May 10
0

“Fannie Mae, Freddie Mac to help cut deficit”

By | Commentary

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.


May 09
0

5/07/2013 Daily US Cash Deficit

By | Daily Deficit

The US Daily Cash Deficit for 5/7/2013 was $4.8B bringing the May 2013 deficit through one full week to $44B.

2013-05-07 USDD

As expected, given a full week, 2013 has more or less synchronized with 2012….and the two years look a lot alike. Looking just at total revenues, we are basically flat, with net revenues up a little over 1B…or 2%. Digging into the details, there are a lot of moving pieces. Taxes withheld are up $5B, or 12%…this is the main metric we are looking for, and it is slightly ahead of where we would expect it to be if 10% was our baseline. However, this is being offset by a $3B decrease in taxes not withheld…as discussed earlier they literally fell off a cliff after 4/30.

I’ve been saying for a while now that May and June of 2013 were going to be our first clean glance at tax revenues following the new tax hikes. The same could probably be said about outlays…we can more or less assume that a month into it, the sequester should be fully in effect by now…so whatever savings there are going to be should show up in cash. So 25% of the way through May, we can see tax deposits holding up and sticking to the same trendline…10-12% growth that we have seen for the last couple of months. This is more or less what we want to see…obviously the bigger the better. Through only 1 week, the gains in taxes withheld are being offset elsewhere, but these will likely become immaterial as the month goes on. Looking at outlays…pretty much spot on with last year…certainly no massive drop-offs, but nobody was really expecting that anyway.

Looking ahead to tomorrow…Social security payments went out today, so a deficit in the $10B range can probably be expected.

May 08
0

5/06/2013 Daily US Cash Deficit

By | Daily Deficit

The US Daily Cash Surplus for 5/6/2013 was $6.1B riding traditionally strong Monday revenues, including a strong wave of “Unemployment” inflows from the states. I’m not sure why, but May is always the heaviest month for this particular revenue stream….of the $60B or so the government gets over a 12 month period, about $20B of it is in May. To date, we have seen $13B this May…pretty much in line with last year.

2013-05-06 USDD

Looking at our charts, we see that through 6 days revenue is up $8B…a fairly large number for less than a week, but I suspect some of it is just timing…Through 6 days, May 2012 had not yet had a Monday…with the associated strong revenues. So tomorrow, the months will more or less sync up….giving us our first glance…though admittedly very preliminary glance at revenues. Outlays are more or less in line for now…expect that to start jumping around with the upcoming social security payments. So far…nothing out of the ordinary to suggest a deviation from 10% revenue growth and flat outlays…


May 07
0

Windows 8 Update 5-7-2013

By | Commentary

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?

May 07
0

5/03/2013 Daily US Cash Deficit

By | Daily Deficit

The US Daily Cash Deficit for 5/3/2013 was $20.8B bringing the May 2013 deficit through 3 days to $45B. The large deficit was primarily caused by Social Security payments of $24B… Social Security payments go out in 4 rounds throughout the month. The first and largest at ~$25B goes out the 3rd….but is bumped up if the third falls on a weekend or holiday. The next three rounds go out the 2nd-4th Wednesdays of the month, each at $11-$12B. Because of this, it isn’t surprising that we almost always see a deficit on Wednesdays.

2013-05-03 USDD

Looking at the charts…through 3 days, all is pretty much in line with last May…..certainly nothing indicating 15%+ revenues, but the month is young. If this month follows last years script, the rest of the month should be a gentle accumulation running up to about $100B…probably more.

Two notable events stand out. On 5/15 a large interest payment around $30B will go out….giving us some insight into how ZIRP manipulation is going. For a few months now, monthly interest paid has actually come in lower YOY, despite having an additional $1T of debt. So savings from lower interest rates are more than offsetting the growing principle….hey…it’s a good deal if you can get it. However, March and April are very light in interest payments anyway…May provides us about $35B or so…twice the last two months combined, so a much better glimpse. I’m not expecting anything, but always on the lookout.

In my data series…which goes back to 2000 (and a few months of 1999) I see a high of 4.639% in 12/2001, and a new low last month at 1.837%. What we are looking for is a bottom, and a new trend back up above 2%….that’s when the trouble starts.

The second notable event will be 5/31…a Friday, when we will probably see about $20B or so of payments due 6/1 be paid out a day early. This may be enough to push the May deficit into the $125-$150B ballpark…but it all depends on what happens with revenue. This same cost shift also makes it likely that June 2013 will run a surplus…we’ll see.