Monday, May 26, 2008
GSEs and their CFOs
"Freddie Mac recorded a $151 million net loss for the first quarter as changes in accounting policies offset higher costs related to U.S. home-mortgage defaults. Without the accounting changes, the loss would have exceeded $2 billion, Buddy Piszel [BP], chief financial officer, said in an interview. But he said the accounting changes mean results better reflect the underlying business. ... Freddie also reported that the 'fair value,' or estimated market value, of its net assets was a negative $5.2 billion as of March 31, compared with a positive $12.6 billion three months earlier. ... Piszel said the negative fair value reflects current distressed prices for mortgage securities and has 'no impact' on the operations of a company like Freddie that is a long-term holder of mortgages. ... Freddie's main regulator .... Ofheo, 'is aware of all of the accounting changes and has taken no exception to them,' Mr. Piszel said. ... Joshua Ronen, an analyst of Graham Fisher & Co., a New York research firm, said the accounting changes 'put a lot of lipstick on this pig'," WSJ, 15 May 2008.
"Fannie Mae and Freddie Mac are 'a point of vulnerability for the financial system' because their capital is meager in relation to their mortgage assets and obligations, the companies' main regulator said. With that skimpy capital cushion, the government-sponsored companies 'could pose significant risk to taxpayers as well as financial institutions and other investors,' the regulator, James Lockhart, director of [Ofheo] said at a conference in Chicago. ... Fannie and Freddie each have 'core' capital equalling less than 2% of the mortgages they own or guarantee", WSJ, 17 May 2008.
I agree with Ronen. This looks like the "regulatory forbearance" that prolonged the S&L crisis of 1979-86. BP sounds like an accountant. I use that as a term of opprobrium. BP apparently doesn't understand Freddie is a highly-leveraged potential disaster area. I found out how many Freddie shares BP purchased recently: none. I found a Form 4 indicating he was awarded 12,538 shares on 31 January 2008 for services and owns 120,851 shares. Prices: $30.01 on 31 January and $25.73 per share currently. Hey, BP, if you believe Freddie is a good deal, buy say 100,000 shares with your sign on bonus. Right! Who is BP? Why did Freddie hire him? A 19 October 2006 press release indicates BP was once a Deloitte & Touche partner. My guess: Freddie hired BP to provide it "regulatory cover" with the SEC, PCAOB, etc., etc., ad nauseum. If BP's like 95% of the Big 87654 partners I've met, he's an economic ignoramus. Chuck Chaplin, CFO of MBIA wrote a letter the the WSJ, 19 May 2008, attacking "mark to market" accounting. It seems, he's another CFO who does not understand the economics of his own business.
"Could pose"? No, do pose.