Fannie Mae: Sitting on Shaky Ground

The new capital will enable Fannie Mae to maintain a strong, conservative balance sheet. ...

- Fannie Mae 1st Quarter Earnings Release (pdf file)

The Heard On The Street column in Wednesday’s Wall Street Journal, “Will $6 Billion Do For Fannie?” (subscription required), caught my attention.

Fannie announced its first quarter results on Tuesday, before the open. In conjunction, the company announced that it would be raising another $6 billion in capital.

However, the article raises the issue of if this is really enough. It is exceeding its regulatory capital requirements, but from a fair value standpoint Fannie Mae (FNM) appears to be skating on thin ice.

According to its Fair Value Balance Sheet, the company has $854.4 billion in liabilities and $866.7 billion in assets. That means the net worth of the company, the difference between the value of what it owns and what it owes, is only $12.2 billion.

This means it can only absorb a 1.4% drop in the value of its assets, which are primarily mortgage backed securities and mortgages, before its entire net worth evaporates.

Given the current state of the housing, mortgage and secondary mortgage markets, such a drop in the value of its assets doesn’t seem far-fetched. In fact, it strikes me as an all but certainty, and it appears that Fannie Mae is sitting on shaky ground.

Comments

[olretred]

FNM & FRE will continue to survive as long as Ben's Helicopter has fuel.
Like BSC, the "Plunge Protection Team" will find avenues to support them.