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ice!
Thank You!
rt
tanta you should put up an amazon wish list for christmas, I'm sure plenty of regular readers would like to buy you a book or dvd or something.
thank you. invaluable as usual
knocked out of the park, yet again. thank you!
edgar,
Thanks for the link, Cramer is not my first choice for informed insight but he is representative of what is AFU with the market today - with record levels of debt brought on by the easy credit low, low FFR he has the cure - more debt from easy credit based on low, low FFR!
1. With FNM's failure to produce filings over the years, is now a great time to roll out new "presentation" parameters?
Maybe not. But then again, is anyone suggesting that 2007 is a "normal" year? Are we going to say that if, and I do mean if, FNM thinks that its FV write-downs for Q3 are unusual, it should suck it up and report them as if they were usual, because they just started publishing Qs again?
2. Not having information on cure rates for loans looked terrible to all traders and analysts
Well, yeah. But cept two things: they did publish 36-month historical outcome information in the 2006 K about loss mit loans.
They haven't got useful information (long-term enough) about these current loans' cure rates to report!
Sure that annoys analysts. How come it didn't annoy them when the loans were made and nobody had historical information about performance of loans made in the height of a bubble?
3. If management of the single largest lending entity in the world cannot communicate clearly what is going on, what is going on?
Good question. And I never claimed that the reporting was perfectly clear.
However. I am uncomfortable with the idea that if you don't understand a release, you should then publish accusations of manipulation and intent to mislead. I think you should first ask for an explanation, and if you really tried and got nowhere, then you should at least publish that the disclosure makes no sense. But there should be a high bar to clear before any of us accuses anyone else of intent to mislead.
That's the problem of "criminalization" of mistakes that Entrepreneur nailed so eloquently above.
We're getting to a situtation where if a reporter without the relevant financial accounting background can't figure it out in the hour or two before press time, that's poor communication on the company's part? I fear serious dumbing down on the way.
OTOH, maybe all we're saying is that you do have to have incredible amounts of expertise to read SEC filings these days, because of the complexity of the biz and the complexity of the rules. If so, that's one of those interesting analysis I suggested in my post that someone should write.
there's no pressure for any kind of major legislative fix,
Out of idle curiosity, which side of the aisle does your insider sit on?
I am thinking of that silly piece we saw a while ago about the woman who used to be a Republican until too many homes in her neighborhood went up for sale.
I don't think you can ever underestimate how much Americans hate lenders. Sure, a vocal segment has contempt for "irresponsible" borrowers, but you'd be amazed at how many people hate bill collectors, repo men, etc. on principle. And because mortgage servicers, in particular, have offered such terrible customer service over the last several years--everyone and his pet kitty has a story about a misapplied payment, escrow error, sixth servicing transfer in two years, what have you--I suspect that more people than you think will turn on the mortgage industry with a passion.
That doesn't mean it will make any sense whatsoever to make the GSEs clean up the mess. But I lost my belief that politics mostly makes sense long ago. If it can be sold to people as these "government agencies" will make sure that some rapacious bank doesn't force you or your neighbors into FC, then I think people might come to buy it.
I guess we'll find out.
Ministry of Truth wrote:
Reporters sell the sizzle not the steak now the news industry has been turned into a money making machine. It is all about a eyecatching headline with some gloified story.
Kinda like the new, improved CNN: now with more cleavage! Poor Mr. Eavis probably lacks the ahem assets ahem to succeed in TV journalism. Too bad he has to live by his wits.
Anarchus, Bernanke's life is defined by the great depression and the study of how to avoid deflation - at any cost. This is the moment in history for which he believes he is the best prepared. His solution is a simple one - inflate until deflation is off of the horizon. He's the nation's helicopter-pilot-in-chief. I would be shocked if he hasn't been working over the Fed governors, HARD, devising plans on how to detect any hint of inflation and print his way out of it regardless of the cost. A 3 handle on the TYN isn't far off.
I don't type much...
[devising plans on how to detect any hint of deflation and print his way out of it regardless of the cost]
Ouchie! Thats gonna leave a mark!
Good points again. I am currently writing a retraction that will be up tonight.
"Sure that annoys analysts. How come it didn't annoy them when the loans were made and nobody had historical information about performance of loans made in the height of a bubble?"--I assume thats a rhetorical question?
"I fear serious dumbing down on the way"--Simplicity has a beauty all its own. An average investor should be able to read a report and make simple comparisons and follow projection logic. Remember, it was the unbridled genius of the brillant minds at the highest rungs of the financial ladder that have brought us to this point. LTCM was so smart they went bankrupt too.
"The whole upset over backing those numbers out of the charge-offs is about being concerned that to do it this way is to say you think your write-down was too much."
Thanks, I missed this, after two read-throughs of your blogpost no less. Probably shoudn't've admitted this.
I thought (and still do) that they were just reporting verifiable facts (viz. market value of repurchase versus amount they actually paid and providing the "picture of how much the total charge-offs in Q3 were affected by repurchased loans" in their stated credit loss ratio.
They spare the financial community their (over)optimistic intention to make realized losses smaller than market losses until they can accomplish the goal.
By the way, I really appreciated your comment response "What do you mean? Look at pages 54-55 of the Q. There are two huge footnotes, plus several paragraphs of text around the table, explaining all of this. Some way to keep it hidden, don't you think?" and your direct "But how can you say that FNM 'neglected to tell the market'?"
and your "our regulators made us buy it anyway" successfully illustrated the political pressure on Fannie Mae for me. For the first time in my life, I begin to think that the company might deserve implicit government backing.
"I suspect that more people than you think will turn on the mortgage industry with a passion."
If only you could post some positive things about the mortgage industry, I might be less tempted to join the mob (with flaming torches) chasing after that Frankenstein ("a riot is a terrible thing").
@Anarchus Thank you for sharing your experience and information. Regarding your "auditors FORCED some nice regional banks to systematially overstate earnings", have you ever heard of the Fed expressing a similar prejudice against member banks who maintained Excess Reserves that the Fed considered, well, too excessive?
Simplicity has a beauty all its own. An average investor should be able to read a report and make simple comparisons and follow projection logic.
You and I agree on that.
And when FASB leads the revolution here, and the SEC gives safe harbor to companies who use simple logical disclosures from nuisance suits by people who claim that, oh, if you said you thought losses were going to be 6 but they turned out 7 and you stated 7 you are therefore playing games, then it'll happen.
For the first time in my life, I begin to think that the company might deserve implicit government backing.
I am now going to go get drunk.
Gretchen's lucky she didn't write this one!
"I suspect that more people than you think will turn on the mortgage industry with a passion."
An anecdote to illustrate that ... with a SNAP! at the end.
This week, at the National Association of Realtors annual convention, the NAR's current chief economist and a former NAR chief economist, John Tuccillo, gave their economic outlooks to a packed theater of Realtors.
Tuccillo blamed the collapse of the housing bubble partly on "people who made sure deals went through, whether they made sense or not, and pocketed their paychecks and walked away."
Hundreds of Realtors applauded, nodding approvingly at Tuccillo's denunciation of mortgage brokers' perfidy.
"Why are you clapping? I'm talking about you," Tuccillo said.
Utter silence in the theater.
"I am now going to go get drunk."--
I am right behind you Tanta! Its almost 8pm taking into consideration standard deviation of the clocks in my house! Time for a brew. I do not drink any more, of course I don't drink any less. And remember, I'd rather have a bottle in front of me than a frontal labotomy!
https://web.da-us.citibank.com/tandcFiles/printable_cashedge.htm
$2k/day outgoing limit? "you have got to be kidding me"
I just received an email today about these IIT limit amounts. They don't appear to apply to transfers initiated from another bank though, or do they?
energyecon,
Agreed. I despise Cramer, but it was on topic.
Holden - thank for sharing that. That's classic - wish I was there. I hope John went on after Larry Yun.
RE Tanta
Anarchus, it's interesting that part of the hoo-hah in the FNM situation is that, starting in 06, FNM began to warn that their losses would go back up to the historically normal 4-6 bps.
When I search for 10-Q from FNM, they filed on 2004-08-09 then NOTHING till 2007-11-09. If I search for 10-K for FNM, one was filed was on 2004-03-12, then the next was on 2006-12-06.
THAT is the stuff that matters; and there was NONE of the stuff from them in between those periods. I don't see how you can say they warned about anything. Nobody freakin' knew what the f*** was there that they and their accountant were prepared to go to jail for all that period of time. Words are cheap, always. We wanted to verify and we have nothing. I didn't take their word for anything in any of their statements - quite rightly.
-K ( o yeah I'm back from the pub but one thing I've learnt is not to be a DICK ( Drunk In Charge of Keyboard)
The expansion of homeownership is a widely supported goal in this country. A sense of ownership and commitment to our communities imparts a degree of stability that is particularly valuable to society. But there are many ways to enhance the attractiveness of homeownership at significantly less potential cost to taxpayers than through the opaque and circuitous GSE paradigm currently in place.
But the proliferation of granite countertops and cathedral ceilings is not a widely supported goal in this country. Most Americans do not own McMansions or second homes. In fact, most Americans either a) own their home free and clear, or b) rent. Therefore, most Americans have every reason to be outraged at the behavior if not the very existence of Fannie Mae which we now know for a fact to be crooked as a dogs hind leg. How do we know this? Why it says so right there in Fortune Magazine the bible of the business press.
So while Tanta is getting drunk, I will be dialing talk radio shows around the country to foment a little class warfare. If any of you people want to offer a rebuttal by explaining that on Page 54 and 55 of form 10Q theres a table and a footnote that says yada yada yada Ill be delighted to hear from you.
Thanks for the analysis.
With all the chicanery out there, an accurate representation is critical.
The key to loss reserves, however they're accounted for, lies in the assumptions used. What would be helpful is providing some clarity of potential outcomes based on varying key variables such as RE valuations.
If RE valuations actually improve next year, it's very possible that some have over-reserved. Conversely, if valuations decline severely along with the economy, it's likely that many have under-reserved.
It's clearly difficult to model, but we all can agree, high FICO, full doc,
I don't think it's contradictory that I agree with both Tanta & 4shzl.
sk, God couldn`t understand what was going on at Fannie, so he sent his only begotten daughter Tanta ....
You are right, the entry is too long to read. But before painting Peter Eavis with too broad a brush, go back and look at his writing in 1999-2000 at thestreet.com. He predicted and nailed the decline in NASDAQ stocks, going as far as predicting NASDAQ 1100. Even Cramer was kissing his butt.
continued...
LT 80% CLTV loans are far more likely to endure valuation and economic stress than the nastier varieties.
I'd rather buy into a company that reserved based on a worse case scenario rather than a better case scenario AND illuminated outcomes based on various scenarios. Then we wouldn't be quite as surprised when they suddenly write off billions.
It seems to me that current MBS valuations (or whatever approximations there are) reflect the growing sentiment of a worse case scenario. It's also becoming clear that if you own a MBS, you can claim the market is irrational, but if the market is reasonably efficient, it represents the collective conclusion of players putting real money at risk. Oh - mark-to-market. Level 1.
Take CFC for example. Are they even solvent at this point?
So while Tanta is getting drunk, I will be dialing talk radio shows around the country to foment a little class warfare.
Make sure you mention the part about how Fannie Mae murdered Vince Foster. I understand they eat that up on talk radio.
The fraud perpetrated by Fannie has little to do with their classification of losses.
No, its the idea that inside Fannie's warm embrace, mortgages are well behaved, predictable creatures. Outside, well, outside is the land of bad underwriters and poor credit risks.
Fannie's balance sheet is a monument to hubris, to the idea that human actions, and interactions, are subject to the same immutable probability distributions as the roll of casino dice. They apply a sliver of capital against an unprecedented concentration of risk, and they bank on the near-impossibility of rigorously modeled six sigma losses.
In the end there will be little difference between "bad underwriting" and "prudent underwriting". No difference because the good loans are backed by recklessly low levels of capital, and are therefore, well, reckless.
"But they can't over-reserve," many would observe. Of course, they can't. But they can have capital. Lots more capital, two, three, five times more capital. Because their models are faulty, and you can just as soon arrive at a figure of $200b needed as you can at $40b, so why not be prudent and choose the former? Millions of taxpayers will wish they had, millions of affected homeowners will wish they had, and ultimately the shareholders will wish they had.
"the Congress needs to clarify the circumstances under which a GSE can become insolvent and, in particular, the resultant position--both during and after insolvency--of the investors that hold GSE debt. This process must be clear before it is needed; otherwise, should these institutions experience significant financial difficulty, the hands of any regulator, and of public authorities generally, would be constrained by uncertainties about the process. Left unresolved, such uncertainties would only heighten the prospect that a crisis would result in an explicit guaranteeing of GSE debt."
Rather then an accounting issue we have a political decision per the FED unless it has changed its mind on the this. BB during his recent visit with Congress did not discuss GSE's other then the set-up question by Schumer .
So based more on the congressional lack of interest in making their position clear one could say that they like it the way it is. If they come out and say no they are private and if they go BK we don't back up them up then investors may not be so interested in GSE paper, on the other hand if they came out and gave some sort of gov't implied warranty that they would cover this and that then that could run into the several trillions dollars. Better to leave it all up in the air.
When Peter Eavis was predicting the decline in NASDAQ stocks, Tanta was busy reading her rental agreement. But now it is her time to shine. Like you say in this contry 'every dog has its day'.
yup, what David Pearson said.
-K
See Edgar,
you can do good things with comics and silly putty!
I followed your cramer URL, got insight and thought maybe I had been a bit snide towards you and James...naaa.
Hey...in the spirit of good fun... as I am under the affluence of incahol.
as Ben said, "let's hang together or most certainly we shall hang separatelly".
Ben Franklin that is... not helicopeter Ben...
We are the Broker men
We are the YSP men
Blogging together
Statements filled with error. Alas!
Our dried voices, when
We deride Tanta
Are quiet and meaningless
As wind in dry grass
Or Ferraris and Porsches
In NEWs lot
Tanta, good.
Eavis, bad.
I read both of Eavis'pieces as well as Tanta's critique, twice. I don't find Eavis's take to be unfair with the exception of the Enron reference which is sensational.
He includes the company's explanation but also indicates that the way the change was handled doesn't provide investors with the comparison with the previous methodology as is common practice.
If this were another company in another industry, it might not be a big deal. But, given Fannie Mae's dubious track record on accounting transparency, and the lack of any clear way of modeling what the anticipated losses on the repurchased loans may be, I think the criticisms leveled by Eavis are fair. The market marks on these loans should have been presented. Investors can decide whether the market prices are an overshoot or not.
Sophisticated institutional investors seemed to share the concerns given the large scale selling of FNM stock.
"Fannie balance sheet is a monument to hubris."
David Pearson has got Fannie pegged.
Any comparison between ENE and FNM is an insult to ENE. The days of criminals going to jail are over. Poor Kenneth Lay, if only he had changed his name to Franklin Raines he would have gotten away with his millions. FNM had a great reputation twenty years ago, now they are a bloated bag of mealy maggots.
Oh, and mock turtle, if you were giving me a hard time earlier I must have missed it. Enjoy the incohol.
Great Work!
Tanta, I humbly submit you consider the bigger picture here. FNM hasn't filed a proper financial statement in years. Even the Federal Reserve thinks they are a huge systemic risk - as the WSJ put it "private profit, socialized loss".
A part of me definitely wants some of these guys (FNM) drawn and quartered. And I consider myself a rational person (mostly).
FNM should be cut off at the knees, all her profit given to the taxpayers. Let her position go to another. No offense Tanta, I like your posts, but if you are seen by me as defending FNM in the least you will get the flamethrower treatment every time. Let them die.
Is the solution that you so elegantly propose to break FNM into quarters? Thus reducing the possibility of too big to fail?
It amazing to me that so many can actually respond intelligently to what is to begin with some pretty fancy accounting in a land of confusing accounting.
in context:
Darling to extend Rock lifeline
By Iain Dey
Last Updated: 12:02am GMT 18/11/2007
British taxpayers face the prospect of propping up Northern Rock for months to come amid signs that the Government has caved in to pressure from the ailing mortgage bank and its advisers.
\t
Darling to extend Rock lifeline Chancellor Alistair Darling has already come under fire over his role in the crisis
The Sunday Telegraph has learned that advisers to Alistair Darling, the Chancellor, are working on plans that would allow all or part of the £25bn lifeline that has already been extended to Northern Rock by the Bank of England to continue indefinitely.
Although European Union rules block the bank from receiving state aid beyond February 17, lawyers are drafting documents that could change the status of the funding to "restructuring aid". This would allow the Bank of England to continue providing funding to Northern Rock - and aid any takeover of the bank.
.....
he Liberal Democats yesterday called for Northern Rock to be nationalised, and demanded that the Chancellor "explain the position of the bank" to the House of Commons tomorrow.
....
Darling to extend Rock lifeline - Telegraph
Caveat #1: the telegraph is of course a ToryGraph.
We've been killing our UK Pound positions systematically ( we don't look at the US$/UK Pound ratio, we look at UK Pound to Euro, to Canadian $, to Aussie $, to the Indian Rupee, the freakin' Rupee, jeez ( no offence meant ) ) that life's baggage put upon us - guess what this sort of shit does ?
Northern Rock over there today, CFC, FNM, FRE ( BKUNA, CORS the list goes one ).. over here soon ? I'm not bold enough to bet on timing - perhaps some expiring put/call option buyer/sellers( unhedged bets required)
want to comment ?
-K
Yikes- T, I wish you covered Auto's
More From the Chairman of General Motors
hi-lites
GMAC lost $1.6 billion, mostly on subprime mortgages, in the last quarter. Our share of these losses totaled $803 million.
They need to take Freddie and his fat little sister Fanny out of the private sector and put the back in the hand of the public under government control and use any proceeds other then op cost to pay toward the national debt. If the taxpayer is on the hook at least these two organizations should give some to the system before the ultimate bail out. Something about quasi government guaranty almost demands it.
Great article regarding the ongoing FFR cut/no-cut debate:
Playing 'Chicken' with the Markets
Asia Times Online :: Asian news and current affairs - Playing 'chicken' with the markets
Off topic, but nonetheless relevant.
The major retailers are SKEERED. If you want to see how SKEERED, check out the ads they've got lined up for Black Friday.
Black Friday Ads - Official Black Friday Site for Black Friday 2009 Ads, Black Friday Deals, Black Friday Sales, Thanksgiving Sale, Thanksgiving Deals
spall :
I looked at the Citi document for which you provided a link. I found it "odd" that Citi is happy for you to transfer $100,000 INTO a Citi account, but can only take $2000 OUT.
I am no authority on the topic or on banking, but if I were a customer I would worry about why Citi won't allow more deposit money to be transferred elsewhere. Are there limits on the check amounts you can write?
I am a little disappointed in the GSE-bashers, they have not been paying attention over the last 5 years.
I guess they needed Tanta & CR five years ago.
FNM & FRE are the good guys. They have provided standards for the industry, they push for uniformity. They are the largest buyers of derivatives in the world and got caught underinvesting in systems to mark all of it, right in the middle of a controversial accounting regime change. They were not reporting to the SEC because they were not required to, and that lack of discipline certainly hurt them, Tanta will agree.
Now that things are turning ugly, many of you are taking the MSM-taint of the last 5 years and smearing your own broad brush.
Yes they borrow at lower rates than the banks & dealers. Yes they subsidize housing. But if they were not around for the last 12 months, the collective we would be in deep kimshee. That is their mission, to provide liquidity to the marketplace. If you want them disbanded, fine, just say so, they are doing exactly what they were designed to do. Get your congresscritter to yank their charter if you don't want them, and stop your bellyaching.
Many more culpable villains in this mess, spill your bile on them.
Clyde,
It's BECAUSE they've been doing what they have for the past dozen years that we ARE in deep doo-doo.
Like our federal government, there's a lot of good that's been done. That doesn't change the fact that we're still screwed overall.
Interesting, informative Tanta post as ever, and more than interesting comments! Me? Hey, I'm just the "dream killer"...sitting in my cube and pushing buttons on a keyboard, wondering why Fannie has put out this crap AUS!
"They need to take Freddie and his fat little sister Fanny out of the private sector and put the back in the hand of the public under government control ..."
Did you think this one all the way through? I'm guessing "no".
re:They were not reporting to the SEC because they were not required to
========================== \t
The Laws That Govern the Securities Industry
* Securities Act of 1933
* Securities Exchange Act of 1934
* Public Utility Holding Company Act of 1935
* Trust Indenture Act of 1939
* Investment Company Act of 1940
* Investment Advisers Act of 1940
* Sarbanes-Oxley Act of 2002
Securities Act of 1933
.....
.....
The Act also empowers the SEC to require periodic reporting of information by companies with publicly traded securities.
Corporate Reporting
Companies with more than $10 million in assets whose securities are held by more than 500 owners must file annual and other periodic reports. These reports are available to the public through the SEC's EDGAR database.
How the SEC Protects Investors, Maintains Market Integrity
You can argue the arcana(e) about delisting procedures but the requirement to file annual and other periodic reports is RIGHT THERE. Unless of course you can demonstrate different.
-K
Surprised this went under the radar for a while. The GSE's are subject to two capital standards, the miniumum and risk-based capital (RBC). OFHEO recently altered the loss severity formula for the RBC statute:
"OFHEO proposes two changes to the current rule. The first change is proposed because certain loss severity equations result in the Enterprises recording profits instead of losses on foreclosed mortgages during the calculation of the risk-based capital requirement. Unaltered, the current loss severity equations overestimate Enterprise recoveries for defaulted government-guaranteed and low loan-to-value (LTV) loans. The results generated by the current loss severity equations are not consistent with the Risk-Based Capital Regulation and result in significant reductions in the risk-based capital requirements of the Enterprises. The second change is proposed because the current treatment of FHA insurance associated with single-family loans with an LTV below 78 percent is inconsistent with current law. The proposed changes in the NPR would correct these deficiencies. "
This is big, the capital impact is up to $10 billion for FNM alone according to OFHEO. This now puts the RBC requirements very close to FNM's actual capital level. This will be interesting to watch.
James,
I find it odd as well (and worrying). This change is recent and some are predicting it has to do with a prevention of an "e-run" on the banks:
http://www.jsmineset.com/ARhome.asp?VAfg=1&RQ=AR,1&ARList=1&cTID=&cCat=&PRID=&cSubCat=&Full=1&Archive=&ArtSel=$5503$
I escaped E*Trade early last week only for this to welcome me in my temporary holding station (citi).
Can someone in the know tell me of any banks that are safe in these times?
Washington Post - Fannie Stock Slides As Questions Arise Over Accounting
Fannie Stock Slides As Questions Arise Over Accounting - washingtonpost.com
Thank you very very much.
I had not looked at Fannie Mae for a while due to the lack of financial information available from them.
From 2004 to 2007 the stock has been basically cut in half from around $80 per share to about $40 per share.
Net income in 2004 was about $4.8 billion.
Net income to this date for 2007 was about $1.5 billion (assuming we could annualize the $1.5 billion by dividing it by 3 quarters and multiplying it by 4 quarters), then the total net income for 2007 could be around $2.0 billion.
This does not look too good to me since net income has been cut by more than half.
More troubling is the fact that the return on assets has been been going down from about 0.47% in 2004 to a negative return on assets of -.72%.
This is about as bad a number on return on assets as I have seen for a large financial company.
The credit loss ratio has gone up by 500% from 1 bps to 5 bps in the last quarter of 2007. Fannie Mae attributes this due to weakness in the Midwest region and national declines in home prices.
Single family delinquency ratio for the same period did go up from about 0.6% to around 0.75%.
In addition, the estimated fair value of net assets (non-Gaap) has decreased by about $8.7 billion.
This is due to a decrease in the estimated fair value of net guaranty assets due to the decrease of home prices, a significant widening of mortgage-to-debt spreads, and to dividend payments to shareholders.
I was not impressed to say the least by the report posted at their web site.
I don't know what other people see in the future for Fannie Mae, but I see a lot of work ahead of them.
The stock might seem cheap at less than 1.5 times book value; however, given the fact that they currently have a negative return on assets coupled with a negative outlook for the housing market in 2008, I would not be surprised to see their stock continuing the current downward trend, the downward trend of financial stocks in general, and the downward trend for the real estate market.
http://www.fanniemae.com/ir/pdf/earnings/2007/investor_summary.pdf
Woah, I'm late for this party, but does Eavis know that Fannie hired hundreds of consultants from dozens of firms to work on various projects to assist in constructing the financial statements?
If someone wants to cook the books, they circle the wagons and DON'T allow outsiders in. I'm sure some of these consultants were heavies, brought in for technical matters. Just try getting some career CPA who's billing rate is $350/hr to put his livelyhood on the line for your 6 month gig when there's another dozen companies calling him for work.
Tanta:
Don't forget that FNM already had it Enron accounting scandal. They were cooking the books for inflate the value of their stock options. This cost CEO Frankling Raines and the CFO Tim Howard their jobs. They also spent billions (no typo!) over the last few years in accounting and consulting fees to restate earnings.
The only reason they survived, and are not already a historical footnote along sinde Worldcom, Global Crossing and Eron, is the implied Government guarantee.
The point is they have no credibility when it comes to accounting for their own business.
Now, they finally report a timely Q and their stock gets slammed over 18% in the week after it's release. Is this Eavis' fault? I don't think so.
Remember that Eavis wrote a similar "hit piece" on Goldman's accounting for level 3 assets in October. (too lazy to find the link right now). What was the reaction to that piece? Next to nothing. Goldman has credibility, FNM does not.
Bottom line, this is a story about a companies' credibility, not an out-of-control reporter. FNM is paying the price of its past misdeeds and has no one to blame but itself for this mess.
This cost CEO Frankling Raines and the CFO Tim Howard their jobs.
You're kidding, right?
The credit loss ratio has gone up by 500% from 1 bps to 5 bps in the last quarter of 2007.
YES!
1 bps is an incredibly low number that it was insane for anyone ever to expect to contine. For Fannie Mae. For everyone else. The entire freakin' industry reported ridiculously low losses for years. They could do this because the losses were ridiculously low. Cheap refis, a hot RE market, and general mania kept them low.
So now the party is over. For everyone.
Anyone who wants to claim that this is some kinda inexplicable trend has been under a rock for a long time.
Does it concern me that credit losses are up at Fannie Mae and everywhere else in the industry? Yes, it does. Did I fully predict this years ago? Yes, I did. Do I think there's something sinister about the way Fannie Mae reported this? No. They reported bad news. THAT'S BAD ENOUGH FOR ME without trying to claim that they cooked the books here.
Edgar,
Go back and familarize yourself with what Fannie did in the early part of this decade.
The issued a boat-load of stock options to all employees (called a "challenge grant") that kicked in ONLY if earnings doubled between 2000 and 2003. They did double earnings and then it was discovered they cooked the books to pull this off. Raines and Howard were shown the door.
When Raines stepped down, he was the vice-chairman of the Business Rountable, an elite club of CEOs. He was also the head of their business ethics committee.
Your reputation matters. This episode should show the pooh-bahs and Fannie that the street thinks their scum.
Now, they finally report a timely Q and their stock gets slammed over 18% in the week after it's release. Is this Eavis' fault? I don't think so.
Whoa, Nellie. Read the second article, to which I linked:
In response to investor concerns about the change, first reported this week on Fortune.com, Fannie Mae executives held a conference call with analysts Friday morning that did little to placate investors. Fannie Mae shares fell $2.32, or 5.39%, Friday. The company's stock price has plunged 17% since Fortune revealed the change in disclosure in a story posted online Wednesday.
My claim: Eavis is here taking credit for having started the whole thing. Since he apparently believes his own story, he must believe that Fannie shares deserved to have dropped in value. This reads to me like a self-congratulatory pat on the back.
Do I think it's true? For the love of Peat. I noted that the headline numbers in Fannie's Q were enough to worry everyone. Eavis's clever detective work with a footnoted change to one calculation did not, as far as I can tell, single-handedly "correct" the market's view of this stock. If it did, then the market overreacted, because Eavis's gripe is trivial at best and misleading at worst.
But for Eavis it isn't a question of "fault," it's a question of "credit."
Tanta:
I don't discagree with you about Eavis trying to take credit. But he does this all the time (see the Goldman story I referenced). Most of the time he is ignored. So why did the Fannie story resonant? Becuase no one trusts FNM.
So why did the Fannie story resonant? Becuase no one trusts FNM.
I would say: why did the Fannie story resonate?
Because no one wants to admit that the entire financial sector partied like a drunk sailor for years, and ignored all the nay-sayers. Now that the inevitable consequences are showing up, it's all about Fannie Mae is cookin' books! Recycle an old story with a litte fresh innuendo, and we can all jump on Fannie for being Enron without having to confront the big picture.
Look, do you work on LaSalle Street? If so, should I ignore everything you say or impugn your honesty because I can, if you want me to, dredge up some pretty ugly tales of behavior on the CBOT?
You know, it does kind of sound like some of you folks are implying that because I did not explicitly rehash what I called "the long wretched saga" in the second paragraph of my post, that must mean I am an innocent child who doesn't know about it or who forgot about it.
Allow me to observe that one cannot spend a few hours reviewing a 2006K that was published in August and a 1&2 quarter Q published in November without being forcibly reminded, if one is too stupid to remember it otherwise, that there must be a reason why these documents were published so late.
Tanta,
If you are trying to tell us that they were all drunks and FNM is one drunk amongst many I'd agree with you. If you ask, why only pick on FNM - I'd answer
-K
Yes I work in Chicago but not for the futures industry. We could start an entire blog on the behavior of the futures industry.
Yes the financial sector is in trouble and the chickens are coming home to roost. But when people questioned Lehman's earnings or Goldman's level 3 accounting. I did not see those stocks tank on the news. Even Citi and MER did not tank UNTIL they admitted they had the losses.
But with Fannie, one Fortune article and the bottom falls out. You cannot deny their checkered past plays a role.
And that past is not that they are cheating. When current CEO Daniel Mudd said they would get to the bottom of what happened this decade, they hired over 1,500 consultants and accountants to restate 2000 to 2004 financials. It took almost two years and they spent billions.
When you understand this you cannot help to conclude that their accounting is impossibly complex. It is not to be trusted.
So, when someone screams foul about FNM, the reponse is to agree that FNM messed up and then start asking questions. When someone screams foul about anyone else, the reponse to assume everything is ok and start asking question.
Lastly, the only orgainzations worse than Fannie are the FHLB and possibly FRE.
But with Fannie, one Fortune article and the bottom falls out. You cannot deny their checkered past plays a role.
I'm not denying that. I'm saying it's stupid.
The logic of the situation you outline is that Mother Merrill could report the worst news since the Bubonic Plague, but if that news does not involve accusations of fraudulent accounting, everyone will go, "BUY STOCK!"
I think that's probably true. But I don't have to participate in it.
Tanta, do you honestly realise how stupid you look? You would make those guys from Pravda blush. Someone is dishonest becouse he or she works for so and so? What`s next? If you are not with us you are against us?
Broker, honey, you just gotta brush up on your reading skills. You really won't be able to start a first-class troll-wreck around here with comments like that. You have to work harder.
Broker,
The point is that every institution has blood on its hands. Eavis is pointing to a paper cut and is claiming the carotid artery has been severed.
Tanta says you are free to disagree, and you don't like that? You want us all to agree with Eavis or all not agree with Eavis?
The logic of your cumulative postings is tiresomely boring. Either post something more intellectually challenging or get out.
There seems to be a lot of trolls lately on this blog. I don`t know if you noticed. In regard with my reading skills, I am working on it. It is not an easy language as you (as a former secretary) should know.
It is not an easy language as you (as a former secretary) should know.
Broker, I am a former salesclerk. A former cafeteria cashier. A former grocery bagger. I have sat babies and mowed lawns. But I have never been a secretary, if you mean that in the usual sense. I have been a Secretary of two boards of directors, one a nonprofit and one a for-profit. I know how to apply an old-fashioned corporate seal. They mostly no longer use those old-fashioned corporate seals. Alas. Another of my skills is obsolete.
I was asking LaSalle a rhetorical question. I am aware that rhetorical questions are hard on new speakers of English. But, well, you should ask what I meant first. Shooting your mouth off first by saying I am looking stupid kinda backfired on you here.
The implied answer to my rhetorical question is "no." It would be totally inappropriate for me to say that LaSalle's point of view is worthless because he/she is associated with an industry that has racked up more than a few fraud convictions over the years.
That was probably quite obvious to anyone who knows that LaSalle Street in Chicago is the home of the Chicago Board of Trade. To folks in the futures markets, "LaSalle Street" is the same kind of short-hand as "Wall Street." You apparently did not know that. Now you do. This blog is very educational for all of us.
But you should have noticed that LaSalle the commenter immediately got my point. If she/he wasn't offended, why were you?
Broker,
Please start your own blog. I'd love to visit you there.
It's a snap to start one. You have a lot of interesting things to say. Please, please, please start a blog of your own. Pour your heart and soul into it. Attract interesting and informed readers. Change the world! Change yourself -- you'll sleep better, have more energy. Get that spring back in your step!
Post the new blog address as soon as possible. Someone with your talents must be shared with the world.
Please start your own blog.
Broker,
Here you go:
Blogger: Blog not found
Proof of concept.
It took me, what, 18 minutes, but that including doing some wash, so you can probably get it down to 13.
A different echo of my comments above...
From Mish's Global Economic Trend Analysis: Fannie Mae's Credit Loss: What's The Real Story?
That leaves an obvious question hanging in the air: is the company being overly optimistic in its assumptions about how many bad loans will stay bad?
Fannie Mae also guided to an expected loss next year ranging from 8 to 10 basis points related to the same recording of charge-offs. And this is where things began to fall apart in the call. Fannie Mae CFO Stephen Swad said, "if there is a 4% national decline in home prices in 2008 and no nationwide recession, we may see a credit loss move into the eight to 10 basis point range."
Fannie Mae, at this point, may be the only institution in America counting on a 4% national decline in housing prices in 2008 and no national recession as the "worst case scenario."
Great blog post.
The most annoying thing is that the guy might be right for the wrong reasons. This has cost me money before. The supposed catalyst for a sharp decline is something that is absurd. Unfortunately that doesn't make fnm a great buy.
I actually spent some time skimming the 10Q and wasn't comforted.
Nevertheless, if they are right, these mark to market losses will reverse. That combined with increases in business and fees should bode will for future profits. However, if they are going to cave in to political pressure on these buybacks, they should demand some cover.
Their fees of 22bp seem low, and the public has gotten a good deal for the implicit guarantee.
Another recent example in the last week were the headlines and articles about a GE Enhanced Yield short term fund losing 4%. This was always discussed in connection with money market funds breaking the buck, even though the GE fund was explicitly and clearly not a mm fund. The mainstream press (i.e. WSJ) always noted this, but then connected them to the extent that the next level down the food chain ignored that key distinction. There wasn't any real fallout from this, but the overall sloppiness was distressing.
Tanta - "Yesterday I spent over two hours rooting through SEC disclosures and listening to a 57-minute conference call trying to independently verify Eaviss point; today Ive spent a couple of hours writing this post."
Thank you Tanta.
This is probably going to sound like I'm gushing and/or blowing current events out of proportion, but I'm respectfully awed by your diligence and integrity in following up on this. I also appreciate your patience and amount of effort in explaining this to clueless schmucks like me and some of the others on this blog. IMHO, it is people like you that we are going to need in spades to tamp down the swell of panicked rhetoric and spin (many from people with their own external agendas) as this wave of financial bust hits harder and harder. I predict there will be more events like this as more blood gets in the water.
As the old saying goes "keep your head while all around are losing theirs" and as evidenced by my posting one of the original Eavis articles in DiMartino thread I didn't entirely keep mine. Thank you to both CR and yourself for keeping yours.
The Thread that just will not die! I wonder if there will be any mainstream media discussion on this topic. Tanta's analysis is already making the rounds for FNM on the stock message boards and mortgage broker blogs. Funny to think of a company as troubled as Fannie being portrayed as the victim! Short week ahead, now is the time for companies with bad news to try and keep damage to a minimum by reporting this week.
Thanks for the detailed analysis. It may have cleared the air about the accounting issues at FNM but I guess it does not clear the problems that they have in terms of business outlook and potential loss. I tend to work in whole numbers. Their exposure to the subprime segment and the alt-a sengment of the market is outsized relative to their capital. A significant meltdown (in the real sense, not in the mark-to-market sense)in both markets will have a detrimental effect on their survivability without additional capital inflow. To me, that is the best reason to sell FNM, FRE and FHLB.
I thank you for over 2 hours of quest of facts and informations, about 1 hour listen to the conference and the other hour for written reports (SEC etc).
For me 1 hour of written report would not include the footnote details. There is a saying the "Devil is in the details". I am NOT saying this is the case here, but in this world of massisve information hampered with creative accoutant, I would ask "How do we know? How much can we know?"
But nevertheless, I thank you for this article.
Thanks for taking the time to wade through all the data and write this post. I admit I was a bit up in arms when I read the article and thinking Fannie was playing with severity numbers. Now I understand, and we have Tanta to thank for that.
As to Blog Journalism - I believe we need it to offset being sucked into the black hole of today's journalism. Articles are similar to the evening network news - nothing in depth, skim the surface, draw a conclusion and get it in print or on the air. And do all that in a 1 minute segment or a couple hundred words.
Blog Journalism, when written by an expert with a deep understanding of the subject, has adequate time to research, and no restrictions on time or length of the article, will gain more importance as time goes on. I think that's a good thing......
Thank you very much, guys.
I really didn't mean that to sound like "I'm the big expert that no one else is." I just meant, literally, that most people have lived long and fulfilling lives without ever having had to learn all about MBS rules or advanced financial accounting, and this is hardly a criticism of them.
But such non-experts can be shareholders of companies, so it behooves the press (and the blogs) to supply the missing expertise when things start to get complicated.
Most of the time, in the big real world, nobody gives a rat's butt about what I know about MBS accounting, myself included. It is only useful expertise in this particular context.
Bless you Tanta. I was hoping you would look at this.
seminole83 at 11.17.07 - 12:13 pm wrote:
tanta you should put up an amazon wish list for christmas, I'm sure plenty of regular readers would like to buy you a book or dvd or something.
Great idea!
Important no doubt, but far too long to read. I'll just take you word (or conclusion) for it.
I also want to say that I struggled over writing this because I did not, in fact, make my case explicitly in all respects.
I did not exactly quote Eavis and then the long paragraphs and tables from the Q, and I relied on my paraphrase notes of the conference call (I don't have a transcript). I could have gone through all the painful detail, compared all the different documents, and showed how Eavis derived 7.5 and Fannie derived 5.0.
But I decided that that was just too gruesome for all of us. So yes, at some level I am making assertions that you are trusting or not, unless you read the documents I linked to thoroughly and listened to that webcast in its entirety, as I did.
It is not always easy to "show your work." That's the terrible problem that articles like Eavis' create: it takes what feels like the equivalent of a master's thesis to debunk it.
In any case, I don't expect anyone to just take my word for stuff. I try when I am expressing an opinion to say so, and when I am reporting a fact to say so.
That's all I want the Real Media to do.
Did you write this to taunt the guy who complained that you were not "crisp" enough? If so, your revenge is perfect.
May I suggest:
Amazon.com: White Bunny Slippers for Women: Clothing
No, James, I did not do this for spite.
I did this because several people emailed this article to me asking for my take on it. Also, the story got picked up by blogs I respect, and sadly those blogs took this story at face value. (Barry said "where there's smoke there's usually fire." I was tempted to title this post "Where there's smoke there's often a dope.")
I explained in the first paragraph of the post why it is so long. That gives people the option of just skipping it.
Crispiness jokes will undoubtedly continue for quite some time until we all find some new blog in-joke to beat to death. That's how comment communities work. It does not mean that every post I write is a response to a specific criticism or compliment in the comments.
That said, if crispiness is getting tedious for some of you, I can go back to old threads and pull out old tired jokes. Pffft.
In the past we had to rely on a reporters interpretation of what an industry insider might say. In today's world a knowledgable and concerned party can post that information for the audience to interpret. This is a complicated topic that isn't like to be gleamed by someone with a superficial knowledge of the subject.
If you blog you have to be intimate.
Tanta nails this !
James,
Go away.
Whoa Nellie - crispiness means getting to the conclusion without wading through all the facts that lead to said conclusion.
IMHO, there is nothing "crisp" about the mortgage business. Verified and documented facts lead to a conclusion, and the less facts you document and verify, the more apt you are to come to the wrong conclusion. Think underwriting here.....
You could apply the same to the IB's et al who made a market for "aggressive underwriting" products. They didn't think it through and here we are today paying the price for "crispiness".
That was masterful. I am in awe.
I joke with my daughters about their future professions. I tell the oldest one that she is going to be chairman of the Fed. I tell the younger one she is going to be Treasury Secretary.
The older one is starting to understand how inherently superficial the MSM is.
Peter Eavis, grow up.
Tanta,
I love the idea of an Amazon gift list for you and CR.
It's more personal than a tip jar. And tax free I believe!
Remember Elvis the Pelvis and his brother Eenis the Penis? Now we have Eavis the Peevus.
Superb, useful post. The website editors at Fortune deserve a chunk of the blame here as well. Their practice of distributing links to other stories through text as though they are subheads is horrible. "Uh-oh. It's Enron all over again" isn't from Eavis's piece and isn't, as far as I can tell, a subhead in his work. It is a link to the Bethany McLean piece, which has nothing to do with Fannie Mae, but which is called "Enron all over again." (That piece mostly discusses off-balance sheet vehicles and ratings agency problems.)
Are you suggesting that Bethany didn't bring down Enron? But she's so gosh darn cute!
In fact, what you bring up is likely to be a continuing problem. The last "financial meltdown" didn't require UberNerd degrees (they gave these four geeks money, they spent it, and no one ever made a dollar). This time it's a different ballgame. Everyone, MSM & Blogosophere & Cocktailparty circuit is going to be going after these folks, but as your blog daily proves, this is not always an easily graspable subject (or at least not trivially graspable).
Also, I second the wishlist idea for both CR and Tanta.
I assume everyone knows the long wretched saga of why Fannie Mae has been so far behind with its SEC filings.
Actually all I know is what was reported in the MSM and given what you just wrote that means I likely know less than nothing and actually need to jettison much of what I thought I knew. You wouldn't happen to have a spare ten or twelve thousand words lying around with nothing better to do than straighten me out would you?
Thanks for your efforts. Superior job. Get your wish list up.
I wonder if this article signals an important shift.
This blog as spent a good deal of time over the last two years debunking "everything is fine" positions -- from MSM, NAR, Tan Man, etc.
In my recollection, there hasn't been much need to debunk "the end is coming" views from mainstream sources. Sure, certain blogs peddle the coming apocolypse, but you haven't seen much of that from corporate-owned entities.
I very well could be wrong, but this could be an early sign of the Bear -- everything is bad news and the bad news is exaggerated.
I'll chime in on the amazon wish list. You guys are awesome; I'd love to have a more personal way to thank you!
Instead might I suggest a more appropriate gift?
Amazon.com: Toy Vault Rabbit with Big Pty Teeth Slippers: Toys & Games
Well, Robert, in my view the short version of the long saga is that FNM did eff up really really badly on its accounting. I don't challenge that general point, although maybe someday I'll write about some of the reporting on that that I thought was ridiculous. My general gripe: it was Fannie Mae, the GSE, acting more like WorldCom than like a government agency (goosing the share price by bad accounting and enriching execs with big bonuses). Yet some parts of the media reported it as a problem with government qua government. In other words, a political argument started infiltrating what should have been business reporting. Surpise, huh?
The thing you might want to know for present purposes, though, is this SOP 03-3 that Eavis goes nuts with came out of Fannie's attempts to correct its accounting practices. How's that for irony? They adopt a policy that forces them to show big write-downs when they are taken, and two years later some reporter uses that policy to accuse them of . . . hiding credit losses. Some days my head just explodes.
Damnit, if I'm gonna contribute usefully to this post I'll have to read the 10Q hard and cross-compare with Tanta's post instead of going off for a lunchtime beer to celebrate my just rewards for a deeply analysed and judiciously timed (yeah right ) shorts in FNM and FRE.
Of course I didn't judiciously analyze their 10Qs and 10K's prior to shorting them. Because there weren't ANY THERE ! And that's the crux of the problem - FNM and FRE were run by crooks, HAS mistated earnings, has been sanctioned by OFHEO, has been unable to account correctly for several years. Shorting them was simply a case of betting on the market sentiment catching up and echoing my feeling that they have been liars in the past and so don't trust them. So when this kerfuffle blew up it merely confirmed my prejudices.
On the issue at hand, I do notice that they at least reported 2006 credit loss ratios in the 10Q using the same formula as the 2007 figures. Not doing so would have been particularly egregious.
On the other hand, I picked up somewhere that on the call their recovery rate worst case analysis is based on a 2008 housing downturn of 2% house price declines and flat sales. That's the worst case they can envisage ?
FNM, FRE seem to be tone-deaf to the criticisms and the need to be totally above reproach in their accounting and presentations. The percieved social benefit accolades they get, presumably from their political devotees, goes to their heads and blinds them to the deeply changed and deeply skittish real-estate-related-stocks market.
Meantime, that beer beckons- yup, I'll read about and enjoy and be grateful for but not re-analyse winning positions that I intend to close - its the losing ones one works on - PZZA anybody ?
-K
Tanta,
As always a scintillating piece, but I have a question.
You wrote:
"If they thought the stuff would go straight to the FC department, theyd have let the servicer take the loan out of the pool and foreclose, and let the losses hit the MBS guarantee fee income."
Given that you have written negatively on the insurers (like eappraiseIT being on the hook for loans they appraised) could it be that fannie is doing some of this to protect the guarantures who would be bankrupt if they didn't.
I know, I know, tin foil hat...and I know your Jack Webb...just the facts. It's just that that sentence struck me...out of all the sentences that you wrote. And there were a lot of them.
Cheers,
Thanks, that actually was more or less my take with one exception. I thought it was very damaging to the markets' reputation that the stocks were not suspended per the rules. That looked too much like playing favorites with the stock which is an Enron/Tyco type game.
You've got to think there will be more articles like this. There's a story here but it takes a certain amount of familiarity and expertise to flesh it out (not to mention that these reporters are probably fed leads by parties with an agenda). At times I think Tanta's biggest critics are the shorts. It's like "how dare you put this inflamatory statement into context"
Reading this post and remembering some of the negative comments on previous MSM-debunking reports made me wonder... It must be awfully convenient-- and lucrative-- for some investors who do actually understand what's going on to have reporters making these kinds of influential errors.
In fact, I wonder if there aren't some people contributing to them. Think how easy it would be: seed the field with some misleading hints in well-placed ears, wait for one of the reporters to sense a 'scoop' and go to town with it, short the stock (after the fall starts, so you don't get in trouble with the SEC) -- or buy up bunch when the hysterical selling is at its height.
I imagine there must be some people pretty mad at Tanta for spoiling the party. I wonder if some of the condescension and the 'don't pick on poor Gretchen' comments don't come from such people?
Nah. On second thought, Hanlon's razor most likely applies: "Never attribute to malice that which can be adequately explained by stupidity."
(p.s. I'd be happy to buy books, but don't want to interfere with the hiking boot fund!)
My simpleminded takeaway from your excellent investigative work is this:
The Eavis claim is that FNM is trying to hide a gigantic loss on assets it took back for the purpose of allowing workouts - workouts that probably wouldn't have been undertaken by the previous owner. Because the current market for delinquent loans is so awful this meant that FNM would have to show horrific losses for the quarter unless they adjusted their reporting method so they can split out the mark to market repurchase loan losses they think are recoverable via workouts vs: the usual losses.
FNM believes that most of these loans can be modified sufficiently to prevent default and will be held on FNM's books until they are paid off. For a profit!
The loans that avoid default and that are presently selling for pennies on the dollar will rise dramatically in value as they again become performing loans. This seems very reasonable. In fact the loans FNM repurchased are exactly the ones they feel have a good chance of survival. It's a form of triage. The bad loans that are hopeless were not repurchased and will go into foreclosure.
So what Eavis the Peevus is doing is to reinterpret a laudable attempt by FNM to provide some transparency as a plot to hide black deeds and throw it back in their face all baked into a shit pie.
Thanks for your effort, Tanta.
How do you know that some of these sensationalist journalists don't have someone in their circle short the subject and make a fortune with the article?
On the other hand, I picked up somewhere that on the call their recovery rate worst case analysis is based on a 2008 housing downturn of 2% house price declines and flat sales. That's the worst case they can envisage ?
I think you are referring to the part of the call where someone asked about the stress scenario for the whole portfolio for 2008.
For the loans that were repurchased in Q3 for the purposes of being worked out, Fannie said they figured the stuff would either re-perform (if the workout worked out) or go to FC and get liquidated in the next 250 days (250 days being their average timeline to liquidation). Therefore, for this limited bunch of loans, projected current losses would not usefully be calculated by looking at life of loan scenarios about where the housing market will be at the end of 2008.
Feel free to disagree with their projection for 08. But I am here to tell you that if they used the same metric for charge offs on current quarter business as they use for stress modeling through the next 18 months, they'd get busted PDQ for over reserving!
Note to beginners in the Fannie Mae saga: one of the things they did get busted for back in 2004 is "cookie jar accounting." They reserved too much, with the intention of using those reserves in the future to smooth out income. That's a big no no. So you have to believe that if Fannie is leaning one way or the other right now, it is not leaning toward over-reserving. They just basically got out of jail for that.
Reporters sell the sizzle not the steak now the news industry has been turned into a money making machine. It is all about a eyecatching headline with some gloified story. This is why I appreciate all the work you do Tanta. It is easier to write an objective story when ou have no bottom line you need to meet. For the record I got rid of all my TVs over 3 years ago and never looked back. Now if I could judt filter out all the mass media. Keep up the great work.
Whoops! I'm too slow for you guys... Thanks racerx, for saying it better and more succinctly. And sk, no offense! Was referring to 'crispiness' and 'boring' comments-- not yours!
Tanta,
I disagree, not with the substance of your piece, but with the answer to the question you pose.
Clearly you've outed the reporter as being fuzzy. Is Fannie's math?
The crux of the matter is expectations for future losses. Fannie guided to a certain number, and that number does not include mark-to-market, only realized losses. Fine, but it neglected to tell the market about the exclusion. It could have been just an oversight, but the fact remains that losses next year are likely to be substantially higher than their guidance given the possibility of more mark downs on loan repurchases.
Behind this stands a big issue that all the bond and mortgage insurers face: the market is telling them that the assets they insure have a loss probability of X, but the insurers have concluded, en masse, that the market is smoking something. "No way is it X," they say, "X is a function of temporary illiquidity. We'll ignore X, you'll ignore the irrelevant accounting for X, and we'll guide you to Y."
So Fannie, Ambac, Magic -- all of them -- are asking investors to ignore the prices they see with their own lying eyes.
Because the current market for delinquent loans is so awful this meant that FNM would have to show horrific losses for the quarter unless they adjusted their reporting method so they can split out the mark to market repurchase loan losses they think are recoverable via workouts vs: the usual losses.
Well, no. To clarify: they did show those losses. Those losses are in the financial statments, under charge-offs.
They have a separate metric from total charge-offs. They call this metric the "credit loss ratio." It takes charge-offs and foreclosure expenses and calculates them as a percentage of loans owned in the period. (That's a perfectly arbitrary calc: it could be measured as percentage of income or percentage of capital or something else. They just decided years ago when they came up with this metric to make it a percent of loans.)
For this specific metric, they backed out FV write-downs that were not realized losses. They did this because, they say, the point of the metric is to show how much real money they really lost in real terms in the current quarter. In other words, it's realized losses, not mark to market losses.
Again, anyone who wants to can make an argument that they should calculate this metric by including the FV write-downs. Eavis calculates that if they did, the loss ratio would be 7.50 instead of 5.00.
Is that a big deal? Do you mean to tell me that investors' faces are being ripped off because at the end of 06, FNM projected 4-6 and they are at 7.50 for the current quarter? Everybody in the universe gave "guidance" on credit losses in the end of 2006 that are now "inoperative" after the Summer Of Hell for the mortgage market.
So yes, Eavis misses the point that the root problem is workouts. But I think he also just makes a mountain of out a molehill on this metric. I also think it wouldn't have struck him that way if we all had gotten the 2006 K back in February, instead of only just getting it in August.
But I have to say this, too: in August, when FNM released that K, they had to have known that some of its risk discussions were now pretty out of date. Did they go back and doctor up the K with hindsight? Or did they leave their less scary 2006 predictions in the document? My take is that if that K had matched the 03 Q, there would have been more, not less, grounds for complaint!
Clearly you've outed the reporter as being fuzzy. Is Fannie's math?
I think part of the problem is we're trying to compare the way illiquid assets (like mortgages) are "marked" to the way liquid assets (like stocks) are marked. When illiquid asset prices change faster than the acceptable methods used to revalue them, problems like this arise.
Doesn't anybody find it ironic that the strategy recommended by the REIC for the average house buyer (buy at any time, don't worry if the price falls in the near future because prices will go up sooner or later) is the same strategy the GSEs and big banks are being vilified for?
Fine, but it neglected to tell the market about the exclusion.
What do you mean? Look at pages 54-55 of the Q. There are two huge footnotes, plus several paragraphs of text around the table, explaining all of this. Some way to keep it hidden, don't you think?
Eavis slyly says that this question didn't come up in the original investor call on the Q release. As if somehow, that's evidence that FNM wanted to hide it. But it is quite possible it didn't come up because no one on that call thought it was a big deal!
The Q came out 11/9. Until 11/15 it appears that we all glanced at that number and said, huh. Eavis then writes his piece saying that it's "misleading," and then the market has a tizzy.
If you want to say that investors didn't read the Q carefully enough when it came out, fine. If you want to say that Eavis caught a problem that no one had yet noticed, fine. But how can you say that FNM "neglected to tell the market"?
Quoting from the Q: "We have revised our presentation of credit losses to reflect only our realized credit losses. Accordingly, we have excluded from our credit losses, and from our credit loss ratio, any initial losses that we are required to record pursuant to SOP 03-3 . . ."
Maybe a lot of people don't understand what that means. I acknkowledged in my post that this is hard on a non-specialist. But it's awfully plain sight to be hiding a change to a performance metric in!
"James,
Go away."
No way, Jose. I learn too much here.
(Anyway it was a lot funnier when Diana Rigg said it to Daniel Radcliffe in EXTRAS).
Sarah, I honestly don't know if what you're describing goes on.
But I would bet my life that someone has tried it.
Business reporters must always be on guard for that. They have to know that there is always someone who will profit from feeding them bogosity.
My trouble very often with Morgenson is that she strikes me as so credulous sometimes that there's no reason to believe she'd recognize a CFC-shorter trying to pull one over on her if "SEC VIOLATION" were written on it in flashing neon.
Maybe Eavis is being taken for a ride by a market manipulator. I actually had the impression of someone who noticed that number A is different from number B, and wants the whole world to notice what a super dooper detective he is! After the serious analysts shrugged it off on Friday, he had to cast around for more problems to keep his story alive. Hence the claim in the second article that these are loans FNM "had to" buy back, not loans they opted to buy back. This subject was explicitly discussed in plain English in the conference call. The footnote in the Q explicitly uses the word "optional."
So I conclude we're dealing with someone trying to force this story into the narrative we saw earlier in the year with forced warranty repurchases by mortgage banks.
You can bet your life that if those loans were rep & warranty violations, FNM would have forced them back on the seller/servicer instead of taking a $607MM write-down itself.
Tanta,
They set the expectations for 2008 losses on the call, and the analysts plug those into their models. Could the analysts be more diligent? Yes. Are their salaries bloated for someone so spoonfed? Obviously. But it is what it is.
So the models the analysts ran on Friday had the wrong plug for '08 losses. Eavis, or rather the short hedge fund that no doubt fed him the tip, corrected this. Now the analysts have to take down their numbers, and the market didn't like that. Tempest in a teapot? I don't think so. When Fannie is as thinly capitalized as it is, loss expectations, and the volatility thereof, matter a lot. We
re talking about "pull-forward" of losses, that's true, but the "pull forward" offsets the "rear view mirror view" that management is trying to promote. The fact is that their historical experience of losses is hardly a guide to this housing cycle, and management should be smart enough to know that by this time.
Bravo!
I think the issue is that FNM gave guidance on a certain metric, missed it big time and then tried to change how that metric is measured without anybody noticing. Is it a coincidence that they decided to change the measurement of the metric the exact quarter that they whiffed? Do you really believe that? Good on Eavis for calling them out. I don't have the expertise to argue with you about what the fair value should be but I do know deception when I see it. Eavis should be congratulated for digging into the nitty gritty details. Wall Street analysts should take note.
Thank you, Auntie Mae.
I must also add my appreciation for sharing your expertise and for your ability to clarify specifics for us non-specialists. You are a true gem. Hope your back to 100%+.
I dont know about you, but I happen to think that a lot of private investors/servicers are refusing to do modifications of securitized loans precisely because they dont want to have to buy them out of the pools and show that nasty write-down on their own books. They claim that its because securitization rules wont let them modify loans, but Ive never really bought that argument, nor have many regulators or the SEC.
Hey, Peter Eavis, this here would be a much better story for your next big splash. Go at it.
The big problem is that being a bear has not only become socially acceptable, but is actually a social enhancement.
So instead of irrational puff stories about how RE always goes up, tales of lines before RE sales offices, the new economy and how strange derivatives are wonderful, we get doom days stories.
They set the expectations for 2008 losses on the call
Yes. On the first call, they set 2008 expectations at 8-10 bps.
In their 2006 K, they set expectations for 2007 at 4-6.
For just Q3 07, the number is either 5 (says FNM) or 7.5 (says Eavis).
Do you honestly mean to tell me that anyone read this report--including the headline numbers!--and thought everything was hunky dory, until one change to the metric on page 55?
Go back and read Eavis' original article again. He thinks the credit loss ratio measures "bad loans." ("and the recent shift in how it discloses a much-watched credit yardstick disguises just how quickly bad loans may be rising.")
Uh, if you go up two pages in the Q, you see the reports on delinquencies and foreclosures. How quickly the number of nonperforming loans is rising was disclosed.
And I just do not understand how anyone can read the paper and see all of this tremendous pressure on Fannie to act like a government agency, not a private company (i.e., to take over the eff ups of the private sector "for the team"), and then want to read these financials without bearing that in mind. Am I nuts here? Do you really think FNM's management is going to say that all these workout loans are just hopeless toast and this whole exercise is pointless?
If people are buying shares of FNM thinking that it will never have to engage in transactions that have more social benefit than bottom-line benefit, they're nuts.
Thank you Tanta,Eavis is getting a lot of play in the MSM.I am learning that the reporting on finance and real estate in the MSM is no more credible than the headlines on the supermarket Tabloids "Fed Chairs Mistress is a Two Headed Goat" or "Bush Reads Book!"
I also think its instructive to look at a situation in which there was no "pull forward" of losses forced by mark-to-market accounting: the case of New Century Mortgage.
Subprime losses for New Century in 2006 were infinitesimal. Nevertheless, analysts could not help but notice, even their stupor, that delinquencies were ramping.
"Don't worry," management said, "we EXPECT losses to return to historical norms, and we're quite prepared for that."
So while delinquencies rose quarter after quarter, management held to their "normal cycle" loss expectations, which given how profitable they were, would have made hardly a dent in their earnings.
There was no "pull forward" indicator what losses New Century might have in the future, at least not in 2006. If there had been, lots of people, some of them retiree's, would have saved lots of money by not chasing after the company's abnormally high dividend.
I don't know, vader. I think this is possibly an example of pseudo-bear, not real bear.
When "hot RE!" was cool, they all wrote puff pieces about some teenager making a fortune flipping condos.
Now that that story is non-operative, it's back to SCANDAL!
In essence, that's my "no Enron comparisons" rule's point: if you confuse real-economy dislocations with salacious stories of accounting department hanky-panky, then you're just not taking the real economy seriously enough. It isn't all just nefarious CFOs playing numbers games.
Shorter Tanta: the business press is just as annoying as the political press. War? Recession? Civil liberties? Environment?
Nope. Bathroom sex.
Thank you CR
Thank you Tanta for the post and your time and effort.
but Ive never really bought that argument, nor have many regulators or the SEC...
The SEC is a sick joke. FNM should be delisted from the NYA. Fannie Mae is one of those money machines that spews endless money with no accountability, and crappy acounting. The only reason they aren't bk is because they won't admit it. They will soon start buying crappy loans from CFC, WaMU, Wells Fargo, Citi, and every other pig man fascist organization for face value. The dollar isn't worth a nickel now in large part due to the beast that is FNM.
Lots of ink being spilled here, so I'll just add a few brief comments...
(From Tanta's article) "But writing a not completely helpful Q based on GAAP isnt a crime in this country" -- Literally true, but in practice are you sure about that?
(From Tanta's article) "Its a story about political and market pressures and reactions" -- Exactly.
(From Tanta's article) "substituting some kind of gotcha for an honest attempt to understand the market mechanisms and economic reality that is creating those numbers" -- Bullseye. How much you wanna bet that Eavis lives in an apartment he can't afford, has a ton of CC debt, leases a car and financed his sofa. There's your problem right there. Pot...meet kettle.
(From James' post, above) "Important no doubt, but far too long to read. I'll just take you word (or conclusion) for it." -- James...living paradigm of ignorance in action. And probably a much more common attitude than many would wish to believe.
The risk we run in "criminalizing" every behavior we don't like or understand in today's byzantine world of political agendas and media points-of-view is that all the really good people who might otherwise run companies and fix problems just throw their hands up and head for the hills. I guess that leaves us at the mercy of... ?
all the really good people who might otherwise run companies and fix problems just throw their hands up and head for the hills.
Exactly right. We'll make that Entrepreneur's First Law.
Tanta's Corollary to Entrepreneur's First Law is that no good company will volunteer to include more than the bare-minimum required GAAP measures in the financials as long as any number you do provide is just another stick to beat you with.
"I have to say I hate blog triumphalism, too. Thats the mindset too many internet writers have that us citizen journalists in our jammies are going to single-handedly bring down the Big Corrupt Media. I firmly believe in beating the press up a little when they do egregiously bad reporting, but thats largely because I care about understanding what the real story is."
Fine, Tanta, but did you read the following piece of tripe?
Who is doing the best reporting on the scary subprime story? - By Jack Shafer - Slate Magazine
An article on Who is doing the best reporting on the subprime story that doesn't include the names Mish, Calculated Risk, Tanta, Roubini, Ben Jones and a host of others.
I'll put up with a bit of blog truimphalism if it means countering this sort of thing.
Just as Gretchen O' The Times was discovering subprime lending her "newspaper of record" was running a feature on how the men of New York were afraid to commit to $600,000 condos in crap Brooklyn neighborhoods while the women were boldly signing away!
Corrupt, yes, and in need of a spanking.
From the Slate Piece:
"Who else has been good? "Not me," writes Newsweek's Robert Samuelson, who also praises the Journal, adding, "my hunch is that the full story is still unfolding and much of what we will ultimately understand is still shrouded in the mists."
Bull-shit! Nothing has been shrouded in mists. The story has been expertly reported for two years by numerous bloggers. They got every damned bit of it right, and now we have to endure this navel-gazing crap from these fools who didn't do their jobs. Or did jobs that were not about getting at the truth.
Yes, blogging in ones jammies isn't as classy as pulling down six figures or more, getting TV time and an Amex card, but still...
Yep, used to be that the business press had as a last resort utility -- bird cage liner.
Now that is gone.
NPR had an story about political reporting and concluded that its crappiness was due to the reporter wanting to get his name on the news quickly, even for fluff or other nonsense, rather than taking the time for serious reporting which may be ignored anyway.
So yea, the fluffy nonsense keeps the reporter employed, just like the checkout rack of tabloids keeps its folks employed.
The risk we run in "criminalizing" every behavior we don't like or understand in today's byzantine world of political agendas and media points-of-view is that all the really good people who might otherwise run companies and fix problems just throw their hands up and head for the hills. I guess that leaves us at the mercy of... ?
That's a great point. Borrowing from Taleb's randomness argument, not only do we have a system that selects for those with the most hubris (people who think they're skillful when they're just lucky), we compound the problem through knee-jerk overreactions that punish those brave (stupid) enough to try and solve the problem.
These scandals are becoming a self-fulfilling prophecy.
(From James' post, above) "Important no doubt, but far too long to read. I'll just take you word (or conclusion) for it." -- James...living paradigm of ignorance in action. And probably a much more common attitude than many would wish to believe.
Hey, so many brickbats just because I said my respect for Tanta was such that I would believe whatever she said! Same with Einstein. I would not be able to follow his General Theory of Relativity, but I am happy to believe what he maintains. But I confess that not understanding Einstein probably does make me a "paradigm of ignorance in action". Same with intricate details of biotechnology. I'm just too ignorant to follow them all. LOL.
Yes, Duncan, I did read that.
Whaddaya expect from Slate? The online rag that regularly brings us Kaus, Paglia, and Saletan?
I think I'd be worried if they did like me . . .
I'm happy to take credit for my small part of the good work we do on the blogs.
You can simply tell whenever I have had to spend my morning Googling for follow-ups on a piece like this. I hit a bunch of ridiculous blog entries that were of that triumphalist variety. It always sets my teeth on edge.
I didn't mean Paglia, did I? That's Salon . . .
I get my S- problems mixed up.
This is a long-winded piece which says nothing. Endless paragraphs of literary fluff. Outline the top six points you are trying to make with this post, if you can.
Ban the troll.
When Tanta says it will be a long post one should get very comfy indeed.
Oh, now, Max. If we didn't have edgar around this would turn into a big love-fest and pretty soon we'd all be singin' Kum-Ba-Ya and those of you of the male persuasion would start wearing pink bunny slippers and before anyone can do anything about it we'd be climbing out of the handbasket right into the eternal flames.
3188 words. Impressive.
Tanta -
I'm feeling very good, at least, about merely reporting on the DROP in Fannie's stock price and what caused it.
I've enough experience to know better than to editorialize w/o having time to dig through the call replay and the SEC filings in depth -- I'd like to think that of the blogs that picked this up, at least some of us understand source credibility, even when it comes to major media outlets like Fortune.
Thanks for your comments.
Tanta @ 11.17.07 - 1:42 pm
"Note to beginners in the Fannie Mae saga: one of the things they did get busted for back in 2004 is "cookie jar accounting." They reserved too much, with the intention of using those reserves in the future to smooth out income."
Maybe the smartest guys in the room were at Fannie Mae. They were just a couple of years early.
Tanta's outline:
1) Peter Eavis is a dirty rotten poopy head.
2) Fannie Mae is good, good, good.
3) I don't think Peter Eavis knows what he is talking about.
4) How dare Peter Eavis besmirch Fannie Mae in Fortune magazine.
5) I disagree with everything Peter Eavis says.
6) Nah, nah, nah!
Sarah - shortsellers have been spoon-feeding exaggerated (or even true!) stories to news reporters ever since they first started trading stuff under the buttonwood tree about 200 years ago. A guy named Foster Winans got indicted years ago for leaking publication dates of his nasty "Heard on the Street" columns to friends:
The Talk of the Money World - TIME
but that's not really what drives the process -- shortsellers actively work at pushing stories to MSM reporters all the time (Jim Cramer has, at times, spoken or written of this phenomena), because the value of an immediate payoff to a highly leveraged short position is so valuable . . . . . . . when he was in the business, a reporter named Dan Dorfman was always generating lots of heat and controversy that may or may not have always been based in reality.
and before anyone can do anything about it we'd be climbing out of the handbasket right into the eternal flames.
I prefer the fires of Hell to an eternal flame war. Banning all the trolls would be a Sisyphean effort in any case.
No more so than explaining these financial issues again and again to all of us wannabes.
If we're all going to hell in a handbasket, there's no group I'd rather be with.
OT-
For the Tape Reader
GM closed at , imo, an ominous level friday. It's was the price of two of Kerkorian's large block exit trades... 29.25 and 28.75
Tauntie Amie, HUH? I had to stop midstream to feed this one back to you to see how it tastes the second time around.
"Nobody, least of all Fannie Mae, is trying to deny that there are severe problems in the housing and mortgage market, that large losses are being taken, and that this will hurt all over the place."
Maybe it's time to turn the machine off & enjoy the weekend.
3188 words. Impressive.
Is that counting "OMG!!!" as a word?
One quick comment about "cookie jar" accounting.
Financial companies are the ultimate accrual accounting companies. When you make a loan, you know the sales price with certainty and you know your interest rate cost, but you have no immediate information about what the real cost is because you don't know what the default rate & loss experience is going to be. So you have to accrue for losses on loans in advance of the occurence. This is standard GAAP practice - matching costs to revenues.
One of the sad things that happened in this cycle in 2005 and 2006 to plain vanilla regional banks with good geographic footprints is that their loss experience in '03 and '04 and '05 was so good that their NPA's almost went to zero and because of too much pressure against EPS management auditors & the SEC forced them to stop provisioning at all (and in some cases forced "negative provisioning" to reduce reserves against bad credits) for a time.
The reason this is really bad practice is that NO BANK ON THE PLANET is good enough to loan money only to people who are going to pay it back -- there's something called the economic cycle that causes good times to be followed by more good times and then more good times but eventually biz starts to slow and then a recession hits and NPA's start to go up. Waiting until that time to crank up provisions and add to grossly dissipated reserves is every bit as bad as over-reserving when times are good -- because in this case, during 2006 auditors FORCED some nice regional banks to systematially overstate earnings by not letting them provision for bad loans simply because the economic cycle was going strong enough to make recent loss experience almost non-existent.
There. I feel better. That's one other side of things.
Thanks Tanta for "doing the right thing".
When a a person who voices a criticism about a significant portion of the mortgage industry, then shows that she can be a plain and honest dealer with the facts that exonerate those whom have thus far not been shown to have done wrong... that's integrity and that's smart.
As for some critics of your writing style... ( are you listening james and edgar?) since I come here to learn and test my ideas...the more you and CR and your regular contributors write the more I learn...slowly, 'cause I'm not fast learner.
Thanks agai
From Tim Iacono at The Mess Alan Greenspan Made. (I thank him because it was from his site I found CR.)
Brian Gongol at Gongol.com has published this traffic ranking for business and economics websites - don't tell Barry Ritholtz at The Big Picture that CR and Tanta at Calculated Risk are breathing down his neck for the top spot.
Anarchus, it's interesting that part of the hoo-hah in the FNM situation is that, starting in 06, FNM began to warn that their losses would go back up to the historically normal 4-6 bps.
On the one side, you have people saying that that was blind, and that they should have seen 2007 ending up well above historically normal.
On the other side, you have people who remember just how unbelievably low everyone's losses were in the years leading up to 2006, and who understood FNM as saying, "don't expect this to last."
Some of us have said for years that the loss numbers were too low--masked by easy refis and hot RE markets--and that Mother History would get home eventually and send everybody to his or her room without dinner.
The crashing irony of the whole thing is that Fannie could have claimed to have been one of the first to offer such a sober warning, except that they published it 8 months too late. Dang.
Tanta, please don't you use the word "crashing." I'm nervous enough with a balance still in my Fidelity MMA.
That post wasn't so long, I was able to read it twice. Want to thank you for these comments.
[Tanta]"What do you mean? Look at pages 54-55 of the Q. There are two huge footnotes, plus several paragraphs of text around the table, explaining all of this. Some way to keep it hidden, don't you think?"
"If people are buying shares of FNM thinking that it will never have to engage in transactions that have more social benefit than bottom-line benefit, they're nuts."
"Does anyone actually expect them to write a quarterly report that says 'We think all this stuff will result in 100% losses in the next 90 days, but our regulators made us buy it anyway, so were reporting the worst possible credit loss ratio we can calculate, just to spite them'"
Finally I can comprehend what a GSE is.
I could use help on two issues in the post.
1) When is Fannie Mae obligated to buy loans out of an MBS pool? I ask in light of your
"If they thought the stuff would go straight to the FC department, theyd have let the servicer take the loan out of the pool and foreclose, and let the losses hit the MBS guarantee fee income." comment.
2) [Tanta]"FNM did eff up really really badly on its accounting."
"they'd get busted PDQ for over reserving!"
"They reserved too much, with the intention of using those reserves in the future to smooth out income. That's a big no no."
Why is it such a "big no no"? What am I missing (ignorant civilian bystander that I am) in thinking it showed probity on their part, and spared me the pain and effort of smoothing out their earnings all by myself when considering whether or not to buy some stock?
(Note: I ended up not buying because it looked like too much of a target dummy for Congress and news distorters).
Why is it such a "big no no"?
Because it can be a way of hiding declining revenues or a deteriorating business.
You're thinking of over-reserving as the thrifty squirrel socking away nuts against the winter.
The problem that has arisen with this is that a company making money hand-over fist today socks it away in a reserve. Then, next year, when revenues are down, it can pull that money out of reserves, which boosts current-period income, which means they can report another quarter of stable or even growing revenues when the reality is revenues are down. The usual motivation for "cookie jar" reserving is to be able to continue to meet or beat analyst expectations. The whole stupid game of guiding on EPS and then beating it by a penny every quarter. You know that drill. It also not coincidentally tends to help execs make bonuses that are based on steady or climbing income each quarter.
It went on a lot in the tech boom.
Tanta, one other historical footnote -- in investing, serial correlation is extremely valuable - the statistical opposite of a random walk.
Smart financial investors know that nothing trends like NPA's (and because NPA's drive provisions and provisions drive costs which drive earnings), so tracking NPA's carefully is critically useful when biz trends are changing.
Going back to the prior great credit crunch of 1989-1991, when the commercial real estate cycle rolled over into a near-depression, and eventually crazed regulators began running up and down the halls of Fortune 500 banks making them write-down perfectly sound loans that had incomplete documentation, banks weren't just queried in detail on Non-Performers, but the hyper-focus was on NPA inflows (because of course the reported NPA number is actually the last NPA number plus NPA inflows less charge-offs and recoveries).
Anyway, the bottom line is that (a) investors are watching NPA trends very very carefully through this crunch, and (b) I think Fannie Mae has a special problem - because their NPA's are so very low, it doesn't take much of a downturn in residential housing to hit them very hard - to my eye, they have a lot of operating leverage to NPA's because everything in their model runs on such a skinny level .. . . . . MASSIVE loans outstanding, small capital base and tiny reserves against bad losses because they have so relatively few losses even in really bad times.
Historically since the early 1980s experience in Texas, Fannie's done quite well, because the truth is a home mortgage written well (against real income and with at least 15% equity) is almost always going to perform because people will move heaven and earth to protect their equity investment. Whether or not that remains true through this epic near-depression like crash in home values will be interesting to watch. If home prices go down by 25% in short order, simple math tells you that even homes with 15% initial equity may not be worth defending at all. PLACE your bets.
Tanta - you don't mean "stable or growing revenues" . . . . you mean, stable or growing net income.
Slowing revenue growth but great earnings gains are actually a marker of a company pulling earnings out of reserves to make their numbers (you know that, I know, it is more of a non-financial company thing)
They just basically got out of jail for that.
Wow! I really havent been paying attention. Was Franklin in jail? Did he have a rough time in the shower?
Oooooh. I get it its a metaphor. When you cook the books and then get sent home with tens (hundreds?) of millions of dollars in your pocket to a lifetime of solid gold retirement perks and bennies thats called going to jail.
Jeez, I really need to do some time.
Lets be clear about something: FNM is a crucial lever in the precarious machine that has enabled (and inveigled) Americans to live well beyond their means for decades much to the detriment of the rest of the planet. Anything that impairs the ability of FNM to continue performing as it has in the past is a good thing. Anything that disqualifies FNM from serving as a government-guaranteed lender of last resort that absorbs the toxic waste created by scam artists on Wall Street is an excellent thing.
Peter didnt get all the arcane nuances of how the lever does its heavy lifting exactly right so what? Its called rough justice, people. Get used to it.
When is Fannie Mae obligated to buy loans out of an MBS pool?
Short version:
FNM offers two servicing options or contract types to lenders.
Also, if for some weird reason a nonperforming loan is still hanging out in a pool after 2 years, FNM has to buy it out even if contractually the servicer ought to. So if you have a long litigation over probate or something where you can't FC yet you can't collect and it drags on for 2 years, FNM has to take it out. That's a protection for the MBS investors so nothing ever lives in "limbo" forever.
you don't mean "stable or growing revenues" . . . . you mean, stable or growing net income
You're right, I don't. Thanks.
Anything that impairs the ability of FNM to continue performing as it has in the past is a good thing. Anything that disqualifies FNM from serving as a government-guaranteed lender of last resort that absorbs the toxic waste created by scam artists on Wall Street is an excellent thing.
Ah. I see. So you can be as wrong as you want about FNM, as long as being wrong hurts the share price and therefore by some mysterious alchemy contributes to the positive economic goal of removing a moral hazard from Wall Street. Because it's painfully obvious that worries over the exact method of calculating a loss ratio will make Congress step up to the plate and forbid FNM from covering Wall Street Ass. And just because a bunch of shorts might profit from this in the meantime is the way the Street operates, so no foul.
Yes, I'd say that's pretty damned rough justice.
"You're thinking of over-reserving as the thrifty squirrel socking away nuts against the winter"
Yes! Like Bakelite, or Sanborn Map! (you read me like a book).
That may be why I enjoyed your "They adopt a policy that forces them to show big write-downs when they are taken, and two years later some reporter uses that policy to accuse them of . . . hiding credit losses." so much.
Tanta,
HOOOOO-RAH! This post and others like it is one of the BIG reasons I have become a habitue of CR. Thanks for being your bad self!
About the reserving issue . . . it came up in this context because that's essentially what these FV write-downs do: they increase reserves.
The concern is that if, in fact, FNM took "too big" a write-down on the loans--if it booked a "panic value" instead of a more judicious value--then it would be putting too much in reserve. The whole upset over backing those numbers out of the charge-offs is about being concerned that to do it this way is to say you think your write-down was too much.
I am merely observing that if FNM had said, look, we think the FV is a "firesale price" and so we're adjusting it and actually not taking such a big FV write-down, everyone would have screamed "mark to myth!"
At this point the market is so dysfunctional, as Max observed, that there is no right answer.
"we have a system that selects for those with the most hubris (people who think they're skillful when they're just lucky), we compound the problem through knee-jerk overreactions that punish those brave (stupid) enough to try and solve the problem"
Excellent contender for tombstone of the United States!
Tanta: thanks again for your time and point of view:
A reminder from recent past:
FRB:Testimony, Greenspan--Government-sponsored enterprises--February 24, 2004
Given their history of innovation in mortgage-backed securities, why do Fannie and Freddie now generate such substantial concern? The unease relates mainly to the scale and growth of the mortgage-related asset portfolios held on their balance sheets. That growth has been facilitated, as least in part, by a perceived special advantage of these institutions that keeps normal market restraints from being fully effective.
The GSEs' special advantage arises because, despite the explicit statement on the prospectus to GSE debentures that they are not backed by the full faith and credit of the U.S. government, most investors have apparently concluded that during a crisis the federal government will prevent the GSEs from defaulting on their debt. An implicit guarantee is thus created not by the Congress but by the willingness of investors to accept a lower rate of interest on GSE debt than they would otherwise require in the absence of federal sponsorship.
Because Fannie and Freddie can borrow at a subsidized rate, they have been able to pay higher prices to originators for their mortgages than can potential competitors and to gradually but inexorably take over the market for conforming mortgages.2 This process has provided Fannie and Freddie with a powerful vehicle and incentive for achieving extremely rapid growth of their balance sheets. The resultant scale gives Fannie and Freddie additional advantages that potential private-sector competitors cannot overcome. Importantly, the scale itself has reinforced investors' perceptions that, in the event of a crisis involving Fannie and Freddie, policymakers would have little alternative than to have the taxpayers explicitly stand behind the GSE debt. This view is widespread in the marketplace despite the privatization of Fannie and Freddie and their control by private shareholders, because these institutions continue to have government missions, a line of credit with the Treasury, and other government benefits, which confer upon them a special status in the eyes of many investors.
The part of Fannie's and Freddie's purchases from mortgage originators that they do not fund themselves, but instead securitize, guarantee, and sell into the market, is a somewhat different business. The value of the guarantee is a function of the expectation that Fannie and Freddie will not be allowed to fail. While the rate of return reflects the implicit subsidy, a smaller amount of Fannie's and Freddie's overall profit comes from securitizing and selling mortgage-backed securities (MBS).
con't excerpts:
The Federal Reserve is concerned about the growth and the scale of the GSEs' mortgage portfolios, which concentrate interest rate and prepayment risks at these two institutions. Unlike many well-capitalized savings and loans and commercial banks, Fannie and Freddie have chosen not to manage that risk by holding greater capital. Instead, they have chosen heightened leverage, which raises interest rate risk but enables them to multiply the profitability of subsidized debt in direct proportion to their degree of leverage. Without the expectation of government support in a crisis, such leverage would not be possible without a significantly higher cost of debt.
The size of Fannie and Freddie, the complexity of their financial operations, and the general indifference of many investors to the financial condition of the GSEs because of their perceived special relationship to the government suggest that the GSE regulator must have authority similar to that of the banking regulators. In addressing the role of a new GSE regulator, the Congress needs to clarify the circumstances under which a GSE can become insolvent and, in particular, the resultant position--both during and after insolvency--of the investors that hold GSE debt. This process must be clear before it is needed; otherwise, should these institutions experience significant financial difficulty, the hands of any regulator, and of public authorities generally, would be constrained by uncertainties about the process. Left unresolved, such uncertainties would only heighten the prospect that a crisis would result in an explicit guaranteeing of GSE debt.
The expansion of homeownership is a widely supported goal in this country. A sense of ownership and commitment to our communities imparts a degree of stability that is particularly valuable to society. But there are many ways to enhance the attractiveness of homeownership at significantly less potential cost to taxpayers than through the opaque and circuitous GSE paradigm currently in place.
"Yes. On the first call, they set 2008 expectations at 8-10 bps"
That's a number Sebastian would probably agree to describe as a little on the low side. If we see 30% off-the-peak declines in bubble areas in '08, not out of the question by a long shot, those loss numbers may no longer be measured in bpts.
Prediction - The Government monetizes this whole mess once the MIs & agencies face insolvency. There is no way around it. It's wise to be prepared for hyper-inflation.
Tanta,
Excellent piece as usual. I admit I am one in the "blogosphere" that posted on the story yesterday evening. Thank you for the detailed analysis. I am not sufficiently skilled in matters of finance (I am only a DNA Molecular Biologist!) to go through all the details of the Fannie accounting changes. I clearly ,issed the subtlety of the change. The burden of proof is on Fannie to be believable and I think that there are still a few points that are troubling:
1. With FNM's failure to produce filings over the years, is now a great time to roll out new "presentation" parameters?
2. Not having information on cure rates for loans looked terrible to all traders and analysts
3. If management of the single largest lending entity in the world cannot communicate clearly what is going on, what is going on?
You are correct that this instance shows the trouble with writing in real time without thorough analysis, and I thank you for your herculean effort.
Fannie Mae's Fall Speeds Up Crazy Train | Financial Advisor Update | Financial Articles & Investing News | TheStreet.com
Funny thing is that half of russian division of CPA couldnt figure out whats going on at Fannie, but Tanta in her infinite wisdom figured it out in no time, i.e. GSE very very good, free market bad, bad, very bad.
And after getting to the end of the comments, thanks to the community here for the outstanding signal to noise ratio - almost all signal - and often (though not always) the noise is entertaining!
(OK mark me down for the Kumbaya gig but I will pass on the pink slippers)
On gov't bailouts, I talked to a DC insider a couple of weeks ago -- according to him, despite occasional blustering by the Charlie Schumer's of the world, there's no pressure for any kind of major legislative fix, in part because there's so many large voting blocks that don't directly benefit: (1) voters who don't own a home, (2) voters who own a home without a mortgage, and (3) voters who own a home with a prudent LTV . . . . . . none of these people are likely supporters of a bailout of the subprime mess when the cost would come out of their pocket and you'd be rewarding people who speculated wildly in residential real estate. Minor fixes may be likely (such as not imputing income to loan forgiveness in workouts) but nothing major is coming.
On hyperinflation, I have to disagree. Traditional credit crunchs are deflationary, not inflationary, and this looks like a traditional credit crunch in most respects. Part of the deal is that credit creation is inflationary, in large part IMO because credit use pulls future demand into the present - you don't have to save for a car, or a TV to buy later, you just buy it now and then pay it off (in theory) over the life of the asset.
To the extent the HEL or MEW ATM has been turned off (and if the 10 year yield gets into the 3's I'm not positive it can't be turned back on) for this cycle, and access to credit card debt and auto loan debt and mortgages has been restricted, that's all going to be bad for demand, bad for employment and bad for inflation.