Friday, March 23, 2012

US Congress is Preventing the Clean Up of Fannie Mae and Freddie Mac

Let’s say that in late 2008, the head of an organization that oversees two entities was appointed. The key responsibility of this head was to make these two entities financially sound.

So how do you evaluate the effectiveness of this head?

Clearly, you review and analyze the audited financial statements of these two entities subsequent to the appointment of this head.

So, now assume that these two entities report the following Audited under US Generally Accepted Accounting Principles (GAAP) Pretax Operating Losses for the most recent three years since this head’s appointment:

……...………Co #1…..........Co #2
………...………millions of dollars


Yeah, that's a total loss for the most recent three years of $104 bil at Co#1 and another $43 bil at Co#2.

The beauty about financial statements audited by independent, external auditors is that they should pretty much reflect economic reality.....GAAP earnings and losses record revenues in the year they were earned and expenses in the year they were incurred.

Thus, GAAP requires all losses prior to 2009 to be reflected in income statements prepared prior to 2009.

Since the financial meltdown occurred in 2008, then the 2008 income statement should have reflected the massive losses related to the financial meltdown.

Thus, unless the 2008, 2009, 2010, and 2011 audited financial statements were prepared fraudulently, the proper way to measure how this head performed during his tenure is what were the profits and losses during his tenure.

And when you look closer at Co#1, it generated Net Interest Income of $19.3 bil in 2011, $6.6 bil less than its Provision for Credit Losses of $25.9 bil. And this excess of Bad Debt Expense over Net Interest Income was even higher in 2010 at $8.3 bil. Further, Co #1 reported Derivative Losses of $6.6 bil in 2011.

And when you look closer at Co#2, it had Derivative Losses of $9.8 bil in 2011 and another $8.1 bil in 2010.

So how has this head performed? Clearly, by any objective measure, he has done horribly. The only good thing you can say is that Co #2’s losses have been declining. But that’s little solace.

Clearly, this head must be replaced, and should have been a long time ago.

But his replacement is not going to happen. Why? Because some people have the power to prevent it from happening.

Believe it or not, this is the precise situation that is going on right now at Co #1, which is Fannie Mae, and Co #2, which is Freddie Mac, and with Edward DeMarco, who has been head of the Federal Housing Finance Agency, the independent US Government Agency that oversees Fannie Mae and Freddie Mac. President Bush appointed DeMarco to head this critical agency in late 2008.

And these massive operating losses for the past three years, which total $104 bil at Fannie Mae and another $43 bil at Freddie Mac, are on the US taxpayer’s dime.

The Obama Administration has some really keen ideas to clean up Fannie Mae and Freddie Mac and to also help US citizens who are underwater on their home mortgages, and even many who are not underwater.

Included in these many very perceptive ideas are wise, fair, very measured writedowns of underwater mortgage principals, and expanded refinancing of exorbitantly high interest rate home mortgages to the current much lower prevailing interest rates.

The closed-minded Demarco so far has refused to listen to these clearly wise Obama Administration's suggestions. Thus, the massive losses of Fannie Mae, and to a somewhat lesser extent, Freddie Mac, will continue unabated, all funded by US taxpayers.

And the Republicans in the US House and in the US Senate refuse to let the Obama Administration clean up Fannie Mae and Freddie Mac and to help homeowners. And the Obama Administration’s initiatives will not only substantially help homeowners, but they will also jumpstart the US economy, and they will also substantially reduce the US Deficit in the long run.

This is one of the many reasons the approval rating of the US Congress is so low, and headed much lower.

Since the Republicans in the US Congress have recalcitrantly decided to not let the Obama Administration replace the head of the Federal Housing Finance Agency with someone who will properly address these massive, continuing losses at Fannie Mae and Freddie Mac, and who will also implement wise initiatives to help troubled homeowners, it is only fair that these Republicans should be removed from office in the November 2012 election. The 99% will demand it. The 99% won't be snowed on this one. They are much too astute.