U.S. Economic/Financial News
Fannie Mae and the Mortgage-Bomb Securities Market
Anyone looking for proof that the mortgage-backed securities (MBS) market is blowing out, need look no further than the June 23 New York Times, which reveals that Fannie Mae, the big sister of Freddie Mac, made no money in 2002, despite reporting $6.4 billion in "core earnings" and $4.6 billion in earnings as measured by standard accounting rules. "On an economic basis, they made no money last year. That's the simplest way to put it," Sonic Capital president Lawrence Kam told the Times.
Kam says that Fannie Mae underestimated how fast interest rates would decline and homeowners would refinance their mortgages, and did not protect itself against the risk that some of its higher-yielding mortgages would be replaced by lower-yielding ones, and that these losses would show up in Fannie's income statements over the next several years. As a result, over the last three years, the discrepancy between what Fannie Mae has reported as earnings, and the actual change in the value of its net assets, is a shortfall of $9.7 billion. Kam said that this is not a matter of breaking the accounting rules, but of the failure of standard measures of profit and loss to capture the underlying economic reality of the business.
The picture that is becoming more clear, is that the refinancing binge, which is necessary to keep housing payments down and consumer spending and debt service up, is blowing up the mortgage-backed securities market, in a classic example of blowing out one part of the bubble attempting to save another.
Freddie Mac Announces 'Re-Audit' To Add Past Earnings
Freddie Mac's new CEO Gregory Parseghian and CFO Martin Baumann said on a conference call, and in a prepared statement June 25, that the company expects to add $1.5-to-$4.5 billion to its past retained earnings. The company originally reported net income of $12.5 billion over the restatement period from 2000 to 2002, but in question, is the misallocation of profits and losses, in particular associated with the $1 trillion derivatives portfolio.
The new execs said, in a "don't worry" discussion, that they would comply with good accounting procedures to show the quality and type of Freddie's interest-rate hedges and derivatives holdings. Afterwards, Freddie Mac stock blipped up by $1.53 a share, or 3.06%, to $51.56 by mid-afternoon.
Meantime, hearings took place today at the U.S. House Financial Services Subcommittee. Witnesses focussed on the fact that neater books would not cover up the problem of Freddie Mac having inadequate capital to back up its securities. Chairman Richard Baker (R-La.) said that current regulation is inadequate, and he wants passage of new legislation he introduced yesterday, putting the Treasury Department as overseer of Freddie Mac and Fannie Mae.
Protection? Another spotlight in Washington is turning on the big buck lobbying tab and political spending of Freddie Mac. The June 25 USA Today reports that in 1993, Freddie Mac employees gave $67,000 in political contributions, but last year, $4.2 million. In 2002, Freddie Mac spent $9.7 million for lobbyists.
U.S. Physical Economy Continues To Disintegrate; Home Sales Up
The latest reports on the U.S. economy, released June 25 by the Commerce Department, show continuing collapse of manufacturing orders, while home sales soared. The statistics, unreliable as they may be, reflect the crack-up of the U.S. economy.
Orders for U.S. durable goods fell 0.3% in May, from the previous month, according to the Commerce Department's figures. In April, orders for durable goods fell 2.4% from March. The dollar value for orders to factories for durable goods (e.g., cars, appliances, and equipment expected to last longer than three years) for May was $168.3 billion, the lowest since June 2002. May marks the fourth time in six months that overall orders for manufactured goods have fallen. Declines in May were broad based, including orders for cars, computers, and machinery.
Shipments of goods, a barometer of economic activity, fell by 0.3% in May, after a 1.1% decline in April.
Sales of new homes skyrocketed 12.5% in May from April for single-family dwellings, to set a record annualized rate of 1.157 million for 2003. This makes May the highest sales month ever, beating out September 2002.
Sales of used homes jumped 1.2% in May over April, for an annualized rate of 5.92 million, according to the National Association of Realtors.
It's Official: The U.S. Economy Is Expiring
The U.S. economy is in its death throes, as even official government statistics show:
*U.S. Gross National Product, for the first quarter of 2003, shows a 1.4% annualized growth rate, revised downward from the 1.9% rate previously estimated by the Commerce Department, which released the new figures June 26. The 1.4% matches the 4Q annualized rate for 2002.
*Inventory Replenishment is falling off to nothing. The Commerce Department said that inventories grew at only a $4.8 billion annual rate in the first quarter, only a third of the $13.2-billion rate it estimated a month ago. Business investment was weak.
*Top 400 wealthiest U.S. taxpayers account for 1.1% of all income earned in 2000, according to new figures released June 25 by the government. The top 400 in 1992 accounted then for 0.5% of all income earned. The average income of one of the top 400 in 2000 was $174 million, four times more than the average in 1992 of $46.8 million.
*Poor told to die off: over 1 million Medicaid recipients being cut off by states. This was the figure as of March, and more are being cut all the time. A survey featured on the front page of today's Wall Street Journal puts the following in rank order by number of people bumped off Medicaid: 1) Tennessee, 200,000; California, 100,000; Michigan, 38,000; and so on.
Fed Drops Overnight Rate to 1%Lowest in 45 Years
The Federal Reserve Bank dropped its key interest rate June 25, by a quarter percentage point to 1%the lowest rate since July 1958, some 45 years ago. This is the 13th rate reduction since early 2001, and the first one this year. The Fed issued a bankspeak statement referring to the danger of an "unwelcome substantial fall in inflation," at hand. San Francisco Fed President Robert T. Parry broke with his colleagues, and said the Federal funds rate should have been cut by a half percentage point, instead.
However, there was no Viagra effect this time on the stock market; the Dow Jones Industrial Average fell 98 points, or 1% as of close of trading, and other indices likewise.
Fed 'One Rate Cut Away' from Electronic Printing-Press Money
Alan Greenspan's Federal Reserve Bank is only "one rate cut away" from electronic printing-press money, as Federal Reserve Governor Ben Bernanke called for last fall, says New York Post columnist John Crudele, June 26. Crudele goes back to the Bernanke statements of last November, that the Fed can (electronically) print as many dollars as it wants "at no cost," and compares this to Germany in the 1920s. Crudele then notes that, adding liquidity when interest rates can't be cut anymore, could cause foreign investors to take their money out of United States, and "if an exodus begins, there may be no way to stop it." There is only one rate cut left, Crudele says, before the government has to start doing the strange things that Bernanke was talking about.
FERC Orders California To Pay Billions to Energy Pirates
The Federal Energy Regulatory Commission (FERC) ordered the state of California to pay multi-billion-dollar energy contracts, signed during the 2000-01 crisis, to energy privateers, despite finding massive market-rigging by the same privateers. FERC also banned Enron from selling any electricity or gasa largely symbolic gesture, since the company is, today, barely a shell. These decisions came at a June 25 meeting of the FERC, in a straight party-line vote. California parties and others have 30 days to appeal.
About $42 billion of power-purchase contracts were racked up during the crisis period, by California-associated energy-buying agencies, and to other entities, including those in Nevada. Since then, many of the contracts have been negotiated down. But three groupings have not, and FERC's decision today, orders the contracts to be paid at the high level: 1) California wanted to cancel and re-negotiate about $12 billion worth of obligations to companies including Reliant, El Paso, Sempra, Dynegy, etc.; 2) Nevada-based Sierra Pacific Resources/Nevada Power Inc. and two municipal utilities wanted to cancel contracts; 3) PacifiCorp. (an arm of Scottish Power Plc) wanted to cancel $67 million owing to various companies including Reliant, Dynegy, Morgan Stanley.
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