Thursday, August 13, 2009

Fannie Mae, Freddie Mac Results Should Concern Bank Investors

More accounting shenanigans to cover up massive losses.

Lauren Tara LaCapra writes:

The fact of the matter is that accounting adjustments played a far bigger role in propping up the bottom line than did any moderation of losses in Fannie and Freddie's core book of business.

The implementation of FAS 115-2, which eases rules on recognizing losses, gave Fannie's assets a positive adjustment of $5.6 billion after taxes and lessened its allowance for future tax expenses by $3 billion. The change boosted Freddie's equity by $8.5 billion -- thereby allowing the firm to avoid drawing additional funds from the Treasury Department.

In a counterintuitive twist, although the housing market -- as measured by home prices, delinquencies, defaults and foreclosures -- continued to sour, the easing of accounting rules allowed Fannie to mark up assets by $823 million. That compares with writedowns of $1.5 billion in the first quarter. Freddie posted mark-ups of $2.9 billion on some assets, and said credit expenses decreased in part because of "enhancements" to its methodology for estimating future loan loss.

Scott Dauenhauer CFP, MSFP, AIF