Tag: insolvency

Fannie Mae, Freddie Mac insolvent under fair value accounting

Via Bloomberg:

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.

Raising additional capital here is a tricky issue. Existing equity holders have been decimated, and infusions are going to cut them off at the knees. They’d like their knees. But new money is a foregone conclusion if bondholders are to continue getting paid. Plus, the equity holders would have to walk in a restructuring situation, but at the same time the right side of the balance sheet is byzantine – there would be more classes of creditors than you could waggle a telephone pole at.

These are GSEs – sovereign wealth funds will not be stepping up to the plate; the Fed, maybe with the cooperation of money center banks, will most certainly be taking some action, and soon.

UPDATE: You have to step back a few years to find Fortunes’ blow by blow on the GSEs (around accounting scandal time). Good stuff, and well worth the read. I’m guessing nobody read it back then.

Balance Sheet Ugly at Government Sponsored Entities

Accrued Interest has the straight-talk on the balance sheet of Fannie Mae’s brother Freddie. The highlight of the Q & A is this loaded question…

Q: Freddie Mac’s senior debt rating is still AAA, which is about as much bullshit as Ambac. How can these guys keep losing money quarter after quarter and retain that rating?

So spot on I didn’t even bother reading the answer – I was overcome with the amusement of “truthiness.”

(h/t to Calculated Risk)

UPDATE: Jonathan Weil has a diagnosis for Freddie Mac…temporary insanity.

UPDATE 2: More on ratings here.