Wednesday, May 14, 2008

Fannie & Freddie Alert

In an interview with the Financial Times, Richard Shelby, the senior Republican on the Senate banking committee, said Fannie Mae and Freddie Mac were "thinly capitalised, highly leveraged and pose a systemic risk to taxpayers".

Financial Accounting Standard 157 allows companies to estimate a value on holdings that aren't traded. Freddie Mac increased its Level 3 assets under FAS 157 to $156.7 billion, or 23 percent of its assets, from $31.9 billion as of December. The company also adopted FAS 159, which lets it pick which financial assets and liabilities to measure at fair value through earnings.

Chief Executive Officer Richard Syron said the new accounting better reflects ``the underlying performance of our business'' as the market continues to deteriorate.

So much for transparency. Source

James Lockhart, the directory of OFHEO, said at a conference that Fannie Mae and Freddie Mac's thin capital ratios posed a risk to taxpayers, financial institutions, and investors (WSJ). Fannie Mae and Freddie Mac have core capital ratios of less than 2% of the mortgages they guarantee. Fannie's core capital is around $50 bln, but would need to be $135 bln to be considered well capitalized according to an industry analyst. Source