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HomeFreddie Mac, Fannie Mae Deja Vu?: Part II
Posted by Larry Doyle on April 8th, 2010 11:51 AM |
On Christmas Eve 2009, the Obama administration provided a blank check to the wards of the state known as Freddie Mac and Fannie Mae. (“Fannie and Freddie’s Huge Christmas Bonus”)
What other quasi-government institutions have a very similar business profile as Freddie and Fannie? The Federal Home Loan Bank system, acronym FHLBs, commonly referred to within the financial industry as FLUBs. I will reserve comment on that moniker. Ten months ago, I questioned whether the dynamics at work within the FHLB system would be the equivalent of what has transpired at Freddie and Fannie. I wrote “Freddie Mac, Fannie Mae Deja Vu?” and highlighted:
Can our economy absorb another financial hit of the magnitude of Freddie Mac and Fannie Mae? (more…)
FHLB-Seattle Sues Wall Street
Posted by Larry Doyle on January 27th, 2010 9:54 AM |
When people lose a lot of money, it’s no surprise that they find a lot of lawyers and a lot of reasons to start bringing lawsuits.
Talking about losses, I first introduced readers to the expected red ink within the Federal Home Loan Bank (FHLB) system last May. I wrote “FHLBs: Red Sea, Dead Sea or Both?” and “Freddie Mac, Fannie Mae Deja Vu?” to highlight the embedded losses within the FHLB system. The losses are centered in the massive mortgage portfolios within the system. The toxic waste within a lot of these mortgages is now being realized in terms of actual losses as an ever increasing percentage of the mortgages default. What’s the result? Let’s go to court.
Thank you to a loyal Sense on Cents supporter for highlighting a developing lawsuit. The FHLB-Seattle is effectively suing all of Wall Street. This suit and its underlying roots deserve significant broad based coverage. Why? (more…)
Sleepless in Seattle . . . FHLB-Seattle, That Is
Posted by Larry Doyle on November 10th, 2009 4:28 PM |
Having broached expectant difficulties in the Federal Home Loan Bank system last spring, I try to keep a close eye out for news of note on this largely unknown – but critically important – system of banks. To a large extent, the FHLBs have been flying under the radar despite some serious problems within their investment portfolios and loan books.
High five to KD for pointing out that the folks at FHLB-Seattle probably are not getting much sleep these days. Why is that? Insufficient capital will do it to you every time. As the American Banker offers, FHLB Seattle Still “Undercapitalized,” Regulator Says:
The Federal Housing Finance Agency said late Friday that the Federal Home Loan Bank of Seattle remains “undercapitalized” and will not be allowed to redeem or repurchase stock or pay dividends.
At the end of 2004, as the bank struggled with the size of its mortgage purchase program, it said members who wish to redeem their stock must wait five years before receiving their money.
But with that time period almost up, the Finance Agency said it would not allow the bank to begin redeeming stock, fearing it could lower its capital base. (more…)
Financial Cooking
Posted by Larry Doyle on July 5th, 2009 8:46 AM |
When business operations make money, it is due to the brains and intellect of management, correct? When business operations lose money, it is some sort of nefarious measure at work in the marketplace which can be ‘corrected’ by changing the rules, correct? The implementation of the relaxation of the FASB’s (Federal Accounting Standard Board’s) mark-to-market utilizes that thought process. Make no mistake, it is flawed and simply allows financial institutions to ‘manage earnings,’ otherwise known as “cook the books.”
We receive a whiff of this recipe in a report by the Wall Street Journal, Home Loan Banks See Net Income Decline 51%. I have maintained that the basic business model of the FHLBs is flawed and we see evidence of this in the fact that outstanding advances (loans) by the FHLBs to their member banks actually decreased in the 1st quarter of this year:
Total advances outstanding from the banks declined to $817.41 billion as of March 31 from $928.64 billion three months earlier. After surging in 2007 and early 2008, demand for those advances has slackened, partly because of the recession and partly because the federal government has offered alternative funding programs for commercial banks.
Without even maintaining the level of advances, the FHLB system is coming under increasing pressure to generate earnings in the face of increasing delinquencies, defaults, and foreclosures on all of their holdings–advances, mortgage originations, and mortgage-backed securities purchased from Wall Street. (more…)
FHLBs: Red Sea, Dead Sea or Both?
Posted by Larry Doyle on May 25th, 2009 8:46 AM |
On April 2nd, in a post Putting Perfume on a Pig, I compared Freddie Mac, Fannie Mae, and the Federal Home Loan Bank system to the Red Sea. Why? For the very simple reason that for the foreseeable future, these entities will accrue losses. How? Unlike commercial banks, Freddie, Fannie, and their 12 FHLBs have very little earnings power in this environment while faced with a steady stream of losses on their mortgage holdings given ongoing defaults and foreclosures.
In retrospect, would it have been more appropriate to compare the FHLB system to the Dead Sea than the Red Sea? I think it may. As the Wall Street Journal highlights, Directors Are Faulted at Home Loan Banks:
Financial troubles at some of the Federal Home Loan Banks are raising questions about how well directors of these institutions are supervising their executives.
A plunge in the value of mortgage securities bought by several of the regional home-loan banks has forced them to halt dividends and curtail funding for local housing projects. An annual report issued by the banks’ regulator this past week says some of them “paid insufficient attention” to credit risks and haven’t invested enough in information technology.
Unlike giant banks or government-backed mortgage companies Fannie Mae and Freddie Mac, the 12 regional home-loan banks draw little public scrutiny. (LD’s emphasis) Created by Congress in 1932 to support the housing market, they are cooperatives owned by more than 8,000 banks, thrifts, credit unions and insurers.
Why do these home loan banks draw such little public scrutiny? They are the wholesale entity (providing funds) to their retail network (banks, thrifts, credit unions, insurers) which deals with the public. With no interaction with the public, the media and market analysts have accorded them little coverage. Thus, I make the assertion that these banks truly are a combination of both the Red Sea (ongoing losses) and Dead Sea (no coverage). (more…)
The Red Sea
Posted by Larry Doyle on April 24th, 2009 11:26 AM |
While there is tremendous focus on the Bank Stress Tests, there remains limited focus overall on the centerpieces of our domestic housing finance industry. I am talking about Freddie Mac, Fannie Mae, and the Federal Home Loan Banks. Some have categorized these institutions as “black holes.” I believe a more appropriate designation would be The Red Sea as these institutions are awash in losses and continue to bleed money.
We may never know the circumstances surrounding the death of acting Freddie Mac CFO, David Kellerman, but there is a lot of focus by government officials on these institutions. There has been much less focus by private analysts. To that end, I am most grateful to Bloomberg’s David Reilly for reporting on Fannie Mae Creates Housing Mirage With Bum Loans.
Effectively, Fannie Mae is giving funds away to very high credit risk individuals who would have otherwise most likely already defaulted on their mortgages. As Reilly reports:
Give money away. That was a solution to the housing crisis mortgage giant Fannie Mae hit on last year.
Faced with growing numbers of homeowners unable to make mortgage payments, Fannie decided to fund loans to borrowers that were instant losers.
The point was to buy time. Even though those loans resulted in a $453 million loss, they helped keep troubled homeowners from defaulting. That meant Fannie for now didn’t have to make good on loan guarantees that may have cost it as much as $2.4 billion.
Make no mistake, this Fannie Mae program was also being utilized by Freddie Mac. Reports have come out that Freddie Mac’s Kellerman was pressured by Freddie’s accountants to improperly report their financials. In a similar vein, Fannie is playing another version of the “shell game” in order to buy time and forestall losses. (more…)
Zombie & Co.
Posted by Larry Doyle on April 7th, 2009 5:45 AM |
I am no fan of George Soros. I often believe he does not draw a hard line between his political interests and his business interests. His active support with MoveOn.org has made a mockery of any attempt to achieve campaign finance reform.
That said, for those involved in global finance, whether you like George Soros or not, you need to know what he is thinking. Why? George Soros can move markets via his own investment strategies. Additionally, there is little doubt that George is the epicenter in a massive flow of market sensitive information.
To that end, Soros gave a stinging indictment of the change in the FASB’s mark-to-market by stating in a Bloomberg interview,
the change to fair-value accounting rules will keep troubled banks in business, stalling a recovery of the U.S. economy.
“This is part of the muddling through scenario where we are going to keep zombie banks alive,” Soros, 78, said today in an interview with Bloomberg Television. “It’s going to sap the energies of the economy.”
Is this statement a self-serving offering by Soros? Who knows? Is it an attempt to further promote the U.S. as a lessened power? Perhaps. That said, there are others, myself included, who believe the relaxation of the mark-to-market, especially for outfits like Freddie Mac, Fannie Mae, and the 12 regional Federal Home Loan Banks (FHLBs) is nothing short of a charade.
Did Soros’ statement have an impact on the market? Not today. The dollar has been improving of late. However, over the longer haul, the cost of having a number of zombie-like banking institutions will be pressure on the dollar along with increased borrowing costs for the zombie institutions or Uncle Sam who will be backing them.
From a personal perspective, would you lend money to a zombie?
And now, here’s a must-watch little treat. Crank up your speakers . . .
LD
Putting Perfume on a Pig!!
Posted by Larry Doyle on April 2nd, 2009 9:45 AM |
***Bumped up from original publication time of 7:30AM. The FASB has now just voted its approval of the change in mark-to-market accounting.
It is speculated that the FASB (Federal Accounting Standards Board) will today relax its rule known as the mark-to-market. This rule requires firms under the FASB’s purview to mark their assets to changing market prices on an ongoing basis. The institutions subject to this rule have been lobbying FASB and Congress for a change because the markets for these assets have imploded and in certain cases totally dried up.
What does the FASB plan to do? The FASB is going to cave to the lobbying pressure and will allow institutions to use their own internal models based upon cash flow analysis to price these assets. This change in the mark-to-market will not only allow institutions the flexibility to not mark down certain assets, but simultaneously mark up other assets.
The media only presents the impacted assets as “hard to value” or the dreaded “mortgage-backed securities” or “securitized assets”. In fact, many of these assets are very simple and plain vanilla. Let’s enter the world of the Federal Home Loan Banks.
The FHLB system consists of 12 regional banks and it provides liquidity (capital) for its respective members to operate. The FHLB system invests its own capital, primarily in plain vanilla conventional mortgages (Freddie Mac, Fannie Mae, Ginnie Mae) and Jumbo ARMS (adjustable rate mortgages) and fixed-rate pass-thrus. Certain banks within the FHLB system may have moved slightly off the plain vanilla path to purchase a small percentage of sub-prime assets, but that was much more the exception than the norm. (more…)
Uncle Sam’s Dirty Little Secret
Posted by Larry Doyle on June 18th, 2009 4:36 PM |
If an agency is sitting on billions in losses but nobody asks about it, can we forget about it?
If an entire group of banks is sitting on hundreds of billions more in losses, and the media is not even aware of this banking system, can we pretend they don’t exist?
Oh, if only we could, perhaps our economic life would be so much simpler.
While Uncle Sam and the media can choose to overlook these institutions, the losses are real and will serve as a drag on our economy and nation for the foreseeable future. Yet, they receive very little attention. Fortunately, Bloomberg shed a hint of light on part of this problem today in writing, Fannie Mae, Freddie Mac in Limbo as Geithner Seeks More Time:
Doesn’t have time or doesn’t want to admit that these agencies represent an ongoing and enormous drag on our economy? How so? Fannie and Freddie hold 50% of the mortgages in our country. These entities are most likely sitting on hundreds of billions in embedded losses currently with limited prospects to generate real revenue. They have no viable business model at this point in time. As a result, rather than entering into an unpleasant and economically harmful dialogue, Geithner chooses to sweep this under the rug. How can Tim do this? Because Uncle Sam has allocated, if not necessarily set aside, funds for these agencies to offset future losses. As Bloomberg highlights:
Over and above swimming in a sea of losses, both Freddie and Fannie are effectively rudderless. Fannie Mae’s acting CEO, Herb Allison, was recently appointed to oversee management of TARP funds at Treasury. Freddie Mac’s acting CEO, John Koskinen, had resigned and only returned when beseeched. While Koskinen has committed to retaining the role of chairman of Freddie, he can’t get out of his daily Freddie Mac responsibilities quickly enough as the WSJ reports, Freddie’s Accidental CEO Tries to Shed Job.
The dirtier little secret hidden by Uncle Sam is embedded within the Federal Home Loan Bank system. Why? After Uncle Sam, the FHLB system is the second largest creditor in our country with approximately $1.2 trillion in outstanding debt. While Freddie Mac and Fannie Mae’s portfolios are chock full of agency mortgage-backed securities (MBS backed by conforming size loans), the portfolios within the FHLB system (12 regional banks) are stuffed with Jumbo mortgages, Alt-A, pay-option ARMS, and sub-prime. In short, lots of toxic assets and lots of embedded losses hidden by the artful deceit of the relaxed mark-to-market accounting standard.
Where are we going with these future wards of the state? I project that in 2010, we will see these 14 entities (Freddie and Fannie and 12 regional FHLBs) combined into one large government owned housing finance entity.
Shhhhh . . . don’t tell anybody!!
LD
Tags: Federal Home Loan Banks, fhlb portfolios, future of fannie mae, future of fhlbs, future of freddie mac, geither comments on freddie fannie, government support of Fannie Mae, government support of Freddie Mac, herb allison, john koskinen, losses in fhlb system
Posted in Fannie Mae, Federal Home Loan Banks, Freddie Mac, General | 3 Comments »