Fannie Mae was plugging along just fine in the early and middle parts of the 2000s Decade, when it generated the following annual Pretax Incomes:
2002……$4.8 bil
2003….$10.3 bil
2004……$6.0 bil
2005……$7.6 bil
2006……$4.2 bil
But then some trouble started to happen in 2007, when this string of annual profits, occurring for many years, reversed course and turned into a 2007 Pretax Loss of $5.1 bil.
This $9.3 Profit Decline in 2007 from 2006 was caused mainly by three factors.
First, its Provision for Credit Losses, including on its Loan Losses, its Guarantee Losses and its Losses on Certain Guarantee Contracts, were stepped up dramatically from $1.0 bil in 2006 to $6.0 bil in 2007. Thus even before the complete financial meltdown in 2008, somebody at Fannie Mae, or at its external CPA firm, presciently sniffed out the coming bad winds, which eventually turned into a devastating tornado, in the real estate market.
Second, Fannie Mae incurred Derivative Losses of $4.1 bil in 2007, as compared with a much lower $1.5 bil in 2006.
And third, Fannie Mae recorded Net Interest Income of $4.6 bil, as compared with a much higher $6.8 bil in 2006.
Then the real estate tornado hit, with Fannie Mae recording Pretax Losses as follows: $44.6 bil in 2008, $76.0 bil in 2009, $14.1 bil in 2010.
So while these losses are just huge, the one positive aspect is that they declined sharply in 2010.
But that’s the best it gets.
In 2011, Fannie Mae generated Pretax Losses as follows: $6.5 bil in the 1Q, $3.0 bil in the 2Q, and now $5.1 bil in the most recent 3Q 2011. Thus for the first 9 months of 2011, its $14.5 bil Pretax Loss already exceeds the annual Pretax Loss of $14.1 bil generated in 2010.
And this 3Q 2011 $5.1 bil Loss was 279% higher than the 3Q 2010 Loss of $1.3 bil.
From its SEC filings, below here is a very condensed summary of Fannie Mae’s Income Statements for the 3Q 2011, as compared with the 3Q 2010.
..............................................................................Increase
.................................................3Q...........3Q........(Decrease)
...............................................2011.......2010....Amount....%
..............................................(millions of dollars)
Net Interest Income..............5,186......4,776........410........9%
Provision for Loan Losses....(4,159)....(4,696).......537.......11%
Derivative FV Losses.....(4,255)......(124)..(4,131).(3331)%
Trading Securities
…...FV Gains(Losses)..............(214)........889.....(1,103)...(124)%
Administrative Expenses.......(591).......(730)........139.......19%
Foreclosed Property Exp......(733).......(787)..........54........7%
Other-net..............................(319).......(668).........349.......52%
=Pretax Loss......................(5,085)....(1,340)....(3,745)...(279)%
Clearly, just like was the case with Freddie Mac, the Fannie Mae Losses were driven predominantly by the Derivative Fair Value Losses.
In fact, absent the 3Q 2011 Derivative Losses of $4.3 bil, Fannie Mae would have lowered its Pretax Loss to $.8 bil. And the massive $4.1 bil Derivative Loss increase from the 3Q 2010 was higher than the $3.7 bil increase in the Total Pretax Loss from the 3Q 2010.
Fannie Mae’s Provision for Loan Losses of $4.1 bil in the 3Q 2011 was huge, but still a bit lower than the $4.7 bil recorded in the 3Q 2010.
And below here is a very condensed summary of Fannie Mae’s Income Statements for the lst 9 months Sept 2011, as compared with the lst 9 months 2010.
..............................................9 Mos.....9 Mos.....Increase
..............................................Sept........Sept.....(Decrease)
..............................................2011.......2010.....Amount.......%
..............................................(millions of dollars)
Net Interest Income............15,118.....11,772......3,346......28%
ProvisionforLoanLoss(20,548).(20,930)......382........2%
Derivative FV Losses....(5,793)...(3,283)...(2,510)...(76)%
Trading Securities FV Gains.....146......2,587.....(2,441)....(94)%
Administrative Expenses...(1,765)....(2,005)........240.......12%
Foreclosed Property Exp......(743)....(1,255).........512.......41%
Other-net..............................(954)....(1,036)..........82.........8%
=Pretax Loss....................(14,539)...(14,150)......(389)......(3)%
The Net Interest Income increase of $3.3 bil is driven by the lower Interest Expense from a decline in interest rates. And yes, the Provision for Loan Losses exceeds the Net Interest Income by $5.4 bil in the first 9 months of 2011 and by $9.2 bil in the first 9 months of 2010.
More than offsetting this increase in Net Interest Income of $3.3 bil were higher Derivative Fair Value Losses of $2.5 bil, and lower Fair Value Trading Securities Gains of $2.4 bil.
I think it is wise to take a longer term look at key aspects of Fannie Mae’s historic income statements.
From its SEC filings, I’ll first analyze its annual Provision for Credit Losses. This is a combination of its Provision for Loan Losses, its Provision for Guarantee Losses, and its Losses on Certain Guarantee Contracts.
Just like Freddie Mac, prior to 2007, Fannie Mae recorded meager amounts of Provision for Credit Losses, especially given Fannie Mae’s huge Loans and Loan Guarantees. Let me lay these out since 2002:
2002…….........$284 mil
2003….…........$365 mil
2004…...…......$352 mil
2005…...........$587 mil
2006…........$1,028 mil
2007...........$5,988 mil
2008.........$27,951 mil
2009.........$72,626 mil
2010.........$24,896 mil
2011..........$21,242 mil*
* 9 Months ended Sept 2011
Frankly, it doesn’t make sense to me why the Provisions for Credit Losses were so low before the financial meltdown. The amounts of Loans and Loan Guarantees were massive. Certainly more than these above meager amounts of bad loans should have been provided for back then.
Also, it seems to me that the 2008 Provision for Credit Losses of $28.0 bil is way too low. The massive financial meltdown occurred in 2008, but yet the following year’s Provision in 2009 was a massive $44.7 bil higher than that provided in 2008. There is no logical match with when the loans should have been determined to be bad, and when the Provisions for Credit Losses were booked.
Likewise, the $25 bil additional Provision in 2010 seems really strange to me, since it’s only 11% lower than the Provision booked in 2008, when the complete financial meltdown occurred.
Further, I think the real economic damage of these Loans is much less in 2011 than the huge Provision for Credit Losses booked so far in the current year.
And second, and most important of all, what in the world is going on with all of these massive Derivative Losses, which are imbedded in the Income Statement report line that Fannie Mae calls “Fair Value Gains and Losses"?
Let me lay out the components of these Fair Value Gains and Losses, reflected in Fannie Mae’s annual earnings, since 2002.
.................................Trading
................................Securities...............Other.......Total
..............Derivative....Fair......Hedged....Fair........Fair
...................Fair........Value....Mortgage..Value......Value
..................Value.......Gains.......Asset.....Gains.......Gains
...............(Losses)....(Losses)....Gains...(Losses)...(Losses)
.......................(millions of dollars)............................
2002........(12,919)...............................................(12,919)
2003.........(6,289).................................................(6,289)
2004........(12,256)..............................................(12,256)
2005.........(4,196).................................................(4,196)
2006.........(1,522)...........8.....................(230)......(1,744)
2007.........(4,113)......(365)....................(190)......(4,668)
2008........(15,416)..(7,040).....2,154.......173......(20,129)
2009.........(6,350)....3,744.....................(205)......(2,811)
2010.........(3,000)....2,692.....................(203).........(511)
2011*........(5,793).......146.....................(223)......(5,870)
Total.......(71,854)....(815)......2,154......(878).....(71,393)
* 9 Months Sept 2011
When you review the above numbers, the entire Total Fair Value Loss of $71.4 bil is more than matched by the Total Derivative Losses of $71.9 bil.
Wasn’t it Albert Einstein who defined Insanity as “doing the same thing over and over again and expecting different results”?
In none of these years, did Fannie have Derivative Gains, and the total Derivative Losses are more than $71 bil! And when you combine Freddie Mac's more than $50 bil of Total Derivative Losses, you get more than $120 bil in Derivative Losses for Fannie and Freddie combined.
If I understand this correctly, if Fannie Mae would not have engaged in any derivatives, it would have had higher earnings of more than $71 bil over the past 10 years. And then Freddie Mac would have had more than $50 bil of higher earnings, if it would not have engaged in any derivatives.
I think the Las Vegas casinos would love to see Fannie Mae and Freddie Mac sitting at their gambling tables, and they would lay out the red carpet for them, would comp them lavishly, and would want them to stay as long as possible.
I think the question the US Government should be asking is just who profited from these more than $120 bil of Derivative Losses related to Fannie and Freddie, and how much money did they each make on them?
I think the US Government, including the US Congress and their staffs, have enough people working on the housing crisis, including reviewing what is going on with Freddie Mac and Fannie Mae.
But I also think the reason the housing crisis hasn’t been substantially improved, including the problems with Freddie Mac and Fannie Mae, is that the US Government doesn’t have enough very bright people, who also have the requisite financial expertise, who are working on these very complex housing crisis issues, so critical to improving the US economy, and US job creation.
The US Congress has done nothing of substance that effectively deals with the housing issue. And I think that all of the Feds responsible for reviewing, and taking wise subsequent actions on, what has been going on with Freddie Mac and Fannie Mae, haven’t effectively done their jobs.
And Fannie Mae and Freddie Mac have the power to keep underwater homeowners from getting their mortgage interest rates, and perhaps even their mortgage principal balances, reduced? That's not right, and not even close to being right.
The Occupy Movement, and their 99% supporters, are spot on in identifying the housing crisis as one where there clearly has not been enough progress made.
And just the thought of Fannie Mae throwing $71 bil away and Freddie Mac throwing $50 bil away in the past 8 to 10 years by making bad, or at least less than optimal, Derivative decisions is enough to make the 99%ers, many of whom have underwater mortgages, intensely angry.
So the Deficit Reduction Super-committee is thinking of reducing Medicare, Medicaid and Social Security Benefits, while at the same time, not taking the proper actions to substantially reduce both Fannie Mae's and Freddie Mac's recurring, massive Derivative Losses? That's also not right.....not even close to being right.
