Yesterday the FHFA reported on Fannie Mae and Freddie Mac, and the report is not pretty:
NEW YORK (CNNMoney.com) — Fannie Mae and Freddie Mac, charged with helping lead the nation out of its housing crisis, are facing "critical" financial problems, federal regulators said Monday.
The companies suffer from severe financial, operational and compliance weaknesses, the Federal Housing Finance Agency said a report to Congress detailing its annual examinations of the firms. Taken over by the government in September, Fannie and Freddie are not able to operate without federal assistance.
This is a different story than the one we heard from Ben Bernanke, chairman of the Federal Reserve last July: [Don't you love the MSM's amnesia?]
"The GSEs are adequately capitalized. They are in no danger of failing," Bernanke told lawmakers of the House of Representatives in a second day of testimony to Congress on the central bank’s semiannual economic report.
"However, the weakness in market confidence, this is having real effects as their stock prices fall, (and) it’s difficult for them to raise capital."
In September after the government put the GSEs into conservatorship, Businessweek’s Aaron Pressman said that Fannie and Freddie "were victims of the credit crisis, not culprits":
[V]irtually none of the $1.5 trillion of cratering subprime mortgages were backed by Fannie or Freddie. That’s right — most subprime mortgages did not meet Fannie or Freddie’s strict lending standards. All those no money down, no interest for a year, low teaser rate loans? All the loans made without checking a borrower’s income or employment history? All made in the private sector, without any support from Fannie and Freddie.
Yesterday’s report however, does not portray the GSEs as innocent victims:
In prior years, management expanded product eligibility to include nontraditional mortgage products, particularly Alt-A mortgages, and private-label securities containing subprime and Alt-A mortgages. These products have been the source of a disproportionate share of delinquencies, foreclosures, and credit-related expenses. Moreover, the Enterprise did not require originators to fully assess borrower capacity. Certain decisions, including the underestimation of risk associated with these products, coupled with changes in the economy, led to escalating increases in delinquencies, foreclosures, credit-related expenses and losses, and $26 billion of losses from impairments and mark-to-market accounting in the private-label securities portfolio.
So what does this mean for the future of the GSEs?
Federal Housing Finance Agency Director James Lockhart, Treasury Secretary Timothy Geithner and other members of the oversight board also stressed that the U.S. conservatorship of the companies, in place since the government rushed to save the them from massive capital shortfalls in September, "cannot be a permanent state."
But emerging from conservatorship hinges on a housing recovery and probably, Congressional action.
If emerging from conservatorship is dependent on housing recovering and Congress acting, conservatorship might not be permanent, but pretty darn close to it.
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twist -
Thanks for putting that up. I can barely manage to think about this part of the disaster. Readers who’ve been with us from the beginning will recall that Jan-Martin had this nailed in September 2006. Bill Maloni, at his blog, has been confirming for months that Dan Mudd went over the edge with subprime.
Obviously there’s no hope that Fannie & Freddie will leave conservatorship for the foreseeable future, especially as government housing bailouts inevitably show up as losses on their books. On the other hand, they can’t become full-fledged government agencies, because that would force OMB to double the nominal figure for America’s sovereign debt, and everyone’s macro-economic models would immediately turn into custard.
So F&F are, and will remain for many years, sort of zombie GSEs. That’s what the red flat-line in the H.4.1 chart is all about, by the way. It represents the undead state of GSE Agency Debt.
The issue is balance sheet consolidation. In the largest sense, consolidating agencies with treasuries would reverse the off-balance-sheet deal, privatizing Fannie in ’68, by which Lyndon Johnson obscured much of the cost of the Vietnam war. Just today, FASB has finalized its rule change eliminating QSPEs as legitimate financial instruments. It was the prospect of this happening that finally destroyed the market’s faith in F&F last July.
“FASB Approves New, Tighter Off-Balance-Sheet Rules”, by Michael Rapoport, Wall Street Journal, May 19, 2009.
By the way, if you’ve got the back of an envelope and a pencil handy you’ll see why the powers-that-be were throwing everything they had at supporting those bogus bank “stress tests” over the last few days. Consolidation will clearly require a rise in new capital for BoA of existential proportions, and certainly they’re not the only ones.
“Board to Ban Accounting Practice That Helped Lending Proliferate: Rule Change Aimed at Preventing Another Financial Crisis”, by Binyamin Appelbaum, Washington Post, May 18, 2009.
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It’s a bit gratifying to see that this guy has some concern, but the article is pretty sketchy. For an interminable discussion of how dangerous that accounting rule was Doomers can, as usual, review my original July 6, 2006 comment. The rant that got me drafted into writing here in the first place.
“Its About Time: Balance Sheet Fraud or Balance Sheet Device?”, by Karl Denninger, iStockAnalyst, May 19, 2009.
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LATER: BoA’s successful stock raise looks to be about 1/3rd the size that Citi’s going to need to plug their Q-hole …
“Bank of America Raises $13.5 Billion In New Share Sale”, by Joe Bel Bruno and Lynn Cowan, Dow Jones / CNN Money, May 19, 2009.