Wouldn’t being worth a negative number be being worth less than worthless?… Barry Ritholtz comments on an article in Barron’s, "The Endgame Nears For Fannie and Freddie," by Jonathan R. Laing. (A subscription is required for the full article at Barron’s, but a free text version is available at Marketwatch.)
Fannie and Freddie: Worth Negative $50 Billion Each
Excerpts: "Fascinating 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 borrowers;
• 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…
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…."
The entire article is well worth the read . . ."
