Financial advisers support Fannie-Freddie bailout

Despite concerns, 84.4% favor rescue, exclusive survey shows

Sep 15, 2008 @ 12:01 am

By Sue Asci

Financial advisers overwhelmingly support last week's federal bailout of mortgage giants Fannie Mae and Freddie Mac.

In an online survey conducted last week by InvestmentNews, 84.4% of 1,214 respondents agreed with the Department of the Treasury's decision to place the firms under conservatorship, while 15.6% disagreed with the move.

"This is a step in the right direction, and a positive one for now," said David A. Massart, president of Next Generation Wealth Management Inc. of Milwaukee, which manages $65 million in assets.

"The housing market is the crux of all the problems," he said. "If they can get some stabilization there, everything will begin to improve."

But while the markets surged immediately following the news last Monday, stocks declined Tuesday, with the Dow Jones Industrial Average losing 2.4%, the Standard & Poor's 500 stock index off 3.4% and the Nasdaq Composite Index down 2.6%.

As quickly as advisers agreed that something needed to be done to rescue Fannie Mae of Washington and Freddie Mac of McLean, Va., questions emerged about the impact of the government's action. The takeover may lead to lawsuits from investors, Brian Terry, vice president of investments and operations and chief compliance officer at Financial Management Concepts of Winter Springs, Fla., wrote in an e-mail.His firm has $110 million in assets under management, "Many investors will be clamoring for their money back, especially since the government is coming to the rescue," he wrote. Under the terms of the deal, the Treasury Department and the Federal Housing Finance Agency will take over and provide up to $200 billion in capital to the government-sponsored enterprises, which own or guarantee about nearly three-quarters of all U.S. home loans. The Treasury Department will purchase $1 billion of senior preferred stock, with warrants representing ownership stakes of 79.9% of Fannie Mae and Freddie Mac. Dividends will be eliminated. The bailout's effect on taxes worried many advisers.

POSSIBLE LAWSUITS

"Unfortunately, it will cost taxpayers billions and previous investors untold losses with no direct opportunity to recoup their losses," Henry Montag, a partner with Jericho, N.Y.-based ARS Financial Services Inc., wrote in an e-mail. His firm manages $700 million in assets.

Mark Kenison, owner of Turning Point Financial Inc. of Charlotte, N.C., which manages $30 million in assets, agreed.

"This means taxpayers will be paying for the whole bailout, and I don't like that, because it means that the average, faithful taxpayer will take a hit," he said.

Indeed, the "bailout is bad news for many younger people whose retirement plans hinge on the assumption that their marginal tax rates in retirement will be lower than what they are now," Thomas Fisher, founder of Fisher Financial Strategies of Cambridge, Mass, a fee-only planner, wrote in an e-mail. "Odds are good that the Treasury will have to cover a lot of losses at the two agencies, and these will add to the federal debt." That said, some advisers feel that the bailout will help future mortgage seekers. "Overall, this is clearly a positive," said Jim Smigiel, head of the investment strategy group at SEI of Oaks, Pa., which has about $150 billion in assets. "Mortgage investors should have received the message loud and clear that Treasury is standing behind the mortgage markets." The rescue plan could also help the overall housing market, said Jim Holtzman, an adviser at Legend Financial Advisors Inc. of Pittsburgh, which has $340 million in assets. "Going forward, it could help people looking for mortgages, and that could reduce the inventory problems around the country," he said. But the bailout won't fix everything.

THE BRIGHT SIDE

"It was a good first step," said Bob Andres, chief market strategist for Portfolio Management Consultants Inc. of Chicago, which has $12 billion in assets under management and is the asset management arm of Envestnet Asset Management Inc. of Chicago.

Still, there are millions of unsold houses, he said.

"We've got to find a mechanism to reduce all those houses," Mr. Andres said.

"We're not going to solve this without addressing the housing market," he said. "Anybody who thinks this is a panacea has their head in the sand."

Jeff Benjamin, Andrew Coen, Sara Hansard, David Hoffman, Dan Jamieson, Darla Mercado, Janet Morrissey, Lisa Shidler and Aaron Siegel contributed to this story.

E-mail Sue Asci at sasci@investmentnews.com.

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