Hunnj on the FOOL on FNM
I keep seeing posts suggesting that Fannie Mae will need to issue bonds or sell assets in order to bring its capital requirements into line. The first option cannot possibly work at all and the second is not likely to work.
Look at the accounting equation:
Assets = Liabilities + Equity
At 12/31/03 FNM looked like this (numbers in millions):
Assets $1,009,569 (as in $1 trillion)
Liab $987,196
Equity $22,373
Let's say they issue $10 billion in bonds. Then the numbers become:
Assets $1,019,569
Liab $997,196
Equity $22,373
Not only does equity not change, but the debt to equity ratio is worse.
Let's say they sell $10 billion in assets and use the proceeds to retire debt. Then the numbers become:
Assets 999,569
Liab 977,196
Equity $22,373
Equity is unchanged and the debt/equity ratio is only marginally better.
If it's possible they have assets with unrecognized gains of $10 billion and they sell them, then it changes the picture. The unrecognized gains would flow to equity on the gain on sale. Let's say they sell $50 billion in assets which have not been marked to market and have a $10 billion gain. They use the proceeds to retire debt.
Then the numbers become:
Assets $979,569
Liab $947,196
Equity 32,373
The accounting on this works out but how likely is it that they have $10 billion in unrecognized gains? Not very. Their problem is assets with unrecognized losses.
This leaves two likely options:
1) Issue stock. A $10 billion stock sale yields the following:
Assets $1,019,569
Liab $987,196
Equity 32,373
This looks the same on the balance sheet as selling an asset sale with unregognized gains but the income statement would show no profit on the transaction as the asset sale would.
2) A gift (from whom do you suppose?)
Assets $1,019,569
Liab $987,196
Equity 32,373
In this case there would be a profit as money has dropped from heaven ... well actually most likely the Fed. |
