Fannie Mae faces $25bn derivatives losses

[54anickel]

http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1078381640902

Fannie Mae paid a net $25.1bn on derivatives transactions in under four years - nearly all of which may represent losses that cannot be recouped, in turn depressing future earnings.

The potential scale of the liabilities, which have yet to be recognised in the company's earnings or in the minimum capital adequacy required by its regulator, raise fresh doubts about the financial health of the mortgage finance giant.

Regulation of Fannie Mae and its sibling Freddie Mac is rapidly moving up the agenda in Washington, amid concerns that the two goverment-sponsored entities have grown so big that they pose a systemic risk to the US financial system. The two entities own or guarantee mortgages totalling $4,000bn.

On Tuesday John Snow, US Treasury secretary, renewed the criticism, saying: "We don't believe in a too-big-to-fail doctrine, but the reality is that the market treats the paper as if the government is backing it."

more...

[Chicago Democrat]

1. They can still afford prime time commercials!

Telling us how important they are. So we wont mind bailing them out after the US real estate bubble pops.

[KoKo]

9. They are bomarding airwaves with "Making Housing Affordable to Minorities

Ads." You know the kind with heart-tugging music and ethnic actors with cute little children in them. Trying for "sympathy," and advertising ahead of the bad news. Most folks don't know why derivatives are bad in the first place but they will think this wonderful company who's so kind is getting attacked for some stupid problem no one every heard about.

Will it work?

[SOS]

11. A simple rule of thumb

is that the more schmaltzy and folksy the ads, the more evil the advertiser. You can apply this to pharmaceuticals, banks, food conglomerates, oil companies - works every time.

[RUMMYisFROSTED]

12. ...politicians...

[AP]

16. Yes, if the product were that good, they wouldn't need to pay so much $$

to convince people they need to buy it.

Another way to look at this, however, is that it's a transfer of taxpayer money to broadcasters. Remember when the US Army bought superbowl airtime in 2002? Fox was having a hard time selling all their airtime, so the Bush administration stepped up to buy an ad for the Army on the most expansive program in the world.

That was just a gift to Rupert Murdoch for helping so much, and it was nothing more.

[AP]

2. That's a lot of money to pump into real estate market. I wonder if this

is some of the air which is inflating the bubble.

It's tax payer money, right?

[aquart]

3. What law allows Fannie to do derivatives?

Because most people know they make junk bonds look safe.

[indepat]

6. Can't derivatives serve either as a hedge or a (very) speculative

investment? A $25 billion loss would tend to suggest speculation rather than a hedge although elements of both could be present.

[kysrsoze]

15. Precisely, derivatives are supposed to be somewhat of an insurance policy

Something's up here. Junk bonds to get higher returns? Sick, sick, sick.

[CaptainClark23]

4. tick, tick, tick, tick, tick......n/t

[Minstrel Boy]

5. Remember who Bush appointed to the board?

An old, old friend.


Victor H. Ashe, age 59, is a Resident Fellow at the Institute of Politics at the Kennedy School of Government of Harvard University. From 1988-2003, he served as Mayor of Knoxville, Tennessee. He served as a member of the Tennessee House of Representatives from 1968 to 1974 and Tennessee State Senate from 1975 to 1984. He is an attorney.

[wryter2000]

7. Please help a finance ignoramus

What is this going to mean? Is it going to affect mortgages? Is it going to bring down the economy in general?

[54anickel]

13. Derivatives may well be the scandal of 2004. There have been several

articles speculating on that idea at the new year. One of the reasons Greenspan was warning on the GSEs, they are NOT guaranteed by the gov't, people just tend to think they are.

Greenspan also does NOT want derivatives regulated by the SEC, they are his other outlet for liquidity, money creation and inflation.

[54anickel]

20. We had a few articles posted in the Stock market watch thread back

on March 1st. Here's a link if you're interested.

http://www.democraticunderground.com/discuss/duboard.php?az=show_topic&forum=102&topic_id=391952#392016

[KoKo]

8. Believe it or not CNBC's Ron Insana warned of this "over" a year ago....

So, now it comes out? They kept the lid on it this long? Why?

[AP]

10. Because economic growth under the Bush administrations is not created

by passing wealth to the middle class. It's created by sending the middle class into more and more debt. What has been keeping the economy's head just above water for the last three years is people re-mortgaging their homes -- ie, people borrowing against the INFLATED value of their home, praying that real estate will appreciate so that they can pay off the loans. Economic growth is NOT coming from more and better employment, R&D paying off, or higher wages.

So, the entire Fed Gov't exists to prop up the real estate industry -- to keep the bubble from bursting before November.

The bubble will burst. If a Dem gets elected, it will probably burst in a very big way, and the Republicans will turn the Dem president into Herbert Hoover so, like with Clinton, the Republicans can both be the CAUSE of the problem and be perceived by the people as the solution to the problem.

If Bush gets elected, the bubble will burst in a more controlled manner, but it won't matter. Frist can run against Bush in addition to running against the Democrats in 2008.

[ozone_man]

18. Yes, I think Kerry may be the 21st century Hoover. :>)

The 2004 presidency is a dubious prize that I was hoping for Dean to win, but concerned at the same time. Whoever wins is a bag holder IMO.

The Hoover prize should really go to Bush, but he deficit spent like crazy to float the economy. Actually, I think Clinton is more responsible than Bush for creating this mess. The stock market bubble occurred under Clinton, from which the real estate bubble was spawned, and now the debt bubble is coming into play (as you point out), from which there will be no escape. Fannie Mae, Freddie Mac, JPM, ..., a black hole derivative implosion, when it happens. Tic, tic, tic, ...

[Ms. Clio]

19. Bush wouldn't make a pimple on Hoover's ass

Hoover was a brilliant man and a humanitarian who single-handedly organized famine relief for Belgium after WWI that kept hundreds of thousands of people alive. He made some mistakes but at heart he was a real compassionate conservative, back when many progressive Republicans were more liberal than many moderate Dems are today.

[AP]

21. Hoover wouldn't raise taxes on businesses or the rich. He tried to balance

the budget on the backs of people who worked for a living. He was a trickle-downer.

[Ms. Clio]

23. My point is that there is really no comparison between Bush and Hoover

Bush is an uneducated idiot who never did a socially useful thing in his entire wasted life.

[Ms. Clio]

24. Raising taxes

Yes, in 1931, he tried to balance the federal budget by raising taxes. "It is in the context of the state of economic knowledge and the particular circumstances in the United States and in the world in late 1931 that Hooever's request for a tax increase must be understood. It must be understood in the light of the unwillingness, or inability, of the Federal Reserve to support bonds by creating more new money in the fall of 1931.... The important point is that the decision to raise taxes was made in a condition of rising interest rates, falling bond prices, increasing bank suspensions, and a large gold outflow." (David M. Kennedy, The American People in the Great Depression, p. 81)

Not only that, but Kennedy actually credits Hoover with some of the pioneering work of the New Deal--he proposed a series of measures in his "Second Program" that basically repudiated his former voluntaristic approach.

[AP]

25. Problem wasn't THAT he raised taxes, it was WHOSE taxes he raised...

...and that he wasn't so interested in building up a middle class of Americans who derived their wealth from selling their labor.

[Ms. Clio]

26. I understand what you're saying

He also opposed direct relief payments. But he himself didn't make the problems that led to the Great Depression, and I don't think future historians will say that about the Bush gang and their fiscal policies when they examine the economic problems of this period.

[AP]

27. what caused the great depression, IMO, is that the playing field

was tipped way in favor of business, and way against consumers and labor.

Hoover did lots of things to encourage that tilt, and then taxing the hell out of the people hurting the most while unburdening the people benefiting the most was the last straw.

Hoover was doing what his party existed to do ever since Mark Hannah's McKinley was president.

We're doing the same thing today.

Bush is trying to undo the new deal and get back to where the Republican party was when Hoover was president. It didn't work before. It's amazing that people are falling for it again.

[54anickel]

22. Depending on what/who you read it could mostly fall to Greenspan, let's

face it, he's been there a looong time now. Some point to Raygun while others take it back to Nixon closing the gold window.

Right now, I'm not even the least bit interested in laying the blame, I just want someone to come up with the fix. It's going to be painful, but we cannot continue to chew up our future like this.

Here's an interesting article I posted a while ago in the SMW thread on the Election Cycle and the Fed.

http://www.atimes.com/atimes/Front_Page/FB24Aa02.html

[54anickel]

14. Dang, still can't access the sideline article: Doubts over derivatives

Keep getting Server overload errors.

[54anickel]

17. Finally, can get to the link article -

http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1078381640936&p=1012571727088

The debate over derivatives

The debate over Fannie Mae's derivative positions hinges on an area of its accounting known as accumulated other comprehensive income (AOCI).

Under hedge-accounting rules, the AOCI is the place on the balance sheet that houses changes in the current value of Fannie Mae's derivatives. AOCI gains or losses do not show up in the company's earnings. As the hedge positions reach maturity, the results gradually move to the net income statement.

In its fourth-quarter 2003 report, Fannie Mae's AOCI position was a negative $12.03bn. If these accumulated losses were included in the company's current earnings and regulatory capital, Fannie Mae's recent earnings would have been smaller and far more volatile, and the company would have fallen below its minimum capital requirements.

Fannie Mae says that AOCI is irrelevant to current earnings or capital levels, saying it provides a misleading view of the company's fiscal health. Jonathan Boyles, Fannie Mae's vice-president for financial standards and taxes, argues that "every financial regulator always ignores the AOCI amount".

more...

[UpInArms]

28. related article: How $24bn losses estimate was reached

http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1078381650569

Fannie Mae, unlike sibling government-sponsored entity Freddie Mac, does not disclose the amount of realized derivatives losses in its accumulated other comprehensive income, or AOCI.

The company says that the number is not material to the company's health, but critics of the company's accounting say that excluding the derivatives losses may provide a false picture of the company’s earnings and capital adequacy.

<snip>

At the end of the third quarter, Fannie Mae's AOCI was negative $24.757bn on a pretax basis (on an after-tax basis, the total was $16.092bn). If AOCI is the sum of realised and unrealised derivatives positions, then subtracting the $1.1bn would mean Fannie Mae's total realised derivatives losses would be $23.653bn (or, on an after-tax basis, $15.375bn).