Counterparties: The most profitable insurer in America

By Ben Walsh
April 2, 2013

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If you’re looking for evidence of just how far the housing market has come since its implosion triggered the financial crisis, consider Fannie Mae. The housing giant seized by US government five years ago reported a record profit of $17 billion for 2012, after a roughly equal loss in 2011. It’s Fannie’s first annual profit since 2006; as  Clea Benson notes, the profit eclipsed that of companies like Wal-Mart, GE and Berkshire Hathaway.

Drilling down into Fannie’s filing gives you a snapshot of the American housing market. The company set aside less to cover future losses on loans it guaranteed ($62 billion, compared to $76 billion in 2011); suffered lower delinquency rates; had higher loan volume and higher fees; and saw the value of its derivatives positions improve. Bill McBride at Calculated Risk pulls out another bright spot: Fannie says that there was a “4.7% increase in home prices in 2012 compared with a home price decline of 3.7% in 2011.”

Fannie’s earnings could have been $59 billion higher, Benson adds. Due to an agreement with Treasury, any net worth beyond $3 billion cannot be retained by Fannie and instead must be paid back to taxpayers. As soon as the first quarter of this year, Fannie could be required to report $59 billion in assets that had previously been written off, and most of that would have to be shipped to the US government to stay under the cap. David Reilly notes that that payment, along with $31.4 billion in dividends already paid to government, would mean Fannie will have paid the Treasury a total of $90 billion. That may look like a large chunk of the $116 billion pumped in by the US taxpayer, but in fact that $116 billion is still going to be outstanding: Fannie’s just paying dividends, here, rather than repaying debt.

It may also be hard for Fannie to repeat the successes of 2012. Matthew Klein notices that Fannie isn’t as hedged as it could be, and wonders how much of this year’s “record profits can be attributed to excessive interest-rate risk”.

Fannie’s current success may keep it in government hands that much longer. Why would the US relinquish control of what Peter Eavis notes is the most profitable insurance company in the country, just as its massive bailout was close to turning a (slight) profit? There’s also the small problem that no one has a real plan for extricating Fannie and Freddie from government control.

Instead, Shahien Nasiripour reports, the rough plan is to create a new public utility to compete with the two companies. That “single securitisation platform” will still be taxpayer-backed. — Ryan McCarthy and Ben Walsh

On to today’s links:

Right On
How paid paternity leave could stimulate the economy – Catherine Rampell

Takedown of a takedown
The problem with David Stockman – Neil Irwin

China
The annual toll of Chinese air pollution: 1.2 million premature deaths – NYT

EU Mess
Ireland: where delinquent mortgages are common, but evictions are rare – Matt Phillips
Cyprus’s finance minister has resigned – Bloomberg

Revolving Door
Former SEC chief Mary Schapiro declares revolving door dead, joins shadow regulator – WSJ
A thorough guide to Promontory, DC’s “shadow regulator” firm – American Banker

Regulators
Why do bank capital rules treat loans as riskier than derivatives? – Sheila Bair

Wonks
What you don’t know about poverty – Lant Pritchett

Contrarian
Is the demand for high-skilled workers actually falling? – Arnold Kling

Says Science
Shakespeare was a tax-dodging grain hoarder – Telegraph

Oxpeckers
You can’t stop ESPN’s economic success, you can only hope to contain it – Economist

Billionaire Whimsy
The London neighborhood so exclusive, it’s empty – NYT

Dubious Milestones
Forget Dow 36,000 — we’ve just hit Bitcoin $1 billion – Verge

Data Points
The benefits of being a philosophy major, and of not being a communications major – Pleas and Excuses

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And, of course, there are many more links at Counterparties.

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