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Stuart Staines
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Stuart Staines, the editor and publisher of The Staines Letter, has over 18 years experience in banking and wealth management. Born in London, he studied in Geneva, Switzerland, and holds a Certified International Investment Analyst diploma (CIIA) from The Swiss Financial Analyst Association... More
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  • In Debt We Trust: GSE Debt & Total Debt - A dissenting view on Sovereign Debt (part 3) 1 comment
    May 18, 2010 8:29 AM

    This brings us to the final but no less controversial issue of Government Sponsored Enterprises (GSEs) and FHA/Ginnie Mae.

    The first controversy surrounds Fannie Mae and Freddie Mac which certainly serve a public purpose and where the government now owns 80% of both companies. These two entities should now be considered as government backed, there is no question about it. This does not mean however that the government share of the 6.3 trillion of liabilities of these companies must simply be added to the government debt position as suggested by some. A balance sheet is made of liabilities but also assets, in this case homes. The loans the enterprises own or guarantee represent more than half of the US single family mortgages outstanding. We could do a dirty extrapolation to try to estimate the losses both entities may occur over the next 10 years, 75 or even to infinity. The chances to hit anywhere close to the actual losses that will be incurred are close to nil. A conservative and more accurate approach would be to simply take the extent of the amount invested by the government to this date and consider that amount irrecoverable. This would give a relatively good representation of the current possible cost for the government without undue extrapolation based on numerous assumptions. The maximum amount either enterprise may draw from the Treasury is the greater of $200 billion or $200 billion plus the cumulative amount of deficiency amounts covered by Treasury preferred purchases as of December 31, 2012, less any surplus at December 31, 2012. Deficiencies are negative net worth measured in any quarter; these require the enterprise to sell preferred stock to the Treasury to maintain net worth at zero. Basically what this means is that the treasury has no clue whatsoever on the costs and there is no limit on the amounts it may provide. Last month when assessing the household balance sheet I took a 20% hair cut to the household real estate asset position. To be consistent and without even considering the current loss reserves, I shall do the same as I believe this hair cut fairly simulates a good worst case at this time.

    As for FHA/Ginnie Mae securities, they carry the full faith and credit guaranty of the United States government, so the off-balance sheet liability risk cannot even be questioned here. Ginnie Mae guarantees 826 billion in MBS at FY2009. So to be consistent, lets attribute the same 20% credit loss as for Fannie and Freddie:
     

    Off-balance sheet US debt (non accounted losses estimate)
    Fannie Mae & Freddie Mac (80%)                   1.00 trillion         
    Ginnie Mae (100%)                                           165 billion                           
    So all in all, although it has been a lengthy and labored process simply to share my thoughts on what I believe should and should not be accounted for when assessing the US national debt level, I now have a ballpark number to play with. A useful exercise when these trillions are thrown in our faces and with everyone, myself included, coming up with radically different numbers. You may of course disagree, but at the least, I hope to have provided some light on what all these numbers imply.
    To sum up, I shall consider the gross debt (debt held by the public + intra-governmental holdings) as well as the off-balance sheet exposure described above. I shall neither consider the state and local government debt and neither the estimated unfunded obligations constantly sensationalized in the media.
    So below (finally!) are the numbers I personally believe more or less reflect the current state of US national debt. The numbers are taken from the “Monthly Treasury Statement as of the 31st of December 2009” provided by the Treasury and my conservative estimate of non accounted off-balance sheet losses:
     
                                                                                   
    Debt Held by the Public:                                               $7’811’009’000
    Intra-Governmental Holdings:                                       $4’500’341’000
    Off-balance sheet estimated losses:                           $1’165’000’000
    Total Federal Debt:                                                   $13’476’350’000

    Full article of "In Debt We Trust" :
    http://www.thestainesletter.com/admin/stainesletter/pdfServlet?pubID=6
     



    Disclosure: No positions
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  • faircaller
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    The 20% credit loss assumed by Mr. Staines may in fact be understated, primarily because a large portion of mortgage financing and refinancing occurred within the period of mortgage hyper-activity from 2000 to 2006. This was done at the height of the housing asset hyper-inflation curve. A 20% loss assumption would require a much larger portion of the guaranteed morgages to have been originated prior to this time. Nor does the credit loss value of 20% contemplate the very real increase in full defaults, which occur at 100%. It is reasonable to conclude that the credit loss assumption figure of 20% is in fact significanlty understated. Though it is difficult to determine just how high the percentage should be, it is almost certainly higher than 20%.
    17 May 2011, 10:04 PM Reply Like
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