Comments on: Behind Freddie’s “profit,” rising NPAs

By: Rich

Rich — Mon, 10 Aug 2009 17:38:35 +0000

Rolfe: I enjoy reading your postings!
I thought Fannie and Freedie have balance sheets and guarantee Agency RMBS securities. What constituits their off balance sheets assets? Also, because they are in Conservativeship, are the taxpayers also ultimately on the hook for the Agencies off balance sheet assets/liabilities?
Thanks

By: Andrew

Andrew — Mon, 10 Aug 2009 14:15:08 +0000

What *I* meant to say is that I *think* that’s what Rolfe was trying to point out.

By: Andrew

Andrew — Mon, 10 Aug 2009 13:02:54 +0000

What Rolfe meant to say is that the AOCI charge inflated capital for the purposes of ratio calculations because companies get to add AOCI back into their Tier 1 case.

I don’t think that’s really a change from the previous policy either, its just a weakness that both policies have that allows an institution to make their capital look better than maybe it really is.

By: tahjahall

tahjahall — Mon, 10 Aug 2009 01:47:36 +0000

infowars.com read up on the fleecing of America that is and has been going on.

By: Kyle

Kyle — Sun, 09 Aug 2009 16:47:06 +0000

Hah, maybe you are right. My initial [and continued] reaction when FASB “folded” back in March was that they changed stuff without ever changing anything, to get politicians [clearly displaying their lack of real concern or understanding of anything] off of their backs.

By: Ward

Ward — Sun, 09 Aug 2009 15:38:14 +0000

Buzzkiller

Good job analyzing the notes. If more people had looked in depth at the smoke-and-mirrors corporate America has put out for the past 2 decades or so maybe we wouldn’t be in the predicament that we are.

By: Rolfe Winkler

Rolfe Winkler — Sun, 09 Aug 2009 04:16:29 +0000

I want to agree with u. To anyone who pays attention it shouldn’t matter too much. But then why make the accounting changes? Because even a little obfuscation can fool the majority of observers…..

By: Kyle

Kyle — Sun, 09 Aug 2009 03:58:15 +0000

To channel Bill Clinton, I guess that depends on your definition of “hide.” I mean, anyone who looks at the F/S should be able to see the shift with a minimal amount of effort. Hell, you don’t even have to look for it, they’re required to spell it out for you. If Joe Investor is fooled because all he does is read the MarketWatch or CNBC headline, is that really important? He’s not moving the market anyway. To be clear, I’m not disagreeing with you on your last comment, I just can’t see how it truly makes a difference. Do money managers/other professionals actually not read the F/S or have such a poor working knowledge of accounting that this fools them?

By: Rolfe Winkler

Rolfe Winkler — Sun, 09 Aug 2009 03:08:10 +0000

But the new fair value rules DO help companies hide losses by shifting them off the P&L, no? “Non credit related” OTTIs no longer impact EPS. Yeah, they’re still in AOCI, but the headline figures are massaged. Freddie is exhibit A. The headline from the Q2 report was that they turned a profit….

By: Kyle

Kyle — Sun, 09 Aug 2009 01:40:35 +0000

I just get kind of annoyed because people are ALWAYS parroting the FSP 157-4 change as this destruction of FV accounting principles, and clearly, it has had little to no effect. FSP 115-2 and 124-2, issued concurrently with 157-4, have certainly had “implications,” such as the one you present in this article, but I think anyone with a modicum of securities analysis or accounting education can identify where the changes occurred. Bottom line is that people (mainstream and blogosphere both) act like those changes (157-4, 115-2, 124-2) are hiding losses that would have been recognized otherwise, and that is quite simply not the case. Anyway, you just gave me a place to vent I always enjoy your work, thanks!

By: Rolfe Winkler

Rolfe Winkler — Sat, 08 Aug 2009 23:46:16 +0000

Thanks for the correction Kyle. Here’s the crucial paragraph from the earnings release.

On April 1, 2009, the company prospectively adopted FSP FAS 115-2 and FAS 124-2. The new accounting guidance revised the recognition, measurement and presentation for other-than-temporary impairments on AFS securities the company holds. As a result of the adoption, the company recognized a cumulative-effect adjustment of $15.0 billion to its opening balance of retained earnings (accumulated deficit) on April 1, 2009, with a corresponding adjustment of $(9.9) billion, net of tax, to AOCI. The difference primarily represents the release of the previously recorded valuation allowance against the deferred tax asset that is no longer required upon adoption of FSP FAS 115-2 and FAS 124-2. Thus, as a result of the adoption of the new accounting guidance, the company’s total equity increased by $5.1 billion.

By: Kyle

Kyle — Sat, 08 Aug 2009 18:06:58 +0000

Rolfe, how does shifting a loss from NI to AOCI inflate Shareholder Equity? Retained Earnings is still reduced by AOCI (and subsequently anything allocated to it this quarter), thus Shareholder Equity properly reflects these losses.