Setting The Stage

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60 | Th e M Rep o RT O r i g i nat i O n s e r v i c i n g a na ly t i c s s e c O n da r y m a r k e t SECONDARY MARKET the latest Fourth-Quarter gdP growth slashed The government's second estimate shows the first might have been too good to be true. a fter delivering a promising first report at the end of January, the government scaled back its estimate for fourth-quar- ter economic growth at the end of February. In the second of three planned reports, the Bureau of Economic Analysis (BEA) put gross do- mestic product (GDP) growth at an annual rate of 2.4 percent in Q 4 2013, down from its initial estimate of 3.2 percent in January and its final report of 4.1 percent in the third-quarter. Full-year growth is estimated at 1.9 percent compared to 2.8 percent in 2012. According to BEA, the latest downward revision stemmed from a smaller increase in consumer spending than what was previ- ously reported. First estimated at 3.3 percent, spending growth was scaled back to 2.6 percent. Still, the agency noted per- sonal consumption expenditures contributed heavily to fourth- quarter growth. Also reflected in the latest data are positive contributions from exports, non- residential fixed investment, and private inventory investment. Putting a drag on GDP were declines in residential fixed invest- ment and federal government spending—down 12.8 percent, a lasting effect of October's shut- down. Imports, which count as a subtraction in GDP, also increased. Paying close attention to the lat- est report will be Federal Reserve Chair Janet Yellen, who in a Senate Banking Committee hear- ing in February was questioned on how the recent economic slowdown will affect the Fed's plans to taper asset purchases. Her response was noncommittal: "Part of that softness may reflect adverse weather conditions, but at this point it's difficult to discern exactly how much." Nevertheless, Yellen and the rest of the Federal Open Market Committee will have to reach an answer on that ques- tion ahead of its March meeting, which will fall before the govern- ment's final estimate of fourth- quarter economic expansion. The committee voted in its last two meetings to curb its monthly purchases of Treasury bonds and mortgage-backed securities. Further cuts, or re- verses, will be based on how the economy continues to perform. GDP won't be the only factor the committee will have to weigh in its March decision. Also figur- ing in will be recent employment reports, which have painted a discouraging picture, weakness in existing-home sales, and a decline in new homebuilding. On the other hand, indicators released at the end of February point to a possible comeback from the current slump: New home sales surpassed expecta- tions in January, and pending sales have at least refrained from dropping any further. investor calls for corporate action at Fannie, Freddie The latest call to action from Bruce Berkowitz un- derscores what's at stake in the GSe discussion. a mutual fund manager with stakes in Fannie Mae and Freddie Mac released at the start of March two letters calling for the directors of each GSE to protect shareholders' interests with gov- ernance actions. In identical letters addressed to the boards of each enterprise, Bruce Berkowitz, managing mem- ber and chief investment officer of Fairholme Capital Management, urged the directors to "act in the best interests of each company and in accordance with accepted best practices for corporate governance." Specifically, Berkowitz asked the boards to retain each company's earnings to rebuild capital; cease borrowing for dividend payments to the U.S. Treasury; provide accurate disclo- sure; and be proactive in address- ing conflicts of interests by retain- ing independent advisers when the Federal Housing Finance Agency (FHFA) is conflicted in its duty as conservator and regulator. The letters also requested each board convene annual shareholder meetings and relist the companies on the New York Stock Exchange. The letters mark another step in Berkowitz and Fairholme's efforts to get a piece of Fannie and Freddie's profits, which have been helped in large part by the recovering housing market and settlements with banks over soured mortgage-backed securities. Though the companies will have paid off their Treasury draws— and then some—as of the end of March, a later adjustment to their bailout terms stipulates all profits be delivered to Treasury. In July 2013, Fairholme joined hedge fund Perry Capital in fil- ing suit against the government to protest the amendment. In November, the company drafted a proposal for a group of investors to purchase each enterprise's core insurance business—a proposal that still stands, Berkowitz notes. In a release accompanying the letters, Berkowitz explained the dramatic measures: "The con- servatorship of Fannie Mae and Freddie Mac—now in its sixth year—is perpetuating the pre-crisis regulatory and management short- comings of the companies," he said. "Any notion that the answer to Fannie and Freddie's pre-crisis problems is more government involvement is just as flawed as the idea that the United States economy can properly function without their core business." A spokesperson for FHFA declined to remark on the letters, while a representative for Freddie Mac did not immediately return a request for comment. Fannie Mae, however, responded publicly with a statement from chairman Philip A. Laskawy. "I am confident that the Board is doing the job it has been given," the statement said in part. "FHFA has retained certain authorities for its exclusive determination and control, as provided by federal statute, including all decisions relating to the declaration and payment of divi- dends to the United States Treasury. "Our Board and management will continue to perform their du- ties, as provided by federal statute and delegated by FHFA, diligently and to the best of their abilities."

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