Fannie Mae And Freddie Mac Profits: A Creative Accounting Technique

The recent good news about Fannie Mae Fannie Mae and Freddie Mac Freddie Mac's $10 billion profit for the second quarter follows similar previous reports and is being hailed as justification for the government's seizure and bailout of the two mortgage giants. More important, it is redemption for Barney Frank and others in Congress who encouraged them to guarantee subprime mortgages to unqualified borrowers, which lead to the housing collapse in 2008.

In fact, the two organizations have repaid $146 billion of the $188 billion advanced to them since they were taken over. In addition, some $90 billion of "profits" were paid to the Treasury that went toward U.S. debt and deficit reduction.

What a wonderful result…or maybe, not.

Does anyone remember that the biggest buyer of Fannie and Freddie mortgages is none other than the Federal Reserve Bank, a  government organization that has no bottom line profit measure. The Fed, with its quantitative easing program, is simply buying $40 billion monthly in packaged mortgage MBS securities valued at prices that are giving Fannie that wonderful profit.

Only time will tell whether the Fed gains or looses on these securities. Estimates of their losses on their $1.1 trillion in mortgage securities holdings range as high as $150 billion, but as stated before, they have no bottom line reporting so we will never know.

By way of comparison, suppose General Motors General Motors decided to put into a leasing subsidiary all those Volt cars it couldn't sell and did so at a price that gave them an instant billion dollar profit. Generally accepted accounting principles would require GM to eliminate this profit from its financial results since a company cannot report profits from self-dealing. But alas, this is the government and the government can make its own rules, as we saw in how GM was 'saved.'

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We see repeated use of creative accounting by government in its daily activities, from how it defines inflation, medical care cost, budget cuts and budget deficits to name just a few of the more prominent ones.

The Fannie and Freddie accounting for "profits" and its reporting as a reduction of the deficit and national debt represents a truly creative accounting technique. We see the Federal Reserve Bank creating money out of thin air, using it to buy newly revalued mortgages from Fannie and Freddie who then use the sales proceeds to pay back loans and a dividend to the Treasury, who declares this a deficit and debt reduction.

Economists think you can't print your way to economic prosperity. Taxpayers are being led to believe that government bailouts are a profit making remedy. Fannie and Freddie shareholders and unsecured debt holders think they are being robbed of profits that rightly belong to them. Poor fools all!