Tuesday, April 2, 2013

Fannie Mae 2012 Earnings On Fire

Before 2007, Fannie Mae generated consistently large pretax earnings of at least $4 bil per year for more than a decade.

Then in 2007, these annual pretax earnings started turning into pretax losses, which peaked in 2009 at a massive $73.0 bil.

These annual losses continued through 2011.  Thus, for the five years from 2007 to 2011, these cumulative pretax losses totaled a gargantuan $154 bil.  Since US taxpayers are effectively on the hook for Fannie Mae's losses, US citizens were rightly enraged at the amounts of these losses.

On the somewhat positive side, the amounts of Fannie Mae's pretax losses were much lower in 2011 ($16.9 bil) and in 2010 ($14.1 bil) than they were in 2009 ($73.0 bil) and 2008 ($44.6 bil).  But still, those large losses in 2010 and 2011 were nothing to write home about.

So, what happened in the current year 2012?  Well, Fannie Mae completely turned around these losses with pretax earnings of a massive $17.2 bil.  No, that's not a misprint.  US taxpayers have to be just elated with what happened in 2012 with Fannie Mae's earnings.

So, what's going on here behind just the bottom line earnings and losses numbers?

Well, it's really three items which have caused this incredible earnings and loss pattern.

The first two are related to the financial meltdown and subsequent housing improvement.  But it should be pointed out that the US Fed provided major assistance here by providing an incredibly low interest rate environment since the 2008 financial meltdown.

Fannie Mae's Provision For Credit and Guarantee Losses totaled $156.8 bil for the five years from 2007 to 2011.  And then what happened in 2012?  Incredibly, these Credit Losses completely turned around from a $26.7 bil Provision (i.e. Loss) in 2011 into a $0.9 bil Benefit (i.e Income) in 2012.

And Fannie Mae's Impairment of Available-For-Sale Debt Securities Earnings Charges totaled $18.7 bil for the five years from 2007 to 2011, maxing out at $9.9 bil in 2009, and dropping dramatically since then to only $0.7 bil in 2012.

The other item causing Fannie Mae's earnings decline was its Derivative Losses, which totaled $34.7 bil for the five years from 2007 to 2011.  Particularly notable here were massive Derivative Losses of $20.1 bil in 2008, and another $6.6 bil in 2011.

While Fannie Mae's Credit Losses and Debt Securities Impairment charges were driven by the housing crisis and subsequent improvement, I don't think the same can be said of the Derivative Losses.

Financial Derivatives are a zero-sum game, for every dollar of losses, there is the same dollar of gains.

Thus, Fannie Mae's massive amounts of Derivative Losses should be particularly troubling to US taxpayers.  I think that Fannie Mae got its clock cleaned in the financial derivative markets by much more savvy traders.

On the positive side, it seems that Fannie Mae did much better in 2012, with Derivative Losses of a much lower, but still significant $3.0 bil.

Fannie Mae's 2012 pretax earnings also received a $1.3 bil benefit from its settlement with Bank of America.

Fannie Mae should do well in 2013, but you won't see a massive pretax earnings improvement in 2013 vs. 2012 as you saw in 2012 vs. 2011.

But what you should see in 2013 for Fannie Mae is a massive after-tax Net Income increase due to the release of its large Deferred Income Tax Valuation Allowance driven by its substantially improved pretax earnings in 2012, which should continue for the foreseeable future.  This Deferred Income Tax Valuation Allowance was established due to Fannie Mae not receiving an income tax benefit in earnings for many of its losses incurred in 2008 through 2011.

But still, if Fannie Mae can just match its 2012 Pretax earnings of $17.2 bil here on out, then it would be able to pay back the money it was bailed out by US taxpayers certainly in less than fifteen years, perhaps even in less than ten years.  So from any reasonable CBO scoring over the next ten years, there should be a huge US Debt Reduction from this huge $34.165 bil recovery in Fannie Mae's pretax earnings in 2012.....going from a pretax loss of $16.945 bil in 2011 to pretax earnings of $17.220 bil in 2012.  Whew!

Pundits are giving way too much credit for the improvement in the US housing market being the cause of this near miraculous earnings turnaround in 2012 of both Fannie Mae and Freddie Mac.

Much more than that it's due to the US Government.  The US Fed was the main driver here by providing an extremely low interest rate environment.  And then the Obama Administration, behind the scenes and without taking an ounce of the credit, has worked with all parties involved to substantially improve Fannie Mae and Freddie Mac's financial strength and earnings prospects.

And it's also clear to me that both Fannie Mae and Freddie Mac got a subsequent upgrade in their management, particularly in their financial management.  The key here isn't the number of people working there, but rather it's the quality of the people.

But still, underwater mortgage homeowners can't be happy with the US Government first bailing out and subsequently substantially improving the financial status of both Fannie Mae and Freddie Mac, when at the same time, the US Government, including the US Fed, the US Congress, and Ed Demarco, the Head of the Federal Housing Finance Agency overseeing both Fannie and Freddie, has done so little to improve the financial status of these underwater homeowners.

After all, where did Fannie Mae and Freddie Mac get their huge earnings in 2012?.....It came from the interest paid by homeowners.  To illustrate this point, below here is the Net Interest Income (i.e. the Excess of Interest Income over Interest Expense) for Fannie Mae for the last six years:

mils of $s
2012 21,501
2011 19,281
2010 16,409
2009 14,510
2008 8,782
2007 4,581

Yeah, this Net Interest Income of Fannie Mae of $21.5 bil in the most recent year 2012 is $16.9 bil higher than it was in 2007 before the financial meltdown hit in 2008.

Just another case of the 99% getting shafted.  And who got bailed out by the US Government for their trillions of dollars of Investments in Fannie Mae and Freddie Mac debt securities which were substantially impaired when the 2008 financial meltdown hit?  It was the 1%, including many of the major US corporations.  One of these days the 99% is going to figure it out that it's all stacked against them, and the US Congress and the US Fed are taking action only to benefit the 1%.  Just where's the fairness here?

Below here are Fannie Mae's earnings and loss elements for the six years from 2007 to 2012:


5 Years

2012 2011 2010 2009 2008 2007 2007-2011
Fannie Mae mils $s mils $s mils $s mils $s mils $s mils $s mils $s

Net Income (Loss) 17,220 (16,855) (14,018) (72,022) (58,319) (2,056) (163,270)

Pretax Income (Loss) 17,220 (16,945) (14,100) (73,007) (44,570) (5,147) (153,769)

(Provision) Benefit For Credit and Guarantee Losses 852 (26,718) (24,896) (72,626) (27,951) (4,564) (156,755)

Derivative (Losses) (2,977) (6,621) (511) (2,811) (20,129) (4,668) (34,740)

Available-For-Sale Debt Securities Impairment Earnings Charge (713) (308) (722) (9,861) (6,974) (814) (18,679)