August 6, 2008
QuickLinks: That Mischievous Little Freddie Is At It Again
∙ Freddie Posts Loss, Cuts Dividend as Slump Deepens [Bloomberg]
∙ Pimco's Gross Says U.S. Will Rescue Fannie, Freddie [Bloomberg]
First Published: August 6, 2008 2:30 PM
Comments from "Plugged In" Readers
But hey, "they might not need any of the bailout money."
Posted by: EH at August 6, 2008 3:15 PM
I'm just impressed that they are finally getting their books straightened out. What a train wreck!
Posted by: Mole Man at August 6, 2008 4:29 PM
I'm not sure they're getting their books straightened out.
I think the essential problem with Fannie/Freddie as well as many of the Financial firms right now is that NOBODY (no, not me either) has any clue how to do their books. The financial firms were too smart by half with their "innovations"
Fannie and Freddie haven't posted clean books for nearly a decade now. They have forensic accountants working over there, and the financials are a mess.
Earlier in the decade they were smoothing DOWN profits to save for a rainy day (a big no-no from a legal standpoint, although it makes sense from a practical standpoint) and also smoothing profits to maximize Executive compensation (a no-no legally and practically).
some people think that their financials are currently opaque for nefarious reasons, and perhaps there is some truth to that. But a lot of it is simply that these firms are so complex that they essentially are beyond our capability to value them. Due to the nature of the assets, the accounting REQUIRES a fair amount of significant assumptions that can radically alter book value.
this is why Freddie's loss was 4x worse than expectations... because nobody can estimate what these things are worth. the value literally changes by orders of magnitude every few weeks. (and yes, there may also be a little bit of fudging here and there but who knows how much of the problem is due to that)
unfortunately, this will continue until housing can bottom... once housing bottoms, the analysts can better estimate the worth of the underlying securities and secondary derivatives. but it's impossible to do as housing continues to fall...
I've predicted for a few years now that fannie and Freddie would fail and be nationalized. I still hold that belief, despite what Treasury has tried to do.
what investor in their right mind would invest in Fannie/Freddie right now? unless there is a full govt backstop? Fannie/freddie's debt will FOR SURE be federally backstopped... but I find it hard to believe that congress will ever allow a full backstop to equity holders (although the Treasury purchase plan is essentially a massive gift to equity holders in and of itself it is not a full backstop of equity and will be dilutive to equity holders)
Posted by: ex SF-er at August 7, 2008 8:01 AM