FHLMC: Freddie Mac's $32 Billion "Temporary" Loss
We Nattered about FHLMC posting a $10 billion loss and how through accounting chicanery called it a $150 million loss.
The Nattering one is not the only person to notice this accounting travesty.
Jonathan Weil at Bloomberg picks up on the trail with Freddie Mac Suffers Bout Of Temporary Insanity.
How long does the word "temporary" mean? The accountant who wants to stay employed knows the right answer: "How long do you want it to mean?"
That new twist on an old joke goes a long way toward explaining Freddie Mac's net loss last quarter of $151 million...
That's mainly because the government-chartered mortgage financier has deemed $32.4 billion of paper losses from mortgage- related securities as "temporary."
Freddie's big sister, Fannie Mae, is in a similar, though less extreme, position with $9.3 billion of such losses.
The designation means the losses don't have to be counted in Freddie's calculations of net income or capital.
To put this in perspective, $32.4 billion is more than double Freddie's $16 billion of shareholder equity under generally accepted accounting principles.
It's almost twice as much as the company's $17 billion stock-market value.
And it's infinitely greater than the fair value of Freddie's net assets, which at March 31 was negative $5.2 billion.
Freddie's sub prime and Alt-A portfolios were responsible for $28.1 billion, or 86%, of the company's total unrealized losses on available-for-sale securities.
With a combined fair value of $114.8 billion, these holdings finished the first quarter 20% below their cost.
Freddie can get away with this because it has hung the label "available for sale" on these investments.
(Since they are "available for sale" and no one will buy them)... Freddie gets to wait (indefinitely) until it decides the losses no longer are temporary.
The company's disclosures don't say how long Freddie is estimating it will take for these securities' values to recover.
This notion that the sub prime meltdown will reverse into a total melt up for Freddie might be comical if taxpayers weren't on the hook.
While the accounting-rule makers can't fix Freddie, they can fix the rules, by treating all securities the same and counting all gains and losses in net income.
Until then, we're left with a system in which the only reason Freddie Mac is now solvent is that everyone who matters has agreed to believe it's true.
That can't last forever, either.
The Nattering One muses... FHLMC has been carrying some of these losses as "temporary" for over two years now.
Some savvy investors, much like those who have been flipping houses the past five years, are soaking up FHLMC stock offerings like a sponge.
Hmmmm, what happens if due to a economy on crutches and further ARM resets, the real estate inventory keeps rising and artificial "values" keep declining?
At what point, if ever, does FHLMC come clean in this ponzi scheme? Sounds like third world banana republic government sanctioned accounting fraud to me.
Shorting FHLMC & FNMA has been lucrative and should continue to be so over the next few years.
The Nattering one is not the only person to notice this accounting travesty.
Jonathan Weil at Bloomberg picks up on the trail with Freddie Mac Suffers Bout Of Temporary Insanity.
How long does the word "temporary" mean? The accountant who wants to stay employed knows the right answer: "How long do you want it to mean?"
That new twist on an old joke goes a long way toward explaining Freddie Mac's net loss last quarter of $151 million...
That's mainly because the government-chartered mortgage financier has deemed $32.4 billion of paper losses from mortgage- related securities as "temporary."
Freddie's big sister, Fannie Mae, is in a similar, though less extreme, position with $9.3 billion of such losses.
The designation means the losses don't have to be counted in Freddie's calculations of net income or capital.
To put this in perspective, $32.4 billion is more than double Freddie's $16 billion of shareholder equity under generally accepted accounting principles.
It's almost twice as much as the company's $17 billion stock-market value.
And it's infinitely greater than the fair value of Freddie's net assets, which at March 31 was negative $5.2 billion.
Freddie's sub prime and Alt-A portfolios were responsible for $28.1 billion, or 86%, of the company's total unrealized losses on available-for-sale securities.
With a combined fair value of $114.8 billion, these holdings finished the first quarter 20% below their cost.
Freddie can get away with this because it has hung the label "available for sale" on these investments.
(Since they are "available for sale" and no one will buy them)... Freddie gets to wait (indefinitely) until it decides the losses no longer are temporary.
The company's disclosures don't say how long Freddie is estimating it will take for these securities' values to recover.
This notion that the sub prime meltdown will reverse into a total melt up for Freddie might be comical if taxpayers weren't on the hook.
While the accounting-rule makers can't fix Freddie, they can fix the rules, by treating all securities the same and counting all gains and losses in net income.
Until then, we're left with a system in which the only reason Freddie Mac is now solvent is that everyone who matters has agreed to believe it's true.
That can't last forever, either.
The Nattering One muses... FHLMC has been carrying some of these losses as "temporary" for over two years now.
Some savvy investors, much like those who have been flipping houses the past five years, are soaking up FHLMC stock offerings like a sponge.
Hmmmm, what happens if due to a economy on crutches and further ARM resets, the real estate inventory keeps rising and artificial "values" keep declining?
At what point, if ever, does FHLMC come clean in this ponzi scheme? Sounds like third world banana republic government sanctioned accounting fraud to me.
Shorting FHLMC & FNMA has been lucrative and should continue to be so over the next few years.
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