Bailout Funds Would Shrink If Profit Jumps at Fannie Mae
By Nick Timiraos
A quirk of Fannie Mae FNMA -6.63%’s bailout agreement with the U.S. Treasury could reduce the amount of aid that the government would be able to provide the company if it reports a huge profit for the fourth quarter of 2012.
Fannie Mae said earlier this month that it would delay the filing of its annual report because it hasn’t yet determined whether the company is profitable enough to trigger an accounting change that could restore value to some or all of nearly $62 billion in tax benefits that had been written down after the company was taken over by the government four years ago.
Reversing the write-downs of those so-called deferred tax assets would increase Fannie Mae’s net worth, the vast majority of which would go to the U.S. Treasury as a dividend payment.
A big increase in Fannie’s net worth would also generate a drop in its remaining bailout funds going forward, which would be ironic since the Treasury has repeatedly revamped the agreement to erase any concerns among bondholders that the companies might not have enough money to meet their obligations.
It helps to understand how the federal backstops for Fannie and its smaller sibling, Freddie Mac FMCC -7.63%, are structured:
In September 2008, Fannie and Freddie were placed into conservatorship. The Treasury agreed to inject up to $100 billion in each company so that the firms could function normally until Congress and the White House decided how to revamp them. The Treasury has purchased senior preferred shares in the companies, and in exchange, Fannie and Freddie had to pay to the Treasury dividends of 10% annually on those senior preferred shares. (The dividend payment setup was revamped last year.)
In February 2009, the Obama administration increased to $200 billion the total amount of money they’d invest in each company, doubling the $100 billion limit.
In December 2009, the Ob
This news is good for both of shorts and longs. The company will release the big profit as a good news, it is indeed good news for longs in terms of the long prospect of the company. PPS will go up higher with newbies, shorts can make money for a day or so, and it will be pulled down badly. JMHO. Good luck all.
P.S. The kind MMs will help us too.