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Fannie Mae and Freddie Mac:WHAT IS OFF THEIR BALANCE SHEETS

Sep 7, 2008 Market Outlook

It actually isn’t what is on their balance sheets that is of the most critical concern. THE BIG CONCERN IS WHAT IS OFF THEIR BALANCE SHEETS AS THAT ACCOUNTS FOR AROUND $4.3 TRILLION OF THEIR FINANCIAL “ACTIVITY” verus the balance sheets which account for around $1.6 trillion of their finances. All of this off-balance sheet hanky panky SHOULD BE REQUIRED TO BE FULLY DISCLOSED AND AUDITED BEFORE A PENNY IS LOANED TO F+F.

The balance sheets are in their 2007 Annual Reports referenced below and the information below was summarized by Econbrowser:

Simplified balance sheet for Freddie Mac, in billions of dollars per 2007 Annual Report, p. 168:

Assets Liabilities
mortgages 80.0 debt 738.6
securities 629.8 other liabilities 29.1
other assets 84.6 stockholder equity 26.7
total assets 794.4 total liabilities 794.4
Annual Report 2007: http://www.freddiemac.com/investors/ar/

Simplified balance sheet for Fannie Mae, in billions of dollars per 2007 Annual Report, p. 102:

Assets Liabilities
mortgages 403.5 debt 796.3
securities 406.6 other liabilities 42.2
other assets 72.5 stockholder equity 44.0
total assets 882.6 total liabilities 882.6
Annual Report 2007: http://www.fanniemae.com/ir/annualreport/index.jhtml

These balance sheets leave out the mortgage-backed securities that the enterprises created and sold directly to outside investors, for which the enterprises have issued off-balance-sheet guarantees for payment. The OFHEO 2008 Annual Report to Congress states that Freddie had sold $1,381.9 billion in MBS and Fannie $2,118.9 billion.

If you add together the mortgages retained outright by Fannie and Freddie (either as whole loans or MBS) plus the MBS that they have sold to others and offer a guarantee for payment, the OFHEO calculates a total “book of business” for the two enterprises of $4,934.4 billion as of the end of 2007, slightly less than the total publicly held debt of the U.S. government. Fannie and Freddie’s combined stockholders’ equity amounts to 1.4% of their total book of business.”

The full article along with charts and comments is at: http://www.econbrowser.com/archives/2008/07/fannie_mae_and.html

As operational entities the biggest problem with F+F is that they financed themselves almost totally based on borrowed money (debt) versus having any real equity. They just borrowed and borrowed endlessly and have to keep borrowing more to keep lending. When loans went and go bad they have no shareholder equity to speak of to act as a cushion to the losses which then get passed to the bondholders or US taxpayers (although that is not at all certain to happen).

To understate the obvious: THIS IS NOT A GOOD WAY TO RUN ANY BUSINESS.

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