don't expect India to move to the China camp.

19:02Carol Massar:But again, I think they're going to hedge their bets and view the U.S. as less reliable and gravitate both towards Russia and China, frankly. And even that they could possibly talk or that we're even talking about them possibly talking is just shows that things could possibly be shifting. Wendy, so glad we could get some time with you on this Friday, a very, very busy Friday, certainly when it comes to geopolitics. Wendy Cutler back with us. She is vice president of Asia Society Policy Institute, joining us from San Diego. Wendy, thank you again. This is the Bloomberg Business Week Daily Podcast.

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19:52Carol Massar:We're going to go back to geopolitics, although this really plays into geopolitics as well. We're going to get to Israel saying it will take control of Gaza City. It's a move that could displace one million Palestinians leaving there. Let's get to the latest on what we are seeing, what we are hearing. Bloomberg News Jerusalem journalist Dan Williams is in Jerusalem. So, Dan, what are you hearing about new moves to take control of Gaza? What are you seeing in and around also? Right now, it's declarative, as you all have read on Bloomberg and elsewhere. The Israeli security cabinet, that's really the top decision making form of the country.

20:28the war cabinet, if you like, decided after a night-long debate, 10 hours behind closed doors, a 4 a.m. resolution that they would order the storming of Gaza City as part of Israel's efforts to end this war with what it would define as a victory against Hamas. Now, Gaza City is part of the 25 % of the Gaza Strip yet to be overrun by Israeli tanks and troops yet to be under full control of the Israeli army. and moving against it would be a long process, weeks or months in the making. It would involve the evacuation, the forcible evacuation, potentially hundreds of thousands of civilians and then presumably laying siege to the Hamas holdouts who were there in the thousands, we're told, of Hamas fighters and also potentially hostages, which they're holding.

21:18It's worth remembering Hamas still has 50 hostages, most of them from the October 7th attack in 2023 that sparked this war. 20 of them are believed to be alive. previously these Israelis avoided entering these areas of the Gaza Strip for fear of endangering those hostages. It appears now the gloves are off but with that said this will not happen immediately on the ground. It will require apparently a doubling of these Israeli forces deployed. That will take potentially a week or two to muster in terms of reinforcements, call-ups of reservists and that does actually leave a window for Hamas to think again about whether its attack in negotiated efforts to achieve a ceasefire, perhaps a negotiated end to this war, needs to change.

21:58So we will see. There are indications that Hamas is sending out feelers, that it wants to renegotiate or review those negotiations. So until we see the tanks and troops moving, all bets are off. Hey, Dan, how has the Trump administration responded? The Trump administration has been openly, openly supportive. We interviewed the US ambassador to Israel just a few days ago and the the ambassador made clear that Trump as he put it is fed up he actually said has run around out of patience with Hamas with Hamas stonewalling as Israel and the US have described it in those negotiations and the US wants to see Israel in this war now for Netanyahu the Netanyahu government in Israel ending the war means winning it through force in the absence of negotiations however many Israelis to judged by polls would prefer to see this war ended by a review of Israel's objectives, basically abandoning the objective of destroying Hamas, of returning all those hostages in a negotiated deal that would keep Hamas in power.

23:01And basically what we have now is a government that's out of sync with its people to judge by the polls, but insist that this is what the country needs to guarantee its long-term security.

23:12Carol Massar:Is it also a government that's out of sync with the region. And I just think about that. And also out of sync with the Abraham Accords, right, which we know set a series of diplomatic agreements, normalizing relations between Israel and several Arab nations brokered by the U.S., the first Trump administration, the first term. So are they out of touch, too, with their partners and other Arab nations in terms of what they want to see done with Gaza? Well, to judge by open statements, absolutely. The Palestinian civilian suffering in the Gaza Strip has become intolerable to many viewers, certainly in this part of the world, where it's become especially combustible in terms of public opinion.

23:57However, oftentimes what's said behind the scenes isn't the same as what's said in public. I'd remind you that some 10, 12 years ago, WikiLeaks revealed that what was being said between US-aligned Arab powers and Israel behind the scenes to US diplomats was very different to what was being said in public. In public, there was talk of Palestinians behind the scenes, behind closed doors. The real focus of the discussions was Iran. It's also worth remembering that, to most assessments, Hamas triggered this war in part because it wanted to scuttle those Abraham Accords. Israel and Saudi Arabia were on the verge of establishing a peace deal.