He took advantage of the central bank’s buying and used cheap borrowing costs to increase leverage for the REIT’s purchases of government-backed mortgage securities. The bets paid off, with the company returning 53 percent in 2009 including reinvested dividends.
The Silver Spring, Maryland native had spent almost his entire career at Freddie Mac, coming from Johns Hopkins University’s Applied Physics Lab. He worked there for 18 months after graduating with a degree in electrical engineering from the University of Pennsylvania.
He wrote computer models for mortgage cash flows in Freddie Mac’s financial research team before moving into trading. By 1995, he was responsible for managing trading decisions and hedging the company’s mortgage positions. When he left, he was senior vice president of investments and capital markets.
Hedging Rates
Kain oversaw an average of about $700 billion during his last few years with the company, primarily government-backed mortgages. Since these bonds don’t take credit risks, his main responsibility was hedging for changes in interest rates. The portfolio also included non-agency mortgage-backed securities, including the subprime debt that helped fuel the housing boom and contributed to the company’s losses that led to the government rescue.
“A major emphasis of the subprime AAA portfolio was around hitting affordable housing goals so it was not as pure of an investment mindset,” Kain said.
When the government seized the company and sought to shrink the portfolio and the company’s imprint on housing finance, Kain said he “knew life at Freddie Mac was going to be very different” and started considering other options.
“His background was a perfect fit for American Capital,” said Jason Arnold, an analyst at RBC Capital Markets in San Francisco. “There’s been a lot of problems at Fannie and Freddie so it’s not surprising that someone would want to go out and do something else rather than be under the umbrella of the U.S. government.”
Biggest Winners
REITs have been among the biggest winners from government policies to resuscitate housing and stimulate the economy. The Fed has made it easier and cheaper for the companies to borrow through the so-called repo market. The central bank’s buying has also pushed up the value of mortgage bonds that REITs invest in.