New York Times
By VIKAS BAJAJ and ERIC DASH
Published: September 5, 2008
For months, the questions hanging over Fannie Mae and Freddie Mac, the beleaguered mortgage giants, have unnerved Wall Street and Main Street. Now, some answers are arriving — and with them a host of new questions.
On Friday, as the federal government prepared to take control of the two companies in its most drastic action yet to resolve the credit crisis and bolster the economy, the potential consequences of the takeovers began to crystallize.
The big question for Fannie Mae and Freddie Mac has been do they have enough capital to weather losses from rising mortgage delinquencies.
Let's see. As of June 30 2008 we have the following numbers from the balance sheets.
Fannie Mae (FRE in Edgar): Total assets - $879 bln, Total stockholders equity - $13 bln. Capital Ratio: 1.5%
Fannie Mae (FNM @Yahoo!Finance): Total assets - $886 bln, Total stockholders equity - $42 bln. Capital Ratio: 4.7%
Wachovia Bank (WB @Yahoo!Finance): Total assets - $812 bln, Total stockholders equity - $75 bln. Capital Ratio: 9.2%
JP Morgan (JPM @Yahoo!Finance): Total assets - $1,776 bln, Total stockholders equity - $133 bln. Capital Ratio: 7.5%
This NOT how regulators measure capital adequacy in banks. I'm too lazy look up the Tier 1 capital numbers to get a more accurate measure of capital, but these numbers give an idea of what's going on out there. Note, that Wachovia wasn't doing very well recently, they did a very stupid purchase a couple of years ago, and had to write down several billion $$$. Yet, its capital ratio is still higher than of FNM and FRE. OFHEO as well as the management of these two companies keep telling us that they're adequately capitalized. The problem's the capital requirements for these two GSEs are very different from capital regulation on commercial or investment banks. GSEs are allowed to maintain much lower capital generally.
It's funny, I did a presentation for Advanced Accounting course in 2007 claiming that GSEs are undercapitalized.