To: JHP who wrote (37228 ) 11/22/1998 12:57:00 PM From: Knighty Tin Respond to
John, Basically, as they always do when interest rates fall, these two govt. behemoths leverage themselves to continued good news on the intererst rate front. However, this time, they have expanded their mortgage portfolios tremendously, 25 and 50% this year vs. 10-15% last year. Why? Because the spread at which they borrow vs. which they lend, has tightened. If the cos. were being managed rationally, they would be seeing falling earnings in this environment. However, since they want to maintain their bloated pe ratios, they have decided instead to make even more bets with fewer assets backing them. And, to top off this gambling fever, they have both reduced loss reserves for bad loans while taking on more loans and bought back shares when they have less capital tail wagging the asset dog. In other words, they are operating like hedge funds or pre-bailout savings and loans. Leveraging short term borrowings to lend long term and reducing net equity. Insane for a corporation, but ridiculous for a Federally controlled corporation. But there is nothing but foxes in this henhouse.
