Saturday, November 17, 2007

Fannie Mae's credit losses still in doubt - Nov. 16, 2007

Well that didn't take long. The day after I speculated with zero evidence of the nightmare that would exist if one of the big agencies got into trouble, Fortune had the same idea but they backed it up with the troubling accounting game that Fannie Mae apparently was playing:

As usual when you try to hide something on investors, they tend to get annoyed and more distrustful. The result? A falling stock price.

Fannie Mae's credit losses still in doubt - Nov. 16, 2007:
"In announcing quarterly results Nov. 9, Fannie Mae (Charts) used a different methodology for calculating its credit-loss ratio -- one that had the effect of making the ratio appear more reassuring to investors than it is. In response to investor concerns about the change, first reported this week on, Fannie Mae executives held a conference call with analysts Friday morning that did little to placate investors. Fannie Mae shares fell $2.32, or 5.39%, Friday. The company's stock price has plunged 17% since Fortune revealed the change in disclosure in a story posted online Wednesday"

1 comment:

Anonymous said...

1. Fannie Mae is a prime example of the worthlessness of federal regulatory agencies. The loss doesn't imply that the regulatory agency is bad, it's the fact that they seem to be unaware of the accounting, risk management and pricing "methodology" utilized by fannie.

2. All finance dorks know that even the lowest tranche -- drawn from a pool of the most mediocre undergraduate finance students -- are able to price and quantify the risk of a mortgage, a mortgage-backed security and any derivative instrument that might be created based upon the mortgage-backed security. For the media to suggest that these mortgagebuggers are *that* hard to price is ludicrous and should be the source of a good belly chuckle by all your students.

3. In this case, Miller-Modigliani might suggest that the accounting is somewhat irrelevant. The value of the company is dependent upon the risk/return characteristics in the underlying nature of the company's business.

4. The biggest risk of these types of companies is the moral hazard which stems directly from a) abstruse political intermeddlers, and, b) the complications caused by the ill-defined role of these inherently inept regulatory agencies.

5. If the Fannie, Ginnie and Sallie Maes all become excessivley volatile, there will be cries for greater regulation, when, in fact a big part of the problem with regulatory structure is the unaccoutability of the oversight agencies. They should be forced to indemnify the companies they're regulating. (BTW, the FDA should also be forced to indemnify the companies they regulate). Indeminfication will force them to closely examine the utilized risk management systems. If the regulatory agencies are unable to indemnify and bless the risk management systems, which I suspect that they will be unable to do, they should be disbanded.