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TheStreet Open House

Regional Bank Stocks Trade Higher Ahead of Fed Policy Statement

NEW YORK (TheStreet) -- Regional Bank stocks were strong on Tuesday, as Janet Yellen began her first two-day meeting of the Federal Open Market Committee since taking over as Federal Reserve chairwoman last month.

The KBW Bank Index I:BKX rose 0.5% to 70.76, with all but three of the 24 component stocks ending with gains.   Comerica (CMA) of Dallas and New York Community Bancorp  (NYCB) of Westbury, N.Y., were the sector leaders, with both stocks rising 1.1%.  Comerica closed at $49.52, while NYCB closed at $16.28.

The Dow Jones Industrial Average was up 0.6%, while the S&P 500 added 0.7% and the NASDAQ Composite rose 1.3%, as investors looked ahead to Wednesday's policy statement from the Federal Open Market Committee (FOMC).

The FOMC is expected to continue winding down the central bank's monthly "QE3" purchases of long-term U.S. Treasury bonds and mortgage-backed securities, which ran at a pace of $85 billion a month from September 2012 through December of last year, with the pace declining to $75 billion in January and $65 billion in February.

Yellen has said the FOMC expects to wind-down the bond purchases by the end of 2014, economists believe will lead to a significant rise in long-term interest rates, although long-term rates have pulled back this year as investors' demand for Treasury paper has been strong. The market yield on 10-year U.S. Treasury bonds was 2.68%, down from 3.04% at the end of 2013, but up from 1.96% a year ago.

As it winds down QE3, which has been meant to hold long-term interest rates down, the FOMC's goal is to return to focusing on its main policy tool -- the short-term federal funds rate.

The federal funds rate has been locked in a target range of zero to 0.25% since late 2008. For some time, the FOMC had set a benchmark of 6.5% for the U.S. unemployment rate, before the committee would consider raising the federal funds rate. Yellen has also indicated the federal funds rate won't move higher until after QE3 ends.

But investors might see new clarifying language in the Fed's Wednesday afternoon statement hinting at when short-term interest rates may be allowed to rise, because the unemployment rate improved to 6.6% in February from 6.7% in January. A rising federal funds rate will be good news to savers earning next to nothing on their deposits, as well as to bankers, since most banks have been continuing to see pressure on their net interest margins, despite a rise in long-term interest rates over the past year. This is because many classes of assets continue to reprice at lower interest rates, since they are pegged to short-term rate benchmarks.

Economy

In economic news on Tuesday, the Census Bureau said housing starts in the United States declined 0.2% from January to a seasonally adjusted annual rate of 907,000 private units in February. Economists polled by Thomson Reuters had expected the pace housing starts to rise by 0.4% to an annual pace of 913,000. But there was a silver lining in the Census Bureau's data: Building permits for private housing units rose 7.7% in February to an annual pace of 1,018,000, which was well ahead of the 1.6% increase forecast by economists.

Crimea

Investors on Tuesday took the signing of an agreement by Russian President Vladimir Putin and leaders from Crimea signed for Crimea to become part of Russia in stride, despite the continued protest of Western governments. Putin in a speech before parliament said he had no desire for Russia to take any more territory from Ukraine.

Fannie and Freddie

The extreme volatility for shares of government-sponsored mortgage enterprises (GSEs) Fannie Mae (FNMA) and Freddie Mac (FMCC) continued on Tuesday, with Fannie's common shares down over 18% in the last few minutes of trading to $3.08, While Freddie's common shares were down 17.9% to $3.07.

Fannie and Freddie were taken under government conservatorship in September 2008, although the two companies' common and preferred stocks remained publicly traded.

Under their original bailout agreements, Fannie and Freddie were required to pay the U.S. Treasury 10% annual dividends on the government-held senior preferred shares. However, in August 2012, after the GSEs had returned to profitability and after they had stopped increasing their borrowings from the government, the bailout agreement was changed so that all GSE profits since then have been swept to the government, in excess of minimal capital cushions.

Following their March dividend payments, Fannie and Freddie will have paid total dividends exceeding the $189.4 billion in senior preferred shares held by the Treasury, but the GSEs aren't allowed to repurchase any of the government-held prerred shares.

Senate Banking Committee Chairman Tim Johnson (D., S.D.) and ranking committee member Sen. Mike Crapo (R., Idaho) over the weekend proposed the Housing Finance Reform and Taxpayer Protection Act of 2014, which would wind-down the two companies, while avoiding the hot-button topic of whether or not the GSEs non-government shareholders will see any return on their investments.

Congress is leaving it to the courts to decide whether non-government shareholders of the GSEs will get a seat at the table, as the future of U.S. home financing is eventually decided.

KBW analyst Bose George on Tuesday reiterated his "underperform" ratings for common shares Fannie and Freddie, but raised his price targets for both GSEs' shares to $2.00, "to incorporate the possibility of a combination of a legal victory for shareholders combined with a lack of action on both the regulatory and legislative fronts that hurts the value of the GSEs".

For more on what led to the current impasse over Fannie Mae and Freddie Mac and the interests of the various players, please see Were Fannie, Freddie Negotiations Done in Good Faith?, Ralph Nader Discusses Fannie and Freddie Shareholder Fight and Fannie and Freddie Plaintiffs Eye FDIC Share Sales. Bad News for Big Banks Favors Bank of America, JPM


Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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