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--- Begin Message ----Caveat Lector- Fannie Mae faces more income issues By Rex Crum CBSMarketWatch Saturday, May 15, 2004 http://cbs.marketwatch.com/news/story.asp?guid=%7B31DC261A%2DBFD5% 2D4063%2D8788%2D8D6496968FD5%7D&siteid=mktwIn the latest criticism of Fannie Mae, this week's Barron's says the mortgage finance behemoth is on shaky ground regarding how it records billions of dollars of losses and presents its financial appearance to Wall Street. Barron's cover story says the root of the issue is how Fannie Mae (FNM) and its cousin Freddie Mac (FRE) manage to keep derivative financial holdings off income statements. With its 2003 core earnings of more than $7 billion expected to grow even higher over the coming years, Fannie Mae would appear to have little negativity on its horizon. Yet a Barron's analysis of Fannie's picture says the company took a major hit to earnings as mortgage rates dropped in recent years. Prepayments on mortgages trimmed the portfolio gains that Fannie would otherwise have received, and it was further hurt by the locked-in rates of its financing sources. To avoid recording a loss, says Barron's, Fannie Mae used a series of legal mechanisms to transfer negative numbers to its balance sheet under "accumulated other comprehensive income," or AOCI. The AOCI strategy lets Fannie Mae "burn off" losses over time. Without that, says Barron's, Fannie's 2002 earnings of $6.4 billion would have been overwhelmed by $8.9 billion in cash-flow hedging losses. Barron's says $3 billion in losses that were recognized in 2002-2003 "pale against" $19 billion paid to settle under-water interest-rate swaps in those years. Indeed, a Barron's comparison of 10-K filings says the company's interest rate swaps on its books rose from $23 billion in 2002 to $149 billion in 2003. The aim of the rising use of derivatives, says Barron's, was to defer losses instead of recognizing them. Fannie Mae can pull this off, notes Barron's, because it has the legal status of a government-sponsored enterprise, or GSE, and can exclude its AOCI numbers from the calculations of capital that are used to support its $1.35 trillion in mortgage-backed securities. The 1938 law setting up GSEs includes Freddie Mac. Earlier this month, the federal Office of Federal Housing Enterprise Oversight, or OFHEO, which regulates Fannie Mae and Freddie Mac, said that a probe of Fannie's financial records showed the company had failed to follow generally accepted accounting principles on obligations for manufactured homes and aircraft leases. In an agreement with OFHEO that avoids earnings restatements, Fannie Mae will take a charge of up to $260 million in the second quarter to account for the losses. Barron's analysis of other manufactured housing securities suggest more write-offs will be needed in future quarters. That OFHEO investigation followed on the heels of Freddie Mac admitting last year that it used derivatives to hide $5 billion of income so it could be reported as profits in future years, which could dress up earnings reports. Critics of Fannie and Freddie say that any crisis they suffer could rock the international finance system. The companies make most of their money by borrowing at favored rates as GSEs and using the capital to buy mortgages from smaller lenders such as banks. Groups of mortgages are packaged together as securities, and in that system Fannie guarantees or owns about half of the $7.8 trillion worth of U.S. residential mortgages. The benefits of the security structure provide liquidity to the original lenders and help make Fannie appear to be one of the most-profitable public companies in America. Barron's maintains that Fannie Mae has done nothing illegal; that the company has just used financial loopholes to adjust its books in order to solidify its position in the eyes of Wall Street, investors, and federal regulators. But Barron's also says that as pressure continues to mount on Fannie Mae to provide a clearer look at its finances, the company could be on the brink of having to disclose income restatements that bring an end to its long run of unfettered profitability. ---------------------------------------------------- To subscribe to GATA's dispatches, send an e-mail to: [EMAIL PROTECTED] To unsubscribe, send an e-mail to: [EMAIL PROTECTED] ---------------------------------------------------- RECOMMENDED INTERNET SITES FOR DAILY MONITORING OF GOLD AND PRECIOUS METALS NEWS AND ANALYSIS Free sites: http://www.jsmineset.com http://www.cbs.marketwatch.com http://www.mineweb.com/ http://www.gold-eagle.com/ http://www.kitco.com/ http://www.usagold.com/ http://www.GoldSeek.com/ http://www.capitalupdates.com/ http://www.DailyReckoning.com http://www.goldenbar.com/ http://www.silver-investor.com http://www.thebulliondesk.com/ http://www.sharelynx.com/ http://www.mininglife.com/ http://www.financialsense.com http://www.goldensextant.com http://www.goldismoney.info/index.html http://www.howestreet.com http://www.depression2.tv http://www.moneyfiles.org/ http://www.howestreet.com� http://www.minersmanual.com/minernews.html http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html http://www.goldcolony.com http://www.miningstocks.com http://www.mineralstox.com http://www.321gold.com http://www.SilverSeek.com http://www.investmentrarities.com http://www.kuik.com/KH/KH.html (Korelin Business Report -- audio) http://www.plata.com.mx/plata/home.htm (In Spanish) http://www.plata.com.mx/plata/plata/english.htm (In English) Subscription site: http://www.lemetropolecafe.com/ http://www.hsletter.com Eagle Ranch discussion site: http://os2eagle.net/checksum.htm Ted Butler silver commentary archive: http://www.investmentrarities.com/ ---------------------------------------------------- COIN AND PRECIOUS METALS DEALERS WHO HAVE SUPPORTED GATA AND BEEN RECOMMENDED BY OUR MEMBERS Blanchard & Co. Inc. 909 Poydras St., Suite 1900 New Orleans, Louisiana 70112 888-413-4653http://www.blanchardonline.com Centennial Precious Metals 3033 East 1st Ave., Suite 403 Denver, Colorado 80206 www.USAGold.com Michael Kosares, Proprietor US (800) 869-5115 Canada 1-800-294-9462 European Union 00-800-2760-2760 Australia 0011-800-2760-2760 [EMAIL PROTECTED] Colorado Gold 222 South 5th St. Montrose, Colorado 81401 www.ColoradoGold.com Don Stott, Proprietor 1-888-786-8822 [EMAIL PROTECTED] El Dorado Discount Gold Box 11296 Glendale, Arizona 85316 http://www.eldoradogold.net Harvey Gordin,� President Office: 623-434-3322 Mobile: 602-228-8203 [EMAIL PROTECTED] Investment Rarities Inc. 7850 Metro Parkway Minneapolis, Minnesota 55425 http://www.gloomdoom.com Greg Westgaard, Sales Manager 1-800-328-1860, Ext. 8889 [EMAIL PROTECTED] Kitco 178 West Service Road Champlain, N.Y. 12919 Toll Free:1-877-775-4826 Fax: 518-298-3457 � and 620 Cathcart, Suite 900 Montreal, Quebec H3B 1M1 Canada Toll-free:1-800-363-7053 Fax: 514-875-6484 http://www.kitco.com Lee Certified Coins P.O. Box 1045 454 Daniel Webster Highway Merrimack, New Hampshire 03054 www.certifiedcoins.com Ed Lee, Proprietor 1-800-835-6000 [EMAIL PROTECTED] Miles Franklin Ltd. 3015 Ottawa Ave. South St. Louis Park, Minn. 55416 1-800-822-8080 / 952-929-1129 fax: 952-925-0143 http://www.milesfranklin.com Contacts: David Schectman, Andy Schectman, and Bob Sichel Missouri Coin Co. 11742 Manchester Road St. Louis, MO 63131-4614 [EMAIL PROTECTED] 314-965-9797 1-800-280-9797 http://www.mocoin.com Resource Consultants Inc. 6139 South Rural Road Suite 103 Tempe, Arizona 85283-2929 Pat Gorman, Proprietor 1-800-494-4149, 480-820-5877 [EMAIL PROTECTED] Swiss America Trading Corp. 15018 North Tatum Blvd. Phoenix, Arizona 85032 http://www.swissamerica.com Dr. Fred I. Goldstein, Senior Broker 1-800-BUY-COIN [EMAIL PROTECTED] ---------------------------------------------------- HOW TO HELP GATA If you benefit from GATA's dispatches, please consider making a financial contribution to GATA. 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