"Fannie: Going Concern, but I am Getting Concerned"

There are some cool charts, and a useful discussion of the continuing travails of Fannie Mae, at EconomPic Data. Let me give you the high points to induce you to read the rest of the post:

Fannie Mae lost a reported $29 Billion in Q3. Over the past 7 quarters, they have now lost ALL earnings associated with the housing boom.

Notice how this is becoming the pervasive story of this entire era: all of the financial firm earnings eaten up by subsequent losses. And those profits were AFTER paying generally egregious bonuses based on what amounted to phantom profits (i.e. had adequate reserves been taken for the risks, earnings would have been de minimus).

Back to the post:

But after the $100 Billion Treasury injection and a variety of new liquidity facilities, the future must look bright… right? Well, maybe once they get past problems associated with their soon to be negative net worth, lack of liquidity, and bad loans. Les get some more details.

Net Worth:

Under the Regulatory Reform Act, the Federal Housing Finance Agency MUST place Fannie Mae into receivership if their assets are less than obligations for a period of 60 days (I’ll believe that when I see it).

Net worth is down from $44.1 Billion as of December 2007, to a reported $9.4 Billion at the end of September 2008. Of that $9.4 Billion, almost half is deferred taxes (i.e. provides no benefit without futures earnings)….


There is absolutely no way any Agency MBS will be allowed to fail as the outcome would be disastrous. At the same time, putting Fannie and Freddie on the Treasury Balance Sheet is not an option as there is incentive to keep up the appearance of Fannie as a “going concern” regardless of how much money they lose (this would require too much transparency). In other words, I expect the original $100 Billion to just be a drop in the bucket.

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  1. wintermute

    Yves, the important observation that all FNM profits made in the boom years are now reversed with subsequent losses – has another parallel.

    The US Government’s spending hundreds of billions left, right and center – is a expenditure of “boom” era money. If deflation, negative GDP, house price falls, crushed tax receipts continue for the next few years then those billions will be impossibly large to repay.

    The “disastrous” outcome of letting FNM fail now – is a smaller disaster than what is being stored up in a few years time. Letting FNM go down might be the line in the sand which has to be drawn.

  2. Anonymous

    “Under the Regulatory Reform Act, the Federal Housing Finance Agency MUST place Fannie Mae into receivership if their assets are less than obligations for a period of 60 days”

    Assets? Don’t they have a few trillion in assets? Surely they don’t burn through that amount in 60 days?

    Did you mean net worth, shareholder equity or some such?

  3. Anonymous

    Would like your thoughts here Yves if you have time. Do they think every one will eat this story. The rest is even worse if you ask me.

    First things first
    Of these, the first is more important. The current crisis – or more accurately the dramatically
    altered dynamics that took hold after the inflexion point in mid September
    – has been addressed with speed and pragmatism.
    But the crisis is not over. An extended credit lockup (with its potential for extraordinary
    damage) has probably been avoided. TED and related spreads seem to have
    moderated. Commercial paper is being rolled over, though not through the conventional
    channels (which are still largely closed). The payments system is functioning;
    public funds are flowing into the financial system helping to recapitalise banks.
    But there is a good deal more to do before we are out of the woods.
    • Mortgages need to be removed from damaged balance sheets, terms reset and
    foreclosures limited.
    • Collateralised and structured assets, not trading and with uncertain values,
    similarly need to be evaluated, purchased, and dismantled.
    While the original conception of TARP did not act quickly enough to recapitalise the
    system, it remains politically and economically important.
    • Homeowners need help.
    Help for homeowners was part of the bargain; implemented properly it will help prevent
    a dramatic downward overshoot in housing prices. And it will begin the process
    of removing the transparency fog and therefore uncertainty about value that surrounds
    those portions of balance sheets with complex securitised and structured
    assets, one of the reasons why private and SWF capital, having been burned once, is still mostly on the side lines.

  4. tompain

    The bulk of this quarter’s losses were from the writedown of a deferred tax asset which probably would not have to be written down if not for the fact that the government is now running the company with no intention of making a profit in the future.

  5. doc holiday

    This chart and many others would be more dramatic and honest if they were triangles, i.e, it would be nice to see the pyramid scheme nature of the last 10 years or more and show the percentage of phantom gross revenues, dilution from insider bonuses, dilution from excess phantom growth and of course the reality of the common share values.

    What you would see, is the con artists at the top of the pyramid with all the money and the rubes at the bottom of the spreading base. I think we could also add in a little color, like insider pirates flying green and black flags, on the top, with the crying rube lemmings below sinking deeper in the red.

  6. Anonymous

    “There is absolutely no way any Agency MBS will be allowed to fail as the outcome would be disastrous.” Unfortunately, you say this assuming the US govt. has a choice. The currency and/or treasury markets might override the govt. and say “yes, you will let them fail”.

  7. Lord

    I like issuing treasuries to China and funding them directly as this makes them largely solvent with any spread accruing to the treasury. Another way to make China pay for it.

  8. Wriiight

    A couple of notes to keep things accurate. FNM has not received a $100B bailout. The bailout gave the treasury $100B in warrants against FNM and FRE which they will pay out on only as needed. Even after this last quarter’s $29B loss, FNM is not quite at the point where it needs to make its first withdrawal against the $100B, but it seems to expect (unless things should improve) to have to do so before the end of the year.

    As far as setting cash aside, much the loss this quarter (except for the large loss from recognizing that they will not get to use their tax deferments) comes from setting more cash aside as their loss expectations increase. Loan loss reserves do not count as capital, as far as accounting is concerned it is as good as spent. The two GSEs have quite a bit of reserves socked away, and the accounting gives their estimate of where they will stand after all their assets and liabilities run their course (with the exception of where accounting requires that they give the value as if they had to sell today, ie Mark-to-Market)

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