Really?? Fannie Mae, Freddie Mac to help cut deficit Fannie and Freddie to the rescue…we are saved right?
Oh boy…where to begin. I’ll start by saying…this is complex, none of the articles I have read provide much detail, and while I think I understand what is going on here…I could be wrong. But here goes.
It is not really news that Fannie and Freddie are contributing to government revenues….all “profits” they generate ultimately flow into fed coffers…as do losses. Unfortunately, they don’t get their own line item on the Daily Treasury Statement, so I can’t whip out the stats, but on 3/29, a $12.3B payment was received in the “Other Category labeled as GSE dividends….sounds like Fannie/Freddie to me… So annualized (assuming this was a quarterly payment), $40B-$50B sounds about right for a current run rate and more or less in line with the stories I have been reading.
But if I am reading this correct, this current news story is actually about something else…some awesome accounting entries that could add $60B or so to Fannie’s bottom line. Enter…Deferred Tax Assets. Let me again profess…this is a bit outside the realm of my accounting expertise, but here goes. As you know….companies and individuals are taxed on net income income..or profits. A company that has $1B in revenue, and $1B in cost…will have no profit, and pay no tax…obviously. So a company that has a $1B profit in year one, would then pay about 35%…$350M in income taxes, and be on their merry way. But then…in year two, say they post a $1B loss. Obviously, they wouldn’t pay any taxes in Y2….turns out, they can actually get a refund…subject to some limitation…on prior taxes paid. Essentially, they could get a refund on the $350M in taxes they paid in Y1….
So…imagine the same scenario…just in reverse. The loss in Y1 of 1B creates a tax asset of ~$350M…. so the next $1B they make will kinda be tax free. This is a deferred tax asset…and it is more or less a real asset with real value…more or less.
Now enter our good buddies at Fannie Mae. This is a bit low, but let’s assume that in a given year…a long time ago….they managed to lose an astonishing $100B. Hooray right….tax assets galore. The problem was….they were still losing money…and had no real expectations of ever making a profit again….so, per accounting guidelines….they were forced to write off a huge amount of tax assets…per this article…around $59B. Yawn….long time ago right??
Well…thanks to some help from Chairman Bernanke and his free money ZIRP policies, low and behold….Fannie is now (though probably temporarily) profitable again. Hooray!!….these profits are the $10B or so we are seeing each quarter. But now…it’s time for some accounting magic…followed by a bit of trickery and insanity.
First…accounting magic. With a return to profitability comes a new set of expectations…. all of those “tax assets” written off long ago….suddenly might have value again. So, what they are contemplating doing…or maybe have already decided…is to write them up…all $59B….and guess where it all flows….profit….Talk about a blowout quarter!! Note that in reality….these “assets” would be recognized over many many years until fully depleted.
Now…for the trickery and insanity. According to the articles….per the takeover agreement of Fannie and Freddie…Profits must be remitted to the government via dividends. The problem then…is that this is just a two line accounting entry….Fannie doesn’t actually have $59B of free cash sitting in the vault….so….what to do???? Hmmmm…. Ok..how about they borrow $59B (from the fed??)….use that to pay a special dividend right in the middle of the next debt limit showdown. Phew….wouldn’t that be awesome?
Yes….it would be incredibly awesome…let’s do it!!
Now…let me just add one more silly thought to the whole silly ordeal. As an essentially wholly owned subsidiary of the federal government….the income taxes paid, or not paid by Fannie and Freddie are essentially irrelevant to the true federal deficit picture…let me illustrate why. Say in a given Year…Fannie posts a $20B profit before tax. If they had no tax assets…they would pay $7B in income taxes…then remit the balance, $13B to the government. Now….with their tax assets…taxes are zero…so they remit the full $20B to the government. Anybody spot the problem? Yeah…paying taxes to yourself is kind of a silly game to play.
So to summarize….accountants at Fannie are going to create a make believe $59B accounting entry to increase assets and income. Then, they will borrow $59B of real money, pay it to the government as a special dividend….then probably in a few years default on that. By doing all of this…we get an extra two weeks or so in the upcoming debt limit showdown, and maybe get to pretend that we cut the deficit by an additional $59B….probably 6% or so.
Perhaps the most hilarious part of all….is that there probably aren’t half a dozen people in DC that could actually follow this fun little money trail. Yep…we’re still screwed.
I just read “Windows 8 fixes are on the way” which reminded me I haven’t done a Windows 8 Update lately…so here goes.
In my last update I discussed two problems…random crashes and the machine getting bogged down when I have a few dozen internet explorer tabs open. I have not experienced any blue screen of death crashes since a Windows update a month or so ago….not sure if they are related, but they seem to be. I have had one regular crash…which I probably deserved….trying to push way too much data to a pivot table, despite having been too lazy to install the 64 bit version of Excel 2013…. So…whatever that was, it appears to be fixed.
The second issue…performance….appears to be partially my own fault. I’m by no means a hardware expert…I’m just an accountant….so I bought literally the cheapest sale laptop I could find….After a bit of research….it appears that my laptop has about the dinkiest processor on the market…literally most cell phones would laugh at my computer…I’m too ashamed to even type it. So that’s probably part of my problem. I will likely get a memory upgrade soon…looks like for $50-60 I can get an additional 8GB…which sounds like an absolutely ridiculous amount, but if it helps even a little it will be worth it….I’m pretty much stuck with a go cart processor for the next 2-3 years. Honestly…it’s not that big of a problem… In retrospect, yes, I probably should have sprung another $100 or so for a big boy computer, but all it means is that I have to wait a few extra seconds every once in a while.
Overall, I have adapted well to Windows 8…..I almost exclusively use the desktop….which more or less is pretty darn close to Windows 7. Sounds like after the updates, it will be even more similar, maybe even bringing back the start button. At the end of the day, there is nothing I can’t do on my Windows 8 machine that I could do in Windows 7. Not that I do a lot….surf the web, Excel/Access, and email…that’s really all I need. Come to think of it, isn’t that all anyone really needs?
For the last three years now, 2010-2012, Federal cash outlays have more or less stayed the same at $3.8T per year. 2013, it turns out is shaping up to be more of the same…despite all of the talk of cutting spending, furlough’s and sequestration…outlays through 4 months are down by $9.5B compared to 2012 through 4 months…. a 0.76% reduction. Well…at least they technically aren’t lying when they say they cut spending…baby steps right?While entitlement programs, especially Social Security continues its exponential growth, this has been offset by cuts elsewhere…but where?
A few things jump out comparing 2012 to 2013. The big reductions came from defense vendors, education, unemployment, and a bit surprising…interest.(Hooray for ZIRP!!)On the other side…the usual suspects…Social Security, Medicare, Medicaid. Sooner or later…the delicate balance between entitlement gains being offset by cuts elsewhere is going to break….the exponential growth will overpower the linear cuts….throw in the gentle breeze of a mild recession and a mild rise in interest rates and down goes the house of cards
Comparing 2013 to 2010 yields similar results…huge gains from reduction in unemployment, defense vendors, and our good friend “Other”, offset primarily by social security Curiously, Medicaid and medicare are little changed…the Medicaid number appears to be legit…but the Medicare # looks to be skewed a bit by timing where May 2010 cost got pulled into April….a TTM analysis would probably scrub that out, but who has time for that.
So…through 4 complete months of 2013….outlays truly are down…at least for now. Say…is that a breeze I feel?
Oh…one more thing…The daily cash deficit for 5/1 was $26.1B….so we’re back in familiar territory…I haven’t done a detailed analysis yet, but probably looking at a deficit between 100B and 125B….roughly washing out the April Surplus 🙁
If you haven’t seen it yet, the WSJ put out:
“The Treasury Department said that it expects to retire a net $35 billion in bonds, notes and bills from April to the end of June.”