Thanks to everyone's favorite piece of regulatory legislation, Fannie Mae and Freddie Mac are now required to undergo a stress test every year so we can get a good sense of what the American housing market would look like should the economic environment nosedive into an "adverse" or "severely adverse" situation.
And now that we're a few years into this routine, we can take a deep breath and relax because Dodd-Frank is humming along and the FHFA is on this. Fannie and Freddie have learned from the past and we're all gonna be fine...
Fannie Mae and Freddie Mac would suffer $127.6 billion of losses in the worst-case stress test scenario used by its regulator to gauge their financial soundness.
Umm... how much?
Those losses would require as much as $125.8 billion in new bailout funds, the Federal Housing Finance Agency said Monday. That would leave $132.2 billion remaining in the Treasury Department’s commitment to keep the two mortgage finance companies solvent.
How are we still looking at numbers like this? It's not like we're accounting for losses as assets anymore...
The severity of the losses under the severely adverse scenarios depends in large part on the treatment of the deferred tax assets of the companies. If the value of these are written-down, as they were during the financial crisis, the losses amount to $127.6 billion. If they are not, losses would be just $51.3 billion.
And nearly everyone close to this is more than okay with the situation because Fannie and Freddie are now inextricably linked with Treasury and therefore able to basic business, yadda yadda yadda.
But put yourself in Tdijane Thiam's shoes - or the fuzzy slippers that John Cryan can't take off lest he find himself weeping and alone in the fetal position on his office floor - Not so fair, is it? Credit Suisse and Deutsche Bank are still getting hammered by Dodd-Frank provisions (and admittedly their own respective business decisions) while GSEs are basically as risky as they ever were, but just more thoroughly backstopped by public money.
Even the big banks that aren't failing their stress tests have to be pissed when they see this kind of result. Especially when they're also forced to watch as politicians use them as a punching bag and everyone is suddenly falling back in love with Glass-Steagall for some crazy f@cking reason. Letting Fannie and Freddie glide over this kind of potential disaster while putting banks in the dunce chair is the kind of thing that makes everyone on both sides so pissed about Dodd-Frank. While Washington regulators push capital requirements, hawk over "Risk," and act pissed about executive compensation, smaller banks are wilting from the pressure of compliance and creating a reality in which money is simply harder to lend.
But that's not what anyone running for office is talking about. Instead, we're letting GSE's contemplate writing-down a quarter of a billion dollars to stave off a new crisis while everyone yells at their TV about "The Banks."
How far have we come? Somewhere, Dick Fuld is looking at the WSJ and saying "Wooooooooow, a $127 billion loss? That's f@cked up dude."