Posted on Monday, April 4, 2011
The Treasury Department will lead the way testing the $4.6 trillion mortgage-backed securities market. Timothy F. Geithner, who leads the agency, said on Monday that the Treasury would begin offloading $142 billion of mortgage bonds accumulated during the financial crisis. The gradual sale of the portfolio could hint at how markets will react when the Federal Reserve comes to sell its nearly $1 trillion pile.
Anyone who had forgotten about the Treasury’s holdings can be forgiven. Mortgage bonds guaranteed by Fannie Mae and Freddie Mac, the government-run housing giants, were acquired in the name of market stability after their regulator seized the agencies in 2008. But the overall crisis at the time and the Fed’s huge intervention are the events that have stuck in most memories.
The combined purchases had the desired effect. Risk premiums on mortgage bonds have tumbled to less than half of what they were before the Treasury and the Fed started buying in 2008, according to Credit Suisse. That has kept mortgages cheap but has not done much for the broader housing market. Data released on Monday showed the prices of existing homes declining and the rate of sales falling nearly 10 percent in February from January. This makes the government’s withdrawal a delicate matter.
It is helpful, therefore, that the Treasury is feeling out the market. Its holdings are only about 3 percent of all agency mortgage-backed securities outstanding, so it is unlikely the sales, set for $10 billion a month starting immediately, will cause mortgage rates to climb significantly. And if they do, it’s better to know before the Fed fires up its own exit strategy, which is likely to move more than just the bond market.
The Fed doesn’t seem to be in any hurry to start selling. The elimination of maturing mortgage bonds has helped trim its portfolio, and the central bank is still buying government debt. If the sales by the Treasury go off with little or no market impact, though, it should encourage the Fed to consider selling its bonds sooner rather than later.
Worse to Bad
Deutsche Telekom’s American nightmare could turn out to be just a fleeting fear. Despite getting its portfolio into shape by negotiating a juicy sale of T-Mobile USA to AT&T for $39 billion in cash and stock, its decade-long investment in the market far from home will still be remembered with a wince.
The 13 percent rise in Deutsche Telekom’s share price on news of the agreement reflects that, in absolute terms, investors like the deal. The exit multiple of 7.1 times historic earnings before interest, tax, depreciation and amortization is about a one-third premium to peer group trading multiples. And even if regulators quash the deal, Deutsche Telekom will walk away with a breakup fee worth $3 billion, or 7.7 percent of the deal’s value, and still more of AT&T’s valuable wireless spectrum and roaming access.
But the transaction doesn’t vindicate Deutsche Telekom’s original entry to America by agreeing to buy Voicestream, T-Mobile USA’s forerunner, in 2000. The German operator paid $51 billion in cash and stock to buy the business, a valuation equivalent to twice the market rate per subscriber at the time.
Since completion, the business has generated $8 billion of cash, after capital expenditure and license costs but before tax, according to one analyst’s estimates. Factor that in, and the value destruction is only about $4 billion, spread over a decade, or 8 percent of the original deal price. Deutsche Telekom would not have done any better investing in German blue-chips, even including dividends.
Of course, this isn’t a clean break. The bulk of the sale brings cash, allowing Deutsche Telekom to cut debt and still leave scope for buybacks and investment. But the German giant also would be left with an 8 percent stake in AT&T, which the optimists will see as potential upside.
After combining its British business into a joint venture and buying out minority stakes in Poland, Deutsche Telekom is in better shape to sell data services in its core European market. As the chief executive, René Obermann, says, Deutsche Telekom is “fixed.” No wonder he is also playing down the possibility of using the T-Mobile proceeds for any more big M.& A. ideas.
By AGNES T. CRANE and UNA GALANI, THE NEW YORK TIMES