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Poole: Fannie, Freddie `Insolvent' After Losses

Thursday, July 10, 2008 | 06:15 AM

in Credit | Derivatives | Real Estate | Taxes and Policy

This mornings must read article is Bloomberg's summary of former St. Louis Federal Reserve President William Poole comments on the GSEs:

"Borrowing at Fannie Mae, the U.S. government-sponsored mortgage company, has never been so expensive and it may not get better any time soon.

Fannie Mae paid a record yield relative to Treasuries on the sale of $3 billion in two-year notes yesterday amid concern the biggest provider of financing for U.S. home loans won't have enough capital to weather the worst housing slump since the Great Depression. The company's credit-default swaps show traders are treating the AAA rated debt as if it were five steps lower. Fannie Mae shares tumbled 13 percent yesterday in New York to the lowest level in almost 14 years.

Chances are increasing that the U.S. may need to bail out Fannie Mae and the smaller Freddie Mac, former St. Louis Federal Reserve President William Poole said in an interview. Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules, he said. The fair value of Fannie Mae's assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, Poole said."

Sheesh, yet another bailout coming. How about we go back and recover some of that ill-gottenthe bonus money the corporate execs paid themselves over the past decade?

Fannie Mae (FNM) and Freddie Mac (FRE) still have a Aaa rating, according to the the agenices in charge of such things, criminal incompetence notwithstanding (that is an another discussion entirely). But derivatives traders aren't buying that nonsense, and are trading the GSEs as if they were rated five levels lower.

Phonie and Fraudy (where ever did I steal that from?) also gets front page treatment in today's WSJ.

I also had a good quote in CNN Money onTuesday: "The only thing surprising is that anyone was surprised by the problems."

Previously:
Fannie Mae Looks Like Hell (November 16 2007) http://bigpicture.typepad.com/comments/2007/11/fannie-mae-look.html

Fannie Mae: Ouch! (November 20, 2007) http://bigpicture.typepad.com/comments/2007/11/fannie-mae.html

Sources:
Fannie, Freddie `Insolvent' After Losses, Poole Says
Dawn Kopecki
Bloomberg, July 10 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=as4DEc5UFopA

U.S. Mulls Future of Fannie, Freddie
Administration Ramps Up Contingency Planning as Mortgage Giants Struggle
JAMES R. HAGERTY, DEBORAH SOLOMON and DAMIAN PALETTA
WSJ, July 10, 2008; Page A1
http://online.wsj.com/article/SB121564782376340951.html

Fannie, Freddie Downgraded by Derivatives Traders
Shannon D. Harrington and Dawn Kopecki
Bloomberg, July 9 2008
http://www.bloomberg.com/apps/news?pid=20601009&sid=aY0CwXhA.F3w&

Feeling Fannie's and Freddie's pain
Chris Isidore
CNNMoney July 8, 2008: 4:49 PM Thttp://money.cnn.com/2008/07/08/news/economy/fannie_freddie/index.htm

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Comments

Fortune: The Fannie and Freddie doomsday scenario; It's time to wonder what would happen if Fannie Mae and Freddie Mac failed. "If Fannie or Freddie failed, it would be far worse than the fall of Bear Stearns," says Sean Egan, head of credit ratings firm Egan Jones. "It could throw the economy into depression or something close to it."…

Egan estimates that Freddie alone will need to raise $7 billion over the next two quarters due to writedowns and losses. But the company's market capitalization - the number of outstanding shares times the share price stands at $8.7 billion… Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.

More likely, the Treasury Department or the Federal Reserve would come in and provide a liquidity backstop, in the form of a loan or guarantee to bondholders that they will be paid…That would allow give officials the ability to argue that they weren't bailing out the companies, but rather making an investment that would pay off in the long run.

Posted by: Bill King | Jul 10, 2008 6:42:39 AM

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