Hello DJ, I was having a good discussion with CB about a few things, about ruination, fiat money, officialdom fraud, Greensputin and BurnAndKaput.
We managed to see the same page on a matter of long debate on this thread, the macro that says Greensputin is running a fraud.
CB apparently, perhaps inadvertently, but correctly identified Fiat Money Inflation in France, under a democracy Message 20042242 , as a fraud Message 20042246 that could only end in tears because it was a fraud.
I must note the similarity between Fiat Money Inflation in France episode to the USA 1929 drama, because the author did so, not so much with 1929, but essentially warned US Congress about the consequences of officialdom policy in regard to money that may end in tears, correctly anticipating 1929.
I must also note the similarity between Fiat Money Inflation in France with the current Greensputin and BurnAndKaput FED that is explicitly working for monetary inflation conflagration
However, having made such wonderful progress in clear thinking, CB stated that Message 20042240 Dollar up or down is neither good nor bad, but, “just is”. I suppose in some sense she is right, everything just is, but I cannot imagine that there are no macro links between the value of money and, or say, the cost of money, and the worth of what money can buy. I have difficulty thinking that the direction of movement of the value of money is neither good nor bad.
In any case, I think we made some progress, but may have retrogressed in other ways.
On ruination watch, I am scared again:
Fannie's Silence Speaks Volumes
By Peter Eavis
Senior Columnist
4/19/2004 4:54 PM EDT
thestreet.com
Fannie Mae (FNM:NYSE) BEARISH
Price: $74 | 52-Week Range: $60.11-80.82
Investors have been watching the equity line.
Now the latest earnings release omits it.
It's hard to imagine the news will be good.
Position: none
Things must've gotten really bad for Fannie Mae (FNM:NYSE) to omit something as critical as shareholders' equity from its earnings report.
Fannie, the nation's second-largest financial institution, released first-quarter earnings on a sheet that looked very much like previous ones. Only this release was completely devoid of any data about shareholders' equity, a fundamentally important number that is arrived at by subtracting liabilities from assets and making some adjustments for gains and losses on securities and derivatives.
The omission comes at a time of heightened skepticism about Fannie's financial reporting. At the end of last month, for example, Fannie's regulator strongly hinted that an examination of the company's books had turned up evidence that accounting guidelines had been misapplied. The failure to disclose the equity, or net worth, number will also serve as useful ammunition for members of Congress and the White House who are framing new laws to tighten regulation of Fannie and its sibling, Freddie Mac (FRE:NYSE) .
Fannie's stock was down 21 cents to $74 Monday afternoon. The company said the equity data will be included in a 10-Q filing of quarterly results with the Securities and Exchange Commission, which is expected on May 10. Fannie scheduled an earnings conference call for 4 p.m. EDT Monday.
Sharing the Wealth
Why does it matter that Fannie left out its net worth number from its earnings release? First, think how fundamental a number equity is. It is the wealth left over on the balance sheet for shareholders. Equity is just as important as net income, which Fannie did somehow manage to provide this quarter.
Regulators and creditors watch financial institutions' equity like hawks because it is the basis of leverage calculations. And leverage is a particularly important number to watch at Fannie because it is so incredibly high. At the end of last year, Fannie had $45 of assets for every dollar of equity; this stratospheric number is possible only because of Fannie's government-sponsored status. Investors have no way of knowing first-quarter leverage until May 10. Nearly all banks publish equity data in their earnings releases -- even those that have a far wider array of complex financial products and much more far-flung operations, like Citigroup (C:NYSE) and Bank of America (BAC:NYSE) . STORY_PAGE_BREAK/>
Equity is also important to any investor holding Fannie stock. The company's market capitalization of $72 billion represents the value investors place on Fannie's ability to grow its equity over time. The market cap is 3.2 times end-2003 equity of $22.4 billion. If equity shrunk in the first quarter, that already pricey multiple would be even higher, which could prompt some investors to sell their stock.
So why might Fannie want to take this highly unusual step of omitting the equity number? One explanation -- and the most benign of a not very benign bunch -- is that the company was told to leave it out by its auditor, KPMG. The reason KPMG might have demanded this is that OFHEO opened up the possibility that Fannie may have overstated capital in the past. The auditor might've told Fannie to hold off on capital-related disclosures until the findings of the Office of Federal Housing Enterprise Oversight (OFHEO) accounting probe are known.
The big problem with that theory is that the sort of restatement OFHEO was intimating at would also impact past earnings. And Fannie went ahead and reported earnings as it usually does for the first quarter.
Another theory is that Fannie's systems are too sloppy to do the equity calculations, which involve measuring the value of billions of dollars of derivatives. These derivatives' values are contained in an equity account called accumulated other comprehensive income (AOCI).
We know from an equity restatement in the third quarter of last year that Fannie's systems were subpar. But they may still be that way, preventing the company from measuring equity in a timely and accurate manner.
When asked why there was no equity number in the release, a Fannie spokeswoman suggested that the complexity of the calculations was an issue. She wrote in an email: "The computation of the AOCI component of stockholders' equity has become significantly more complicated -- taking additional time to ensure the integrity of data is a prudent and appropriate decision."
The Bold and the Beautiful
The poor systems are unnerving enough, but there is another possible reason that is actually more disturbing. Fannie may have wanted to conceal the equity number because it fell in the first quarter by an amount that would shock investors and embolden its critics.
Failure to properly hedge against big drops in interest rates led to a halving of Fannie's equity in 2002, excluding a one-off accounting gain created by a shift in assets. At the end of 2002, Fannie's equity was $16.3 billion and it didn't recover much until the fourth quarter of 2003, when Fannie finished the year with the $22.4 billion of equity.
The recovery in the fourth quarter was due to a rise in interest rates. As Detox pointed out at the time, Fannie's book was aggressively positioned to benefit from a rise in rates in the fourth quarter. However, in the first quarter of this year, rates fell. That could've meant huge losses in the derivatives book that may have wiped out the fourth-quarter recovery and then some.
But because Fannie has reported big declines in equity before, why would it get squeamish now? Well, even in 2002, when there was little understanding of the seriousness of the equity decline, the equity drop managed to rattle investors and spark negative stories. Now, with far more people correctly grasping that equity losses are real losses, Fannie may have feared a firestorm of criticism if it released a sharply lower equity number for the first quarter.
Fannie's defenders might argue that because interest rates have gone up so far in the second quarter, Fannie's equity may have recovered. Indeed, cynics surmise that Fannie delayed its publication of equity numbers because it wants to show in its SEC filing that rate rises in the quarter have led to an equity recovery since March 31. This might offset the bad publicity from any steep drop in the first quarter.
But there is a good chance that Fannie may not have been positioned for a rate rise in the second quarter. What evidence is there for that? Well, there's the duration gap, which compares the relative sensitivity of assets and liabilities to interest rate shifts. The duration gap was zero at March 31, which means a rate move in either direction wouldn't benefit equity by much. In other words, Fannie may have locked in any first-quarter losses.
Understandably, Fannie bristles at the notion that the delayed equity filing should raise questions about its financial performance. The spokeswoman says: "You absolutely should not infer anything about the nature of our results from this change in reporting."
It's hard not to, though, when Fannie is possibly the only large financial institution to omit a number everyone is focusing on.
Chugs, Jay |
