News hit the wires on Wednesday that a GE run money market fund was going to "break the buck" as its called. Great roundup here: http://globaleconomicanalysis.blogspot.com/2007/11/ges-enhanced-cash-fund-breaks-buck.html
What is extremely important here is that the "well contained" subprime losses in the mortgage markets are now even threatening the most basic of financial instruments. If one cannot even trust the banks to keep a money market fund from losing money, what does that imply for confidence? While that certainly applies to the average guy on the street, more damaging is if trust erodes between large institutions. The US debt and credit economy simply cannot afford any deceleration in money and credit. The event will be seen in future times as a watershed moment.
You Cannot Make This Stuff Up
Suppose, like me, you are on the bearish side as it pertains to the US economy and especially to the housing market. As more and more information and data comes forward a definite set of problems become clear. Even so, the banking system and the stock market seem impervious to the enormity of the losses involved. While there is a certain amount of the Economic Disconnect that can be explained away by shear stupidity of market participants, I cannot help but think that there is an elaborate cover up going on to try and buy time for the banks to recover. The FED, the banks, wall street, and the government all are involved in this delay game. Some might say I am paranoid. Some might call me a conspiracy nut. I will remove the tin foil from my head long enough to present exhibit A; Fannie Mae and the old switcheroo.
Fannie Under Fire Over Accounting Change
Friday November 16, 6:56 pm ET By Marcy Gordon, AP Business Writer
Fannie Again Draws Scrutiny, Defends New Calculation for Potential Loan Losses As Stock Sinks
Full article: http://biz.yahoo.com/ap/071116/fannie_mae_accounting.html?.v=12
Key info point one:
"Using the new method, Fannie reported a so-called "annualized credit-loss ratio" of 4 basis points for the first nine months of this year, meaning the value of four out of every 1,000 mortgages it owns declined during that period. The Fortune article pointed out that under the old method, the credit-loss ratio for that period would have been 7.5 basis points -- far exceeding Fannie's forecasts on the $2.4 trillion worth of mortgages it owns."
Damning key info point two:
In Friday's conference call, Chief Financial Officer Stephen Swad said some of the $670 million in provisions for credit losses on soured home loans that Fannie wrote off in the third quarter likely would be recovered.
"We book what we book under (generally accepted accounting principles) and we provide this disclosure to help you understand it," Swad said.
Several analysts asked the executives in the conference call why the company couldn't disclose what proportion of high-risk mortgages it is able to refinance into fixed-rate loans and save from default.
"The problem is that we don't have the underlying information," said Credit Suisse analyst Moshe Orenbuch.
Case closed. There is absolutely no defending the move by Fannie. The "new" calculations can only be explained as a price discovery delay device. That's it. That's all. A company that has not even produced financial statements in 2 years simply cannot be trusted. Some key questions Fannie MUST answer right away:
- Does the "New Math" use historical models that are not applicable to the current market conditions or is the new math reflecting current trends in foreclosures and defaults? (You already know the answer to this one!)
- Is Fannie expecting that past due loans can be brought current based on the same historical rates that have no basis in the current market? (What do you think?)
- Can the models and projections in use for the assumptions Fannie is making be made available for review by outsiders? (Care to Guess?)
So there you have it. Fannie is changing its own accounting rules. Fannie says they will make a ton of loans that are failing become full performing. They just cannot say how many or how they expect that to be so. Glad this puppy is backed by the US government!
Seriously folks, you cannot make this stuff up anymore. The Fannie situation is an abject disaster. No amount of window dressing can change that.
Future Changes for the Overall Good
In the future here are some new accounting changes we can look forward to:
- Realising that home owners equivalent rent is not the best measure of inflation as it relates to housing, the FED will now base housing inflation numbers on the Case-Shiller housing index. The FED will compare home prices on that scale with mid 2006 as the start point. Clearly then, there has been no inflation, and actual deflation in housing prices, and the CPI runs negative going forward! Amazing!
- The FED acknowledges that food and fuel prices are indeed a component of inflation, but they introduce a new correction factor that takes into account that as the price goes up for these items, you appreciate them more, so the real gain in prices is minimal! Again, no inflation even with food and energy thrown in!
- Bank losses related to mortgage defaults are no longer "losses" but a charitable write off trying to help the average US citizen achieve the dream of home ownership.
Well, maybe not the last one.
Credibility of the credit markets took a tremendous hit this week. Between the FED, Fannie, and the ratings agencies there is not one shred of evidence that any of them can be believed or trusted. What happens when an economy built on debt and a silly fractional reserve banking system cannot convince the US consumer that all is what it seems? I'm not sure, but I doubt its going to be pretty.
Have a good night.