US Daily Cash Deficit 12/20/2013-Freddie Mac Payday Loan

The US Daily Cash Deficit for Friday 12/20/2013 was $3.6B bringing the December 2013 surplus through 20 days to $13B with 6 business days remaining.

12-20-2013 USDD

Revenues take a big hit today…$-7B vs last year…now down $11B YOY…almost 5%. While most of that can be attributed to a $6B TARP repayment received last year…that’s not really a surprise. Excluding TARP…tax deposits are just about flat at +1%…including corporate taxes which are up 3%.

So…while December is looking like a pretty miserable month on the revenue side…I just stumbled upon a nice little news story from back in November that looks like it will save the day. Over at The Street they reported that Freddie will be making a $30B payment to treasury. This is pretty much identical to what happened with Fannie Mae back in June as I documented here. Accountants at Freddie wrote back up previously written off tax assets…creating an accounting gain of $24B. Then…they go out and get a $24B loan….and use that to pay uncle Sam his due. Sounds great right??

Well…you see the thing is…Freddie is essentially a government owned entity….and since these fictitious “tax assets” only value is in reducing future taxes owed….the entire thing is essentially a huge circle j***. The US government is using Freddie and Fannie to get a payday loan….in this case cashing out $24B today….but reducing future revenues by the same…plus whatever interest Freddie has to pay…

At risk of putting some to sleep, I feel a need to proceed. Let’s just say in a given quarter Fannie and Freddie together post a $10B  before tax profit….which they are obligated to turn over to treasury per the bailout terms. Now…if they were a normal corporation….they would pay about 35% of income tax….$3.5B…then the remaining $6.5B would then be turned over to Treasury (as the owner). Net to treasury….$10B. Now….let’s let them use their pretend tax assets to reduce income tax to zero. They still have $10B but no income tax….so all $10B is handed over to treasury. So…Treasury gets $10B regardless of what kind of nonsense the accountants come up with. However…now Freddie has an additional $24B of completely unsecured debt on it’s books. The interest on that…though probably not much, will directly reduce future earnings handed over to the treasury….and of course…the debt itself will ultimately have to be repaid. Even if Treasury ever sells Freddie, or lets it go public again….the entities value to a suitor has been reduced directly by the $24B of cash pulled out….a haul old school corporate raider Mitt Romney could only ever dream about.

So…the net impact of all this is that the December Surplus will be $24B higher than it otherwise would have been….and future deficits will be $24B+ or so higher. To my knowledge…the Fannie/Freddie bag-o-tricks is now just about empty… after buying us a whole…maybe 2 weeks of time. Yep…we’re still doomed 🙂


Fannie Mae Payday Loan: Revenue Or Reduction In Cost??

Back in May, the CBO released an updated forecast of FY2013 that was a $200B improvement over the forecast they had released in February…basically on a $100B decrease in outlays and a $100B increase in revenues.

In my review here, the reduction in outlays was quite puzzling For a few years now, we have been running more or less flat costs as increases in Social Security and Medicare quickly gobbled up whatever tiny cuts were actually made. So…I thought it was very odd that with only 5 months remaining, they would predict…all of a sudden a $100B reduction, or $20B per month remaining in the FY.

After comparing the Monthly Treasury Statement (MTS) with the  Daily Treasury Statement (DTS) for June… I have a much better understanding now. It seems that rather than categorizing the Fannie Mae special dividend as revenue…like I have, they instead classified it as a reduction in outlays. From a deficit perspective…it really makes no difference. From an accounting perspective, well, I can see it going either way, so I don’t think there is anything shady afoot…. well, there is a lot shady about the payment, but I don’t have any vehement objections to this classification of outlay reduction instead of revenues 🙂

At the time, I suspected that the revenue increase was primarily the Fannie Mae payment and the cost reductions were somehow related to extraordinary measures pushing cost out of FY 2013 and into early FY 2014, so maybe I got that part all wrong….maybe:)

So, lets look at revenue…which I had just assumed was Fannie Mae. Since it wasn’t, they must have expected a bona fide $+100B in revenue. With 9 months of MTS data in the bank, we are $726B under the CBO’s may outlook of $2.813T. Looking at year ago numbers, we see that July to Sep netted $625B in revenues…so a 16% YOY improvement should get them there.  But…with July currently at 7%….and looking to end ~%10 without any surprises…we are going to need a very solid September to pick up the slack. unfortunately, we seem to be seeing a slowdown in revenue growth that could make this difficult. The Jan-April period saw 15.5% YOY increases….the May-July period looks to have slowed to right around 10%…more or less as predicted.

Now…a final note on the MTS…I don’t like it and I don’t trust it. You may be tempted to assume that the MTS is just a summary of the DTS…it’s not, in fact several attempts by me to reconcile the two reports have failed miserably. Treasury informed me a while ago that in fact, they are pulled from completely different source data. Furthermore. The MTS data is presented using a “modified cash basis…vs. the DTS, which is cash…period. Personally, I don’t really know what “modified cash basis” means, but I trust it just about as far as I can throw Chris Christie :). All that said…the MTS deficit numbers are the ones you are going to hear any time someone refers to the official deficit. keep that in mind in a few months when they start braying about how great a job the government has done at cutting cost….Once you back out the “cost reduction” associated with the Fannie Mae payday loan, it’s unlikely to be nearly as impressive.

Fannie/Freddie Make $66B Payment to Treasury

Multiple news outlets are reporting that Fannie Mae did in fact make the $60B payment we’ve been discussing on and off…no surprises here….when we add Freddie into the picture, the total was $66B. Most of what I’ve read is just news clips…but this one  by Daniel Gross at the Daily Beast takes the cake.

“That payment of $59.3 billion is real money—equal to about 2 percent of all expected federal revenues for the current fiscal year. And it all goes to deficit reduction.”

It’s a nice Kumbaya kind of article…Everything is getting better…the bailouts worked……. But it’s all bull$#@%…. as I documented here. I never know any more if the journalists are really just that ignorant, or if they are just lying SOB’s. Quick…Somebody flip a coin.

So…let’s take another look at what has really happened here. Fannie Mae is essentially a government run operation., so whatever “profits” they make get handed over to the government.  So…let’s just say that in a given year, they make $10B before tax profit  They would send in $3.5B to the Treasury as “corporate taxes” and $6.5B as a dividend payment.

Now…say they have a “tax asset” based on past losses that basically shields all of their income from income taxation. So…this time around, they make the same $10B…and send it all to treasury as a dividend. Hopefully the point is clear…the very idea of one government entity paying “taxes” to another is a bit silly…am I right? The cake is still the same size, no matter how you want to slice it. Tax assets are of no value to government owned entities….

Back to Fannie….I think we can agree from the above example that taxes are irrelevant to the future cash flows they will generate for treasury. Despite this….Fannie Mae…not doubt prodded by Treasury, decided to write up the value of previously written off tax assets (from when they actually were kinda sorta a public company) back up….recognizing an immediate $50B gain. It’s kind of neat…you should try it. So open up your personal balance sheet….and where you have the value of your 10 year old car at $3k…..just write it all the way back up to whatever you paid for it, say $33k. Instant $30k gain. Don’t you feel richer now? Didn’t think so.

After writing up their imaginary assets that are pointless for what is in reality not a public company…then…They went out and got a loan for the full amount….then wrote a check to Treasury on their “earnings” This is actually kind of what everybody was accusing Mitt Romney and his band of corporate raiders of doing back in the day. Take over a business….then lard it up on debt and use the cash to pay yourself big cash bonuses. Then, you take the company public again… and a few years later the whole thing goes bankrupt because they can’t pay the outrageous amount of debt they have.

When it comes down to it…from a cash flow perspective, all Treasury has done is pull forward future cash to today….trading a bigger cash payment today for smaller future payments. I don’t know what kind of interest rates Fannie will pay on $60B of debt, but it’s probably a lot higher than treasury would have.

Finally, I just want to take a minute to clear up one other thing I thought was silly, but is often repeated. Gross mentions that Fannie has now paid back $95B of the $116B they took in bailout money. I have no reason to doubt the numbers, but I feel it misses an important point. If you lent somebody $1000 back in 1980….and they came back in 2013 and said…here’s the $ I owe you. Technically, yes…they paid you all back. Obviously you are happy to get it, but in saying you are even forgets a very important component…opportunity cost. You could have invested that $1000 over the last 33 years, getting say 5%, and ended up with over $5k.

Now, 33 years haven’t passed, but this simplistic analysis by Mr. Gross is either amateur or just plain misleading. Treasury had to go out and issue an additional $116B of debt, and pay to service it for the last five years…And who knows how much cost they incurred printing up those pretty annual reports. At least twitter is free, so it didn’t cost them any money at all to announce their $66B funny money scheme to the world.

For more info on the shenanigans…check out my original post here. It’s a lot of trouble for perhaps…three weeks worth of deficit relief?

Finally…just some thoughts on the value of Fannie Mae. Let’s just ignore all of the other $3T of debt Fannie has, and pretend for a moment that as of 6/27, Fannie Mae was generating a bonafide $20B of cash per year, and that the market would value this cash flow at say 10X, for a total value of $200B. Just pretend that this is what treasury could sell Fannie Mae to a buyer for.

Now…it is 7/1, and the facts have changed a bit. They are more or less the same, but now they have $60B of unsecured debt. How much would somebody pay for them now? Probably about $140B or so. So…you see, Treasury hasn’t managed to pull money out of thin air like they want you to believe…all they have done is get a payday loan, and diminish whatever value Fannie Mae had by another $60B and I’m not sure if it was positive to begin with….

 

**Edit**

Just wanted to say…you can make an honest case that the budget deficit has improved a lot over the last 6 months, or even the last couple of years. Now…I would argue that it’s temporary, but facts are facts, and there is no denying that after topping out in 2009 at $1.6T, the deficit has steadily dropped and will probably end 2013 between $700B and $800B…huge numbers still, but clearly dramatic improvement. Fine…make that case. What pisses me off though, is someone using these Fannie Mae payments as evidence of deficit improvement, despite the completely shady way the payment came about.

“Fannie Mae, Freddie Mac to help cut deficit”

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.