It seems the #1 U.S. home finance company couldn't resist the sweetfreebase-like appeal of subprime yields. After the bell on Tuesday, Fannie Mae announced plans to issue $7 billion in non-convertible preferred stock and to cut its dividend by 30%, due in part to market losses on the securities that it owns.
Perhaps Fannie was bored with their cutesy New Deal era mission tp "help those who house America"; apparently, they were buying "private-label" subprime debt from banks in the private sector.
Even though their subprime and Alt-A mortgage-backed bond holding represent a "small proportion" of their overall mortgage portfolio, their combined value is nearly double Fannie's $40 billion of capital.
And it gets worse: According to the Fortune article, it seems that some of the securities that Fannie owns may be trading far below the 2% markdown that they applied in the third quarter. Future writedowns may be five times greater -- or more -- depending upon the securities involved. These include the aptly titled "liar loans", where deadbeats can take advantage of low-disclosure requirements to borrow more than
they can afford to pay back.
Fannie Mae could face more losses [Fortune]
Posted by , Dec 05, 2007 11:14AM
Carney-
Spare us the continued bashing of the consumer. Emotional decisions are placed in front of an individual with the caveat that if you sign here you will own a house. How many people are going to (wrongly) accept that carrot and move into a new home?
Banks did not have the emotion when they leveraged all those "liar loans" to the point where they would be insolvent if they actual placed a real valuation on them. The only emotion working on them was greed and it continues to be the only thing they operate on.
Try attacking the banks as they are more irresponsible than any consumer is ever allowed to be. Consumers are not allowed to place declining assets in a "special place" while they hope the market rescues them from poor risk management.
our entire banking system is marked to a myth.
Posted by , Dec 05, 2007 11:52AM
11:14 you really don't understand much about our banking system do you
Posted by , Dec 05, 2007 12:02PM
Please correct my "misunderstandings"
I wait with much anticipation
Posted by , Dec 05, 2007 12:27PM
banks predominantly do not own those loans. the economics of a loan you own for investment does not cost you any distress below the level of losses you recognize so why would anyone mark them there? 90% of bank trading assets are marked to market anyway.
Posted by , Dec 05, 2007 12:46PM
good luck with that flawed reasoning.....
You must work at a bank...
"no distress below level of losses you recognize"
That is PRECISELY the problem....unrecognized losses.
Good luck with that
Posted by , Dec 05, 2007 12:50PM
This is pretty good too:
"90% of bank trading assets are marked to market anyway."
yes that's why most banks are not too keen on placing those back on it's own books. Since they are flush with cash and can trade those "assets" in a liquid market
If it were truly liquid they would'nt exist in a made up land of valuations ala L3
But I'm sure you knew that.....
Posted by Matt , Dec 05, 2007 1:39PM
Emotional decisions are placed in front of an individual with the caveat that if you sign here you will own a house.
That then, I guess, would make every crime in the world legal.
I mean why does a person lie, steal, rape or murder? Emotional decisions made by individuals - all of the above.
I see your vision of utopia. Good luck.
Posted by g-sam , Dec 05, 2007 1:51PM
12:46 its called provision accounting look it up
Also, you may have noticed that level 3 assets do exist on the bank balance sheet. they are negligible at most banks and average under 2% of assets for the industry. 6% at citi, the worst of the bunch, but that is because citi has such a large broker/dealer
Posted by , Dec 05, 2007 1:53PM
Matt, come on obviously, murderers and rapists are okay as long as they don't lend to blue collar workers too dumb to realize they cannot afford the mortgage on a $750k home
Posted by , Dec 05, 2007 2:04PM
Matt-
GFY....
G-Sam-
That's why it's bullshit....you or I do not get the same treatment yet we are supposed to believe that losses vs. loss realization is different? Sorry a loss is a loss no matter how you use accounting gimmicks to mask it.
That's exactly like saying "well we did'nt have a loss when you factor in tax benefits and share buybacks"......
Did you have a loss? yes or no...
This is nothing more than banks postponing the inevitable task of fair valuation.
Posted by , Dec 05, 2007 2:09PM
Anon 2:04 you seem to have an interesting point but can you explain why a bank should have to put up a cash provision for expected losses on a loan portfolio and at the same time also have to take an additional charge to impair the value of that portfolio because this is what you are saying right? Or do you want to do away with loss reserves? Otherwise that sounds like double counting to me. Perhaps you could explain.
Last time I take a loss btw yes I did get a tax benefit.
Posted by g-sam , Dec 05, 2007 2:18PM
A bank holds a loan it provides for losses against that loan. Costs the bank money it comes right out of the income statement. No mystery there.
A bank wants to sell that loan it transfers it to trading, takes a mark against the MV of that loan. Again no mystery.
Finally sells the loan, recognizes additional gain or loss.
So what is the confusion then?
Posted by , Dec 05, 2007 2:20PM
@2:04,
What is your point?
Bnks made wrong bets and lost money. Whose mistake? Theirs. Who should pay? Them.
Should they be bailed out with taxpayer money (or through special government intervension through modification of laws/contracts)? No.
Consumers took out loans they could not afford. Whose mistake? Theirs. Who should pay? Them. Should they be bailed out (just like above)? No.
Do banks have a way out? Yes. Absorb assets onto balance sheet at lower price or conduct a firesale.
Do consumers have a way out? Yes, conduct a firesale (if some recovery is possible) or walk out of the house, start renting and let the home be foreclosed.
So what exactly is the issue (or conflict) here?