Carolyn Feng
Capitalist Corner

An Open Letter to Bill Gates

By, 07/18/2008

Dear Mr. Gates,

In the span of just one lifetime, you've achieved so many great things. You helped spark a revolution in personal computers and software, served as CEO of one of the world's biggest firms, and now you're a champion of philanthropy. What will you do for an encore? I have an idea.

Buy Fannie and Freddie!

I appeal to your good sense as both a philanthropist and a businessman to do the right thing here. You're one of the only titans who can help. Before you blink your eyes and remove this post from all of cyberspace (I suspect you have cyber powers yet unrevealed), please consider a few salient points:

The mortgage industry is troubled and credit markets are tight. Still, the industry's largely functioning, in part because Fannie and Freddie have remained solvent, and they own or back almost half of our nation's $12 trillion in mortgage debt.

Recently, potential new accounting rules have called their solvency into question, leading investors to dump their shares. Fannie and Freddie's difficulties could reverberate through the mortgage industry and exacerbate current conditions—affecting millions of existing and future homeowners.

So again, our appeal to you, Bill (may I call you Bill?), to buy Fannie Mae and Freddie Mac. Not only would you be an economic savior of the first order (totally awesome), but you'd also be making one of the greatest investments of all time. Who could resist? For some billion bucks you could own nearly $5 trillion in performing loans!

Current share prices for both Fannie and Freddie are down around 80% from a year ago. Fannie and Freddie's market capitalizations are $10.5 billion and $5.2 billion, respectively. The combined sum amounts to mere pennies relative to the wads of cash padding the insides of your colossal coffers—or can be easily funded by the charitable Bill & Melinda Gates Foundation. (Your choice!) Perhaps you are wondering why you should bother—these are troubled enterprises in a troubled industry after all. But the current problems are more about sentiment and accounting, not long-term fundamentals.

Share prices and valuations are low likely because current investor sentiment is dominated by fears of perceived liquidity problems. New federal accounting rules could consolidate Fannie and Freddie's mortgage-backed securities (some are off balance sheet under current rules), which could raise their capital requirements. Especially troubling investors is Fannie and Freddie's combined $1.4 trillion in sub-prime alt-A and other exotic paper loans. These are the most susceptible to mortgage delinquencies and could create losses too big for Fannie and Freddie to absorb.

If the credit market tightens further and Fannie and Freddie can't raise capital, the mortgage market would be dealt another blow. If Fannie and Freddie issue new equity shares, existing shareholders would likely suffer even more. If Fannie and Freddie tap into government credit for help, investors fear taxpayers would be left footing the bill.

Except, sentiment is not always indicative of reality. That spells opportunity! Act on those killer instincts that helped you build an empire and made you one of the world's richest men. Buy now!

Here's the real kicker, the reason you can't pass this opportunity up: The government won't let them fail—"too big to fail" in their words! It's virtually risk free!

As recently as early July, the Fed and the Office of Federal Housing Enterprise Oversight (OFHEO), Fannie and Freddie's regulator, have reassured the public both enterprises have capital well in excess of capital standards (both have raised significant amounts this past year and are continuing to do so). Furthermore, the new accounting rules will likely exempt Fannie and Freddie.

Even if new rules do consolidate Fannie and Freddie's guaranteed mortgages onto balance sheets, OFHEO emphasizes this would not change these firms' risk (they mostly hold prime loans, and delinquencies are a very small percentage) and as a result wouldn't create a dramatic capital change. Plus, remember, the government has virtually guaranteed their existence through thick and thin! Indeed, as government-sponsored enterprises, Fannie and Freddie enjoy a multitude of tax and regulation exemptions, resulting in billions of savings and excess capital.

In addition, your purchase of Fannie and Freddie would earmark a return of confidence to the two enterprises and to mortgage markets. The return of confidence could permeate the whole market, lifting them (and consequently your other investments, including those for the Foundation)—and likely create more solvency in a much-deprived mortgage market. You'd be the economic savior for all time!

And as history teaches us (for example, J.P. Morgan financing $25 million to keep Trust Company of America afloat and rescuing the US from the 1907 panic), saving the economy helps the public and can be profitable for the rescuer. In your case, doubly profitable! The investment returns from Fannie, Freddie and your other investments would further the Foundation's ability to support innovations in global health and education and in other causes.

Really, the benefits are endless. You've done truly amazing work in your business field and as a philanthropist. It's not impossible to combine the two. Maybe "economic savior" is a hat you've yet to consider, but I beg you to try it on for size. If not for the homeowners, then for the children.

Sincerely,

Carolyn Feng
July 18, 2008

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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