Fannie Mae (FNMA)

[guchu]

The three-card Monte accounting of Fannie, Freddie conservatorship

Admittedly partisan study raises troubling questions

Treasury justified the conservatorship of the GSEs via accounting gimmicks since they faced no liquidity issue at the time of the crisis and recession. They note that Fannie Mae’s Cash Net Income, adjusted for non-cash items, was positive throughout entire crisis and recession.

In the third quarter of 2008, the financials should have looked like an abattoir floor. But it didn’t.

If, the authors argue, the GSEs were on the verge of diabetic coma and they needed their insulin from Treasury, they’d be stone cold dead.

So how did Fannie or Freddie keep operations going while they were supposedly insolvent?

The answer is simple: they were never insolvent…the smoke and mirrors of accounting reserves were used to make them appear that way.

Loan loss and FMV reserves were materially overstated in 2008 and 2009 then reversed in 2013 and beyond.

Rep and Warrant accounting was incorrect. Never recorded any receivable from the banks, only impaired the defaulted loan

If everything in the whole report – and I urge you to look the full thing, with its extensive research and footnoting – then there’s an amazing amount of gymnastics you have to go through to get to where the Treasury stands today.

The Deferred Tax Asset Reserve should have never been booked in the first place. Using the uncertainty of conservatorship as a reason to impair while ignoring the previous 18 years of profitability is unreasonable and incorrect. On the flip side, ignoring the uncertainty of conservatorship in 2013 to reverse the reserve is cherry picking and also incorrect.

What they’re saying – and I can’t find a good counterargument otherwise – is that the Treasury can’t use the argument to its advantage on the front end and ignore its existence on the back end.

Deloitte knew or should have known better…and they should be on the hook for the cost of a full restatement. In addition, all non-cash inflated reserves that were historically unnecessary must be reversed and pushed back into Net Income. Deloitte simply has no margin for error based on Treasury’s imposed “Net Asset” trigger for borrowing funds.

http://www.housingwire.com/blogs/1-rewired/post/34280-the-three-card-monte-accounting-of-fannie-freddie-conservatorship