Posts filed under “Taxes and Policy”

Fannie and Freddie: Worth Negative $50 Billion Each

Fnm_fre_20080815233336Fascinating piece in Barron’s this week on our favorite junk paper: Phoney and Fraudy.

A few interesting factoids about the GSEs, many of which you may have been unaware of:

• In the "1980s Fannie was effectively insolvent";

• These two GSEs currently have $5.2 trillion debt and guarantee obligations;

• Both balance sheets contain a tax credit entry called "deferred tax assets." These increase Fannie’s net worth by $36 billion and Freddie’s by $28 billion. They don’t represent real cash, but are merely paper credits built up over the years. The worse shape the companies are in, the greater these credits are. To insolvent companies like FRE & FNM, they are meaningless accounting entries.

• The CEO claim that losses were due to being "forced to buy
higher-risk mortgages to meet government affordable-housing targets"

is provably untrue; The vast bulk of GSE losses came from mortgages where there was no attempt to
verify borrowers’ income or net worth. And, most of these mortgages were for principal balances much higher than mortgages made to low-income

• It was the lack of lending standards — LTV, Income verification, FICO scores, debt servicing abiloity, down payments, etc. — that was the primary cause of losses, and not a "soft" government goal;

• A substantial portion of Fannie’s and Freddie’s credit losses ($337 billion and $237 billion respectively) comes
from not sub-prime, but Alt-A. These mortgages were the real-estate speculation in the ex-urbs of Las Vegas and Los Angeles;

• Freddie CEO Syron has recently said they did not want to dilute current shareholders further;

Here’s your Ubiq-cerpt:™

"IT MAY BE CURTAINS SOON FOR THE MANAGEMENTS and shareholders of beleaguered housing giants Fannie Mae and Freddie Mac . It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer’s dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies’ common stock, with preferred shareholders and even holders of the two entities’ $19 billion of subordinated debt also suffering losses. Barron’s first raised the possibility of a government takeover of Fannie and Freddie in a March 10 cover story, "Is Fannie Mae Toast?"

Heaven knows, the two government-sponsored enterprises, or GSEs, both need resuscitation. Soaring mortgage delinquencies and foreclosures have led the companies to gush red ink for the past four quarters, and their managements concede the outlook is even grimmer well into next year. Shares of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) have lost around 90% of their value in the past year, with Fannie now trading at $7.91, and Freddie at $5.88.

Similarly, the balance sheets of both companies have been destroyed. On a fair-value basis, in which the value of assets and liabilities is marked to immediate-liquidation value, Freddie would have had a negative net worth of $5.6 billion as of June 30, while Fannie’s equity eroded to $12.5 billion from a fair value of $36 billion at the end of last year. That $12.5 billion isn’t much of a cushion for a $2.8 trillion book of owned or guaranteed mortgage assets.

What’s more, the fair-value figures reported by the companies may overstate the value of their assets significantly. By some calculations each company is around $50 billion in the hole. But more on that later…"

As previously noted, we covered our short in Fannie some time ago — but that was not an endorsement of either company. They simply had fallen far enough that we wanted to avoid the inevitable short squeeze.

The entire article is well worth the read . . .




The Endgame Nears For Fannie and Freddie   
Barron’s AUGUST 18, 2008

Free text version at Marketwatch

Category: Credit, Derivatives, Real Estate, Taxes and Policy

Down 97%: Tax Trouble Coming For States & Cities

Category: Credit, Derivatives, Earnings, Economy, Taxes and Policy

Bear Hunt

Category: Credit, Legal, Markets, Politics, Short Selling, Taxes and Policy

No Shorting. That’s the Rule.

Category: Short Selling, Taxes and Policy, Trading

No Recession? No Inflation? Don’t Make Me Laugh!

Category: Consumer Spending, Data Analysis, Earnings, Economy, Taxes and Policy

WSJ: States Slammed by Tax Shortfalls

Category: Consumer Spending, Economy, Real Estate, Taxes and Policy

End of Illusions for GSEs

Category: Bailouts, Credit, Real Estate, Taxes and Policy

Economic Witch Hunt

Interesting discussion:

"The political establishment is embracing a time-honored response to the nation’s economic turmoil. It’s going on a witch hunt.Politicians of all stripes worry that improper trading by short sellers has contributed to turmoil in the stock markets. And "excessive" oil traders have replaced oil-company executives — themselves twice keelhauled by congressional committees this year — as the bogeymen behind the run-up in gas prices.  For Washington veterans, the sharpened attacks are the incarnation of a standard political trope, one found especially in election years"

Economic Woes Get a Fix: Witch Hunt
WSJ, July 19, 2008; Page A3

Category: Markets, Taxes and Policy, Video

Bailout Nation: Treasury, SEC on Bailouts

I did three segments Tuesday on Yahoo Tech Ticker at the Nasdaq: 

Here is the last, on Bailouts, Fannie & Freddie:

Click for video

Bailout Nation: Paulson, Cox, Shorts Weigh in On Fannie, Freddie
Aaron Task
Yahoo Tech Ticker, Jul 15, 2008 07:00am EDT,FRE,GM,TM,%5EDJI,%5ESPX,XLF

Category: Bailout Nation, Books, Credit, Federal Reserve, Taxes and Policy, Video

Ethanol DeathWatch Map

Category: Commodities, Energy, Taxes and Policy