Fannie Mae: A Weak Foundation for the Housing Market?
An article from The Street.com compares the chicanery at Fannie Mae to the massive fraud at Enron and Worldcom.
Fannie Mae, the government-sponsored mortgage company whose financial statements were strongly criticized in a report by its regulator last week, looks set to join Enron and WorldCom in the hall of accounting infamy.
Lining up Fannie Mae alongside two of America’s worst corporate fraud offenders may seem a stretch to some. But a close reading of the report suggests that Fannie could have kept billions of dollars of losses out of earnings — as well as out of an important capital number that is used by its regulator to determine the company’s financial strength.
WorldCom is thought to have hidden around $11 billion of expenses to boost its earnings. But it’s possible that Fannie, which provides huge support to the U.S. housing market through billions of dollars of mortgage purchases each year, overstated the capital number by more than that. For example, at the end of last year, the capital number in question may have excluded as much as $11.6 billion in pretax net losses.
Implications for the housing industry
If Fannie did fail to include those losses in earnings and capital, it would have drastic ramifications for the company, investors and the structure of the U.S. housing industry. Fannie may have to raise far more new capital than Wall Street currently is estimating, leading to a further decline in Fannie’s stock. The Office of Federal Housing Enterprise Oversight (OFHEO) and Fannie announced Monday that Fannie must immediately go about raising its capital to 30% above its required level, but the final amount may be far higher.
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In the third quarter of 2002, when plunging interest rates drove up derivatives losses at Fannie, the company easily could have been nearly 40% undercapitalized, if it was incorrectly excluding OCI losses from core capital.
There is absolutely no way that any banking regulator would allow a bank to continue normal business if it were that much undercapitalized. If Citigroup’s regulator were to come out tomorrow and say it was 40% undercapitalized, sell-side analysts would be quick to slap a sell recommendation on the bank.
But when Fannie’s regulator comes out and produces strong evidence that the company may have been similarly undercapitalized, Wall Street strangely rushes to Fannie’s defense.
That could be because the government would capitalize Fannie Mae with government (taxpayer) guaranteed loans from the big New York Banks.
The government has a long history of bailing out third-world governments, and failing U.S. corporations when they become undercapitalized by guaranteeing loans made by private banks. Banks love such loans because they can never go bad. The government just increases taxes to pay them off or prints more money. The banks owners never see a loss. (Read G. Edward Griffin’s The Creature from Jekyll Island for more on this topic.)
What this article is basically saying is that Fannie Mae never had enough money to buy up all the loans that they’ve been purchasing in recent years. By purchasing those loans, Fannie Mae props up the housing market.
Some of you might remember that when the economy was really weak earlier in George Bush’s term, it was being kept afloat by a strong housing market. But now it appears that the housing market was being propped up by fraud at Fannie Mae.
So where does that leave the housing market?
The war in Iraq has also been used to prop up the corporate world by shoveling billions of dollars into the pockets of defense contractors.
If Fannie Mae wasn’t cooking their books and there was no war in Iraq, I wonder if we would have any economy at all.
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