By Jonathan Weil
February 28, 2008
SourceFeb. 28 (Bloomberg) -- Fannie Mae, the government-sponsored mortgage company, yesterday reported a net loss of $3.55 billion for the fourth quarter and a $2.05 billion net loss for 2007. As horrible as those results are, they don't even begin to tell how bad last year was.
The better gauge of Fannie's performance is the amount by which the company's net assets declined in value. Viewed this way, Fannie lost $13.4 billion last year, according to the annual report it filed yesterday. That figure excludes the effect of capital transactions, such as the $7.5 billion of preferred stock Fannie issued last quarter when it needed to raise capital to stay above its regulatory minimums.
Fair-value changes for Washington-based Fannie are more informative than its results under generally accepted accounting principles, or GAAP, because almost all the things on the company's balance sheet are financial assets or liabilities. While Fannie discloses fair values for all these items each quarter, it still carries many of them on its official balance sheet at historical cost -- sometimes out of choice, and other times because the accounting rules require it to.
Think of how a hedge fund or mutual fund reports its results, or even how you might tally your own investment portfolio's performance. If the value of your portfolio rose last year to $5 million from $1 million, then you made $4 million, at least on paper. It makes no difference what the accounting rules say. The economics don't change.
Fannie estimated that the fair value of its net assets was $35.8 billion at Dec. 31, down from $43.7 billion a year earlier. About $6.5 billion of that slide came from declines in the net value of mortgage guarantees on Fannie's books.
By contrast, Fannie's net assets under GAAP were $44 billion. Meanwhile, its ``core capital'' as defined by federal statute was $45.4 billion, about 9 percent more than the government's current minimum requirement.
Taking a Dive
The company said it had experienced ``a significant decrease in the fair value of our net assets since the end of 2007,'' though it did not say how much. If current conditions in the mortgage and credit markets persist, Fannie said, it expects ``the fair value of our net assets will decline in 2008.''
If they do decline, Fannie's stock should, too. There's really no good reason why a portfolio of financial instruments like Fannie's should sell for significantly more than fair value. For instance, back to the example of the investment portfolio: If the fair value is $5 million, it makes little sense for someone else to buy it for $6 million or more.
By some measures, Fannie's common stock still trades at a premium, even after losing half its value during the past year. Yesterday, the company's shares closed at $27.27, up 30 cents, giving Fannie a $26.7 billion market capitalization. Based on Fannie's latest fair-value balance sheet, that's 30 percent more than the portion of the company's book value that's available to common shareholders.
Losing Control
The $35.8 billion of shareholder equity at fair value consisted of $20.5 billion of common shareholder equity and $15.3 billion of preferred shareholder equity. A year earlier, by comparison, the fair value of Fannie's common equity was $34.7 billion, while the fair value of the preferred was $9 billion. This is a fancy way of saying that the common shareholders are losing control of the company, fast.
Fannie's chief executive officer, Daniel Mudd, yesterday said the company has ``no current plans to go back to the market for capital.'' Still, the annual report makes clear that Fannie shareholders should brace for even more dilution of their stakes.
``If the current challenging market conditions continue or worsen,'' Fannie said in its annual report, ``we may have to take further actions to meet our regulatory capital requirements,'' including issuing additional preferred or common stock.
Make Sense
Yesterday, at least for a few hours, Fannie investors appeared to be all smiles on news that the Office of Federal Housing Enterprise Oversight will remove the growth caps on the portfolios at both Fannie and its government-sponsored cousin Freddie Mac.
The agency had imposed the restriction in response to the accounting scandals at Fannie and Freddie a few years ago. Both companies' stocks initially soared on the news. Fannie at one point touched $31.58, up 17 percent from Tuesday's close.
It was as if the market seemed to think that Fannie might keep losing gobs of money, but make it all up on volume. Investors quickly came to their senses.
(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Jonathan Weil in Boulder, Colorado, at
jweil6@bloomberg.netLast Updated: February 28, 2008 00:27 EST