Friday, November 6, 2009

Fannie and AIG: The Dogs of the TARP

All of those optimists who think the US government is going to make a killing on its TARP investment have yet to take a look at Fannie's latest earnings report, released yesterday after the close. The good news is that Fannie actually reported a narrower loss than in last year's third quarter. The bad news is that the loss was still $18.87 billion. Really, how excited can an investor get over the phrase "losses narrowed to a mere $19 billion?" The loss was primarily due to a $22 billion increase in credit-loss provisions and foreclosed-property costs due to spiking delinquency rates. The mortgage giant put in its quarterly request for more money from the government, this time a puny $15 billion.

So really, why should anyone care about Fannie anymore? It's barely a public company since the government seized the mortgage giant and put it into conservatorship last September. Fannie Mae is the mortgage market. In fact, Fannie, Freddie and FHA loans account for approximately 95% of mortgage issuance this year. Earnings reports from Fannie and Freddie aren't merely company earnings for investors in those firms, but they are important barometers of the economy. Spiking delinquencies and foreclosures for Fannie's properties paint a rather bleak picture of the state of the housing market, one that counteracts all the bullish carping of those who believe that a few months of slightly higher medians for housing prices means it's back to the boom years of 2005. The government is keeping the housing market alive. And it's costing us a pretty penny.

In other Fannie news, the WSJ reports that Fannie has introduced the "Deed for Lease" program, a new program that allows delinquent borrowers to transfer their property to Fannie Mae in exchange for a lease. Borrowers-turned-tenants will pay market rents, which in many cases are much lower than their mortgages and might be offered extensions when their lease expires. The hope is that allowing delinquent borrowers to stay in their homes will keep another wave of foreclosures from hitting the market and depressing prices further, causing yet more homeowners to go upside down on their mortgages thus continuing the endless downward spiral in housing prices. The program is only offered to those who are seriously delinquent, which seems to create an enormous incentive for those who are upside-down but current on their mortgages to stop paying so they too can remain in their house for much lower monthly payments. Furthermore, it doesn't really solve the problem of the massive losses that Fannie needs to take when owners who paid too much for their homes hand the properties over to Fannie. It just delays the loss recognition for a few years (depending on how Fannie chooses to account for it, and everyone knows Fannie is famous for its scrupulous accounting.) Unless, of course, housing prices miraculously rebound and Fannie can just sell its mounting inventory for a huge profit in a few years. Yeah, right. Other than those minor pesky issues, I think it's a great idea.

Finally, we get to AIG. The formerly highly regarded insurance conglomerate that everybody loves to hate on. AIG posted a highly anticipated profit of a whopping $455 million. Of course, compared to the year-earlier loss of $24.47 billion, these results were spectacular. New CEO Robert Benmosche did not miss the opportunity to pat himself on the back, remarking that AIG's results "reflect continued stabilization in performance and market trends." Yeah, AIG will be out of the $120 billion hole in no time. Mr. Benmosche's strategy is to become more patient in selling off all of those valuable businesses AIG owns. You know, like the airline leasing business, AIG's "crown jewel," which is looking for a new buyer along with just about every other airline leasing operation in existence that is currently up for sale. That crown jewel that just had to borrow money from AIG (i.e. the government) because it couldn't refinance its debt. On the horizon is another $5 billion charge the company plans to take as it closes an SPV connected to its foreign life-insurance business to pay off $25 billion of its New York Fed credit line. Then there's the investment company Primus Financial Holdings that AIG sold last quarter for $2.15 billion, its biggest sale globally so far. The company will book a $1.4 billion fourth-quarter loss on that sale. Seems like the CDS book wasn't the only thing on AIG's books being mismarked.

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