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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (17317)	6/26/2003 9:07:39 PM
From: Spekulatius	Read Replies (1) \| Respond to of 78774

I'll take a little FRE here. I will assume that the bad news is out. I have also been looking at FRE and here is what i see: Numbers per 2002 annual report: Mortgage assets: 1140 B$ Pre tax earnings: 6.3 B$ - this is a return of .6% on the total equity. FRE lives off the .6% interest margin it earns over its cost of capital: Shareholder capital: 20 B$ FRE is profitable because of the small margin it skims of the mortgages it own and its underwriting business. Return on equity is high because of the 50x leverage even with an interest margin of only .6% (well managed banks have an interest margin of 1.2-1.5%). Besides the small margin I also don't like the fact that it owns a large part of the mortgage assets it issues and guarantees - this may result in apositive feedback loop (mortgages go up)as long as it buys but in negative one if it sells. The meager margin means that FRE is very sensible with respect to the cost of capital. My guess is that FRE does not deserve a AAA credit rating without the implied treasury guarantee. How much would the earnings fall if FRE were downgraded to AA? This is not a business I want to own even though I think the fallout from the accounting issues will be limited, i think the political issues may not.