No Estimate Of Magnitude In Newly Disclosed Errors: FNM
The biggest mortgage firm in the world has some news out this morning. “Fannie Mae, the nation’s top home mortgage lender, said Monday that it notified the Securities and Exchange Commission that it will miss the March 16 deadline to file its 2005 annual report. The lender said it expects that its annual report, which will include its restated results for 2004, won’t be submitted before the second half of the year.”
“Mortgage finance giant Fannie Mae, engulfed in an $11 billion accounting scandal, on Monday said it found more accounting errors and delayed posting financial results for the second year running.”
“Fannie Mae did not estimate how the newly disclosed errors might affect the magnitude of its expected restatement. Fannie disclosed new accounting problems in its Monday filing with the SEC. It said those errors were not previously reported in other filings or in the report issued last month by former U.S. Sen. Warren Rudman, the investigator hired by the company’s board.”
“Those new errors included accounting for certain investment securities at the incorrect cost basis, accounting for certain guaranty fees and obligations in connection with a small portion of Fannie Mae mortgage backed securities trusts, and certain loan-related accounting matters.”
“The U.S. Treasury Department is studying the growth of sophisticated financial vehicles such as hedge funds and derivatives to see what risks they may pose to financial markets or institutions, a senior official said on Monday.”
“Treasury Undersecretary for Domestic Finance Randal Quarles told an international banking conference that derivatives have exploded in both type and use, and sounded a note of caution. ‘We at Treasury,’ he said, ‘want to ensure that the magnitude of risk and exposure are properly measured and that investors and market participants have full and adequate disclosure’ with which to make decisions.”
“Quarles said Treasury is also reviewing the pace of capital accumulation by hedge funds and private-equity funds, the role of nonbank financial institutions in markets and other issues. He also criticized the big holdings of securities at mortgage giants Freddie Mac and Fannie Mae.”
“Quarles said ‘we’d like to see these holdings significantly reduced. With an appropriate phase-in period, we believe that our capital markets could adjust to a significant reduction in the presence of the [government-sponsored enterprises] as mortgage investors,’ he said.”
MarketWatch and Reuters have already updated the stories since I began working on this post, so i apologize if any quotes are rearranged. I have heard rumors that the new amounts are substantial.
Something seems real fishy here. Another enron story possibly? When you can’t keep your books straight there are other underlying problems.
Enron again. In fact, I believe at this point that Fannie Mae’s saga will be the mother of all Enrons.
I second that perspective.
Note only do the GSE’s have bogus accounting…They’ve bought scores of mortgages contrived thru bogus appraisals and corrupt real estate system.
This will be the mother of all “crashes”…Thanks, Al.
And to top it off, there is the “G” in GSE to consider. Enron was a private firm, and while its collapse sent shock waves throughout the asset markets, the most directly affected were those who privately purchased the shares. Since Fannie has an implicit guarantee from the US Treasury, all US taxpayers are at risk.
GetStucco-
The key word is “implicit”…From my reading, there is absolutely nothin’ in writing which says the US taxpayer has to come to the rescue. In fact there has been a movement in Congress to have the Feds to increasingly distance themselves from both entities and to publically disavow the impression that they will automatically be there for a bail-out.
Hypothetically, if it does lead to a “bail-out”, as far as I”m concerned the credibility of the entire banking financial system is totally shot.
This entire 5-year real estate sales and refi racketeering show has been engineering by the transplanted penny-stock, pump and dump, bucket-shop crowd, with the GSE’s as their ultimate suckers.
I’ll be f*cked if my tax dollars are used to bail these b*stards out.
Hello Belize…
FNM will make Enron look like small potatoes. Unfortunately, your comment about the “G” in GSE is most relevant. Will we ever really know what happened at Fannie? The government will go to great lengths to whitewash the whole affair and make it seem benign, meanwhile bailing out the whole sorry mess at taxpayer expense.
This is the main reason I stopped shorting FNM. If left to stand on its own merit, FNM would be a $9 stock, well on its way to delisting. Instead, its being pinned to the low 50’s and seems to levitate there forever as nobody really believes it will ever go bankrupt.
I’m very tempted to gamble a bit and get some put LEAPS on FNM. It’s a nutty gamble since so many mutual funds hold it.
This is the one stock that makes me believe in the PPT. They have not done their books since 2004 and say they can’t come to grips with their accounting, yet the S&P research has a 1 year price target of $60 (it is now trading at $53.5).
How can someone, with a straight face, put a 1 year price target to paper when FNM openly states they have no idea of their accounting situation since 2004.
Been investing successfully in stocks for many years now (over 40% return/yr since 01′) and am allway amazed that roughly 1/2 of all listed securities are dogs. I see no value in over half of all securities, least of all FNM. You are just begging for trouble when you own a stock with accounting problems. Hell, FNM is way beyond “accounting irregularities” and into systematic fraud and corruption.
Only fools and our phantom PPT (funded by the fed.) would own this security.
Someone above said this should be a $6 stock, I disagree. If this was a real company it would have imploded in 04′ when their book cooking became public.
I have an accounting degree and can tell you they are full of shit when they say they have been trying to get their books together since 04′. It would be expensive, but they could have one of the big firms come in and set up their books from scratch in six months. Just ignore trying to fix them and start over. It is a straight forward procedure to acertain what they own and what they owe.
The reason they haven’t corrected their books is because they don’t want to, not because they can’t. They are fully aware that if their real situation were known they would be done.
Isn’t it wonderful that they use taxpayer money to lobby politicians to allow them access to more public funds for more lobbying.
This is going to make ENRON look like lunch money extortion in grade school.
while FNM could ulitmately make Enron look like a walk in the park, i don’t think it’s fair to say that this is anything NEAR the moral sewer that was Enron. I read the entire report that came out last month and it seems that:
- Raines was careless
- the BOD did nothing
- accounting was not considered important (disgusting)
BUT this is not like the stories of Enron which included prostitues, cocaine, cult-like ruling, connections with governments, California power outage, lies, and special purpose vehicles calles “death star” and “dragon”….
Don’t forget “get shorty”, which might also be used for describing why Fannie’s stock is so tough to short…
http://www.economicprincipals.com/issues/02.05.12.html
“…It said those errors were not previously reported in other filings or in the report issued last month by former U.S. Sen. Warren Rudman, the investigator hired by the company’s board.” Former U.S. Sen. Warren Rudman? Yeah, there’s no corruption at the highest levels of government. The implication: “Cut us some slack and you can have a nice cushy job with us after the voters finally throw you out of office”. We’re doomed.
What’s more worrisome is many otherwise conservative investiment advisors reccomended FNM stock and mortgage-backed securities in general as a part of investment portfolios…
I predict that retirees covered by traditional pensions will get the sh!t kicked out of their anticipated retirement wealth once Fannie’s accounting problems are finally unraveled. Too many fund managers have loaded up on MBS on the dubious assumption that they are conservative investments.
Maybe these pension fund managers should divest from MBS and go for Fannie Mae’s stock instead. It has excellent plunge protection insurance:
http://tinyurl.com/cw3zt
Per CNBC this morning, existing home sales, new homes sales, homebuilder stocks, all down, down, down, interest rates up, up, up, expecting 5.25 10 year bond by year end, 30 year fixed already around 6.25.
But according to those same NAR numbers CNBC reported home prices are expected to appreciate 5-6% this year.
Actually, it’s more like 6.5% and rising seeing where the 10yr is at and doing today.
Haven’t seen 6.5 yet, but hey, bring it on.
“…certain loan-related accounting matters.”
There’s a weasel phrase you could drive a scandal through. I’m “guessing” here but anyone wanna bet they discovered that the bundles and tranches they’ve been purchasing from originators are full of loans that don’t meet their legally mandated standards?
I always thought it would be FNM that would break the camel’s back. It still might be true.
After all, it was Fannie Mae who loaded the camel’s back with three times normal carrying capacity…
“Quarles said Treasury is also reviewing the pace of capital accumulation by hedge funds and private-equity funds, the role of nonbank financial institutions in markets and other issues. He also criticized the big holdings of securities at mortgage giants Freddie Mac and Fannie Mae.”
With rather strong evidence of government intervention to game US asset prices, there is little wonder that hedge funds have grown up like so many mushrooms to exploit the resulting predictable market distortions.
Read about The Fed Officially Kicks Off the Next Recession.
“However, once the Fed Chair sounds the alarm about commercial real estate loans, it starts an entire chain of events that ultimately and unequivocally leads to economic recession.”
What else are they supposed to do? With all the economic numbers coming in so strong, especially a falling unemployment rate, they have to continue tightening or else catch the blame for letting inflation run amuck. If the housing bubble is collateral damage, so be it; their behinds are fully protected under their mandate to maintain price stability.
Melody, this is a truly frightening article. Perhaps Ben will expand the discussion on it.
Excellent article, Melody!
I believe the fecal matter is about to contact the oscillating device.
“Average weekly earnings rose to $555.04 last month from $555 in January. ” Oh wow, that’s a big salary increase….NOT!!!!!!!
I hate the way the media tells their stories.
That’s $555.48 annualized. Or in populist terms, 10 half-caff mocha lattes at Starbucks per yr.
Maybe my calculations are wrong, but that comes out to an annualized earnings increase of 0.0865% a year. How is that news? The real news is that once you take inflation into account, you have an earnings DECREASE.
If you check John Williams web site on the ‘Real’ inflation rate, you’ll find that it’s running OVER 8%. Not the BS adjusted CPI put out by the BLS.
If you really want to stir the pot,when you write letters to the media instead of referring to the ‘Housing Bubble’ start referring to it as “The Mortgage-Housing Bubble”….let’s take it from a ‘ghost’ hard asset to the doorsteps of the financial world in terms they can understand and not ignore. This am business report had someone talking about the possibility of a 6% Fed fund rate…..
This am business report had someone talking about the possibility of a 6% Fed fund rate…..
There so much inflationary bias built in the system right now, I’m surprised the estimate is not double that. Inverted yield curve-stagflation…
Hello, Jimmi Carter…
“Those who forget history are doomed to repeat it…”
Hello Paul Volcker???
http://www.bankrate.com/brm/default.asp
Good link for current home interest rates. They are in a solid, steady, slow uptrend. This is what, “based on results”, the Fed wants.
to Chrisinpnw,
Did you check out the article on that site: Auto-loan debt
now tougher to cut. Great article on what happens under the new bankruptcy laws. A real eye opener! Thanks for putting up the site listing.
11+BPS increase in one week for all mortgage rates. That looks a bit like the slow-motion inventory crash currently underway. I am beginning to suspect that Ben Bernanke likes slow-motion crashes.
“One has observed life carelessly who has failed to see the hand that–kills gently.”
this story gets crazier every few months.
Fannie’s problems are festering. If the leg is not amputated soon, the entire organism (US Inc.) may have to go on life support…
““Quarles said ‘we’d like to see these holdings significantly reduced. With an appropriate phase-in period, we believe that our capital markets could adjust to a significant reduction in the presence of the [government-sponsored enterprises] as mortgage investors,’ he said.”
****************************************************************************************************************
Significant reduction? Would that suggest that Fannie Mae might buy fewer mortgages this year than last? Would that mean that there will be fewer buyers? Don’t we need more buyers now that the inventory numbers are up? What do we do now, Mr. Lereah?
I have thought that the Fannie Mae issue would have blown up earlier than this. But, at least, it is coming out. I estimate that the $11B is actually low. And that was the Worldcom amount, which was the biggest corporate belly up to date. And their folks are now sitting in jail cells (where they should be). So, those responsible for this FNM mess etc should be prosecuted and jailed for life. Will they use the Bernie Ebbers approach, (I didn’t know) crap, or what? Will be interesting to see. Also, to see what will happen with the new BK laws, and increase in credit card payments. THat will hasten the flopper’s rush to sell, and cut the bleeding.
I b gettin paid
F Raines (AA)
If anyone is at all vaguely familiar with the situation at the GSE’s the only surprise should be that people are surprised at this behaviour at all.
I like what one commentator called the GSE’s “Fanron” . The GSE’s have been marred by bad accounting since 2003, when the President of Freddie Mac was forced to resign. Fanron has always been late with their financial statements.
Of course it didn’t help that in Fall of 2004 that OFHEO wrote a nice 116 page report saying that Fannie Mae was not in compliance with GAAP.
Many people have openly stated that if Fanron were a public company its stock would have exploded long ago.
Fanron is a disaster of unprecedented financial magnitude waiting to happen.
The only surprise here is that the public at large has taken action to protect itself from the impending implosion.
“The only surprise here is that the public at large has taken action to protect itself from the impending implosion.”
Alex –
You talk like a Berkeleyan. Could you please elaborate on how the public at large has taken action to protect itself?
Thx,
GS
The thing that is the most frightening is I wonder if we are all too calm as well. The correction of the market could have some real ripple effects. Can we come out whole or are we personally going to have to deal with defaulting banks, lost jobs etc?
Simmssays…americaninventorspot.com
I just read this article about the new FNM accounting errors and I cant believe that this big news is not even mentioned at the end of the day on Yahoo business. How can this event not be considered news-worthy? I fthink it’s horrifying.Can the rest of the people be so dissconnected?
Let us consider reasonable extrapolations from what we know. We know that Freddie and Fannie, the two largest and most highly-regarded mortgage giants have major financial problems due to, at a minimum, incompetent bookkeeping. We know that Freddie and Fannie write “A” paper; that is, they require compliance with extensive regulations before they will accept or guarantee any mortgages. Even with their compliance requirements and regulations, they have bad loans and a deeply troubled financial picture.
What does this mean for other mortgage institutions who do not have such regulations? Is there a serious contention that Ameriquest, Wells Fargo, or Countrywide have been more diligent and better lenders and bookkeepers than Freddie and Fannie? Have they not been laying people off, closing mortgage processing centers and otherwise battening down their hatches?
Perhaps the phrase “tip of the iceberg” is no longer appropriate. We should consider alternatives like “the whole fricking glacier” or maybe more explosive terms like Mt. Pelee or Krakatoa.
When the fire-god rumbles, it’s time to leave the area. We have more than just rumbles here. Prudence dictates a rapid relocation.
Think Alvarez hypothesis applied to the lending industry…
http://en.wikipedia.org/wiki/Cretaceous-Tertiary_extinction_event
all we needed to really crush this bubble into oblivion was some sort of event, right?
we got it now
there’s always opportunity in chaos. this is getting good.
When does the collapse of Fannie morph from a forestalled inevitability into common knowledge?
it was only 3 or 4 weeks ago that Barron’s was telling the whole wide world it was all good over at FNM - absolutely no downside.
FNM’s business model:
loan money to people buying houses; bundle the loans together; place a guarantee on the bundle; sell the guaranteed bundle; simultaneously hedge the guarantee. book everything as profit. spend more time with your congressional lobbyists.
oh but wait … it turns out that there is a possible flaw with their model. they really DON’T KNOW whether what they received as money for guaranteeing all those nice bundles of mortgages, AND what they thought they booked as trading profit on their hedges is really, truly enough. oh my …
Some other problems are:
1) Figuring out the value of all these Fannie hedges requires a rocket-science-level knowledge of finance.
2) The values of the various hedges depend on underlying conditions which have been endogenously altered by a systemic buildup of too many such hedges.
3) The rocket scientists either could not or did not anticipate the endogenous impact of a steadily growing mountain of hedges on their ability to withstand a catastrophic financial meltdown.
4) The mountain will most likely continue growing until said meltdown takes place.
5) The larger the mountain, the higher the probability of a meltdown occurring.
None of the above probably will matter at the end of the day — the US taxpayer unwittingly stands with open wallet, ready to make it all good again.
we have to think big, really big on this one. i mean Krakatow eminated waves that were measured all the way up the Thames. so, perhaps the US taxpayers are towards the front of the line, but, we aren’t alone … our friends from China, Japan, the Middle East … yup even Texas, are all there with us.
I don’t know anything about hedges, but they appear to me to be a substitute for insurance. If that is correct, is no one worried about the funds’ ability to pony up when the loss is called? Insurance companies have to have demonstrable reserves, but it sound like hedge funds do not.