Thomas O'Donnell, a former business journalist, was ranked first in the American Banker survey in two analyst categories-for government-sponsored enterprises and for thrifts.

In 1997, Mr. O'Donnell had 14 estimates with an average error rate of 0.18 for GSEs (18% of the average for all analysts) and he had 47 estimates with an average error of 0.67 for thrifts.

Mr. O'Donnell, who is known as a prolific report writer, began his career as a reporter covering the banking industry. In 1977, as a reporter at Business Week, he started writing about Fannie Mae when it was "a small troubled company," he said.

After serving as the banking editor for Business Week and a senior editor for Forbes, he moved overseas to cover international banking from Melbourne, Hong Kong, and Tokyo.

While writing about financial institutions, Mr. O'Donnell developed an appetite for the insider's perspective and he grabbed the opportunity in 1986 to work for a brokerage house. He began to work for Prudential Securities in an effort to build an international research department. Ultimately he headed that department before moving on to cover GSE's and savings-and-loans at Prudential. In 1994 he moved to Salomon Brothers, where he is now a senior analyst for GSEs and S&Ls.

From his office in the Travelers Corp. building in lower Manhattan, he has an expansive view of the towering World Trade Centers. In mid-February, he answered questions about his prowess in covering GSEs and S&Ls.

S&Ls were up 69% in 1997 after two good years, he said. But S&Ls are not performing as they did in the 1980s because there is an excess of capital, adjustable rate mortgages have reduced interest risk, asset quality problems are now fixed, accounting gimmickry has been eliminated, and regulators are on top of the industry, he added.

The challenge for thrifts is putting money to work profitably. "It's a healthy industry in every way except finding a good return on the money," said Mr. O'Donnell. S&Ls are now trying to become like consumer banks, he added.

Reflecting on the span of his nine-year career covering S&Ls, he said, "I saw them grow from being very much out of favor with very low prices to investments which during the last two to three years widely outperformed the market." S&Ls were the second-best-performing industry in 1997 after brokerage companies, said Mr. O'Donnell.

While there is still "fundamental value" in the industry, the question they confront is whether they can manage their way through the flat yield curve. "High quality, innovative companies can manage their way through with minimal damage," he added. For 1998, he predicts that S&Ls will outperform the market with 10% to 15% growth.

The last three years were good for S&Ls and GSEs. Fannie Mae's and Freddie Mac's stocks are doing well because of an improvement in credit quality, "baking in strong EPS growth for the next two to three years," he said. The second half of 1997 saw healthy mortgage portfolio growth. The year was challenging for analysts to come up with accurate estimates for GSEs because Fannie Mae, Freddie Mac and Sallie Mae performed differently during the first half of 1997 than during the second half of the year.

For Fannie and Freddie, 75% of their business is investments in mortgage-backed securities and 25% is focused on generating fees for the creation of mortgage-backed securities, he said.

In 1997, when some analysts were proposing bearish outlooks on agency stocks and began to feel that the agencies might be too big and were displaying "structural declines in profits and slow mortgage portfolio growth," Mr. O'Donnell had a different theory. "It was clear that it was cyclical and the concern that the portfolio was slowing was not true. I stuck to the view that better days lay ahead," he said.

This outlook was confirmed for Mr. O'Donnell when the decline in long interest rates and the increase in volume led to portfolio growth in 1997.

In 1998, Fannie and Freddie have had strong run-ups in price, warranted by the favorable rate environment, said Mr. O'Donnell. "They're safe havens," he said. But at the time of this interview, Mr. O'Donnell said "in recent days as the market has hit new heights, investors have moved away from the safe havens." With Asian concerns subsiding, there is some profit taking and investors are seeking out higher-risk, higher-return stocks, he added.

"Fannie and Freddie tend to move in spurts," he said when asked about their stock price. "I think its because there has always been a lot of skepticism about Fannie and Freddie."

Rate risk, credit risk and political risks are the three main factors Mr. O'Donnell tracks when looking at agencies. "All three seem to be at low points," he said. Credit and rates are positive factors right now with the improvement in credit quality and the favorable rate environment, he added. Political risk is the main threat to the agencies but it is now at a low point, he said. "The government in the past has tried to get into their deep pockets," but with a balanced budget the risk is low.

Last year was also pivotal for Sallie Mae. During the first half of the year, there was a battle for control of the company. Management was challenged by a minority group and the issue was finally settled on July 31, Mr. O'Donnell said.

Mr. O'Donnell supported the minority group that took control in July, he said. The minority group of directors, led by Albert L. Lord, now runs the company. "I supported the minority directors and was close to them," he said. "Then when they won, my projections for the company actually came into being." While the management of Sallie Mae is talented, it faces an important overhanging issue of whether the company will receive government subsidy, he said.

Legislation from 1993 mandates a July 1998 reduction in the rate that lenders and holders of student loans receive. Lenders would receive a rate based on the 10-year Treasury bond plus 1%. "Essentially it will be far less profitable and in many cases unprofitable for lenders to make student loans unless it is reversed," said Mr. O'Donnell.

How does he approach the daunting task of analyzing thrifts and GSEs like Fannie Mae-a company that boasts nearly a $1 trillion balance sheet? He looks at the quality of earnings, but noted that there are few surprises with Fannie and Freddie, who both have consistent earnings. With the agencies, it is the case of "the dog that doesn't bark," said Mr. O'Donnell. Nevertheless, Mr. O'Donnell said he remains in "constant contact" with the agencies by speaking with their executives by telephone several times a week. His sources include portfolio managers, economists, and CFOs. In addition, he tries to visit the agencies at least once a quarter, he said.

Mr. O'Donnell also speaks with institutional investors to see what is on their minds and then tries to track down answers to questions they may have. He estimates that he travels almost 40% of his time, meeting with institutional investors.

After the research, he spends a lot of time modeling earnings on spreadsheets, he said. And then he publishes.

"I stayed bullish in the first half of the year when things were looking dark for the companies," said Mr. O'Donnell. During the first half, portfolio growth was "low and erratic," he said, but during the second half, when portfolio growth started to pick up, Mr. O'Donnell stayed bullish.

Companies he covers keep a close watch on analyst reports, which can send investors fleeing or jumping to get on board.

"He has a good handle not just on the MBS portfolio dynamics of our business but he has a good handle on our customer base within the industry," said Jayne J. Shontell, senior vice president for investor relations at Fannie Mae. Ms. Shontell said Fannie is very predictable, having experienced double digit growth in earnings per share for the last 11 years. Nevertheless, she said they have weekly conversations and that Mr. O'Donnell is "pretty aggressive" in anticipating Fannie. He is one of the first analysts to call Fannie, she added.

"When he takes me out on the road, he works me harder than any analyst I know," said Charles John ('Bud') Koch, chairman and chief executive of Charter One Financial. "And that's good for his clients, because he maximizes his usage of us."

Mr. Koch says he is on the road with Mr. O'Donnell for meetings with investors at least once or twice a year. "I think he listens to management," Mr. Koch added.

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