Fed to GSEs – Put it on the Balance Sheet!

Bruce Krasting's picture

The June Federal Reserve Quarterly
Mortgages Outstanding report
contains some interesting information.
I’m not quite sure what to make of it.

Consider these two slides from the June report on 1st Q mortgage


The Federal Reserve has reclassified $4.4 trillion of IOU’s. They have
taken them out of the category “Mortgage Pools and Trusts” and put them
on the individual Agency’s balance sheet(s).

Now consider the March 2010 reports from both Fannie and Freddie. They
don’t show the shift in assets from “Guaranteed” to “On the books”.

Some thoughts on this.

-This is not a small matter. $4.4 trillion of bookkeeping is involved.
This is more than 40% of all individual mortgages. This is a major

-In this case I would side with the Fed. All of these dubious assets
should be on someone’s balance sheet. But I am stumped as to why the
Fed did this without FHFA adjusting its book too.

-The Fed thinks this should be on the Agency’s balance sheets. We all
know that Treasury owns the GSEs at this point. That being the case
shouldn’t the debts of the Agencies be on the Federal balance sheet?
This would put us $3T or so over the debt limit and bankrupt the
government on paper. I find it odd that the Fed is pushing this at this
time. It works against them.

-This is just an accounting adjustment. But these things do matter. The
terms of the Conservatorship require that the GSEs keep their balance
sheets below $900 billion. So this accounting adjustment would throw the
legal status of the GSEs into question. They would be in material
covenant default on the Senior Preferred (Treasury Basura Preff) if this
adjustment takes place. Given that all of the other securities of the
Agencies are “cross defaulted” this raises the question as to the legal
status of all of the publicly traded debt securities of the Agencies. I
know Washington did not mean that to happen. But then again, stuff does
tend to happen.

-The Fed owns $1.2 Trillion of the former “Trust Securities”. Maybe the
Fed feels better knowing that these are direct obligations of the GSE’s.
I am not sure that makes them more collectible. But in a bankruptcy a
senior claim will have a better chance than a subordinated guaranty. In
that sense the reclassification puts the Fed in a better creditor
position. But really this is all the same pocket, so why would that

-I don’t think that the Fed makes $4 trillion changes in accounting
without substantial internal discussion as to the implications.
Therefore this is quite deliberate and we should not ignore the
significance of it. I’m still wondering what the significance is. I’ll
ask the Fed and the FHFA. If they respond, I'll let you know.

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kaiserhoff's picture

Great stuff Bruce.  Smells to me like a Washington turf war.  As Rainman pointed out, F & F have at least theoretical blank check books.  If they began to use that in any serious fashion, they would drive any new QE program, with minimal oversight/intervention from anyone other than the Banking Queen (Barney Frank).

Baldy Ben has no legal authority to do most of what he's doing, but he certainly doesn't intend to share power with lowly mortgage brokers.  Ben is also running out of options.  He has a snowball's chance of getting anything new through Congress.  This might be his way of intimidating/highjacking F & F to play ball.  Chicago ethics, a few trillion dollars a throw.  It will be fun to watch, but I'll be damned if I see how playing silly games with dead mortages really changes anything.

CPL's picture

Sounds like they are moving into place to crash the market again by placing the Mark to market rules back in place.


This is going to be really, really, really bad.

QQQBall's picture

Thanks for the great post!

Don Smith's picture

There are a couple of strings floating that I've been hearing - 1, that some sort of quiet default is necessary in the US space, 2, that mortgages are being successfully challenged in court as invalid when attempts are made to foreclose, 3, the gulf is going to create another massive wave of defaults in those areas, 4, the delisting of F/F opens some doors, 5, that FASB is going to require full MTM by 2012.

I'm trying to sort out how those threads tie together, but I think we'll look back to this six months from now and say, "GOd, why didn't we see this coming, it was so OBVious."

beastie's picture

Is this the Feds version of project mayhem?

Blow it all up and see where the paper lands. If they do blow up Fannie and Freddie it will take years to sort out who owns what piece of worthless motgage paper.

This could be fun :)

SWRichmond's picture

I am sitting here reading this, thinking the same thing.  I am particularly interested in how this bears on foreign (Chinese) holders of Fannie and Freddie debt.

Will we see / have we seen action in the CDS markets in response to this move?

toros's picture

"You see in this world there are two kinds of people my friend, those with loaded guns, -click- and those who dig."


Only on ZH, thanks Bruce.

jkruffin's picture

I smell a Fannie/Freddie bankruptcy filing once they put all this trash on their balance sheets.  Hence the move for those stocks onto the OTCBB.  There are going to be some very ticked off bondholders, when Benny gives them the shaft.  This is a shuffle off the FED's sheet onto Fannie/Freddie with every intention of bankruptcy to default on it and make it disappear.


The fighting question will be "Who owns the properties"?  And I guarantee no one knows, and they will all be claiming they do.  This is going to be a mess.

nmewn's picture

"The fighting question will be "Who owns the properties"?  And I guarantee no one knows, and they will all be claiming they do."


Part of the "miracle" of Bwaney and Rubin's slicing and dicing of mortgages to mitigate risk, was the original would have gone into one pool, a second into another, a third into another.

Me thinks they were too clever by half this time, as someone who is being foreclosed on (the defendant) has the right to face the holder of the note (the plaintiff) in court...and the holder has an obligation to prove to the court they have legal title to the property.

A quick google search reveals as recently as yesterday (second one down);





Rainman's picture

F/F have an unlimited credit line from Uncle Sugar, courtesy of the Great Xmas Eve '09 Taxpayer Massacre announcement.

More coal will be stuffed into our stocking on Xmas Eve '10. Muni backstop anyone ??

Great job, Bruce.

Skeptical_10016's picture

Well (1) We can see the FHA balance sheet  (2)  the MBS has always been "defaultable" (sic) (3) with all of the previous QE the fed's balance sheet has been expanding, not contracting, so not sure what you mean by shifting $4 trillion OFF OF the Fed's balance sheet  (4) Nothing worth doing is ever easy, that's what the politicians don't seem to understand, or even better, that's why the politicians are not in the best decision to make decisions about what's best for the markets, elected officials never are.   However, the best solution would be allowing Fannie / Freddie's bondholders to take whatever the bankruptcy process provides them instead of infusing them with more and more and more capital to prop up housing prices and in effect keeping zombie banks alive.  Check out John Hussmans writings on this subject or read Panic by Andy Redleaf.....

steve from virginia's picture


 - I wonder what the FHA balance sheet looks like?

 - Is this mortgage paper now considered 'defaultable'? (Are Fannie/Freddie now 'bad banks'?)

 - Is this another round of QE in drag (shift $4 trillion off the Fed balance sheet to add $4t in Treasuries)?

... Nothing easy/sensible comes to mind ...


Oquities's picture

simply transfer of obligations to agencies pre-default to isolate treasuries.  china treasuries for agencies swap months ago must have anticipated this.  fannie/freddie preferred now defunct - why not bonds?  who now owns most of the agencies, banks?  find this out and you'll probably find the guppy.  the coming loss and default on the millions of gulf coast homes necessitates drastic planning now.  betcha big banks have been divesting agencies!

kenny_1999's picture

Bruce, this was the result of implementing a new accounting rule--it actually allows a more friendly recognition of losses for the GSE given the MBS are no longer recorded on a MTM basis and losses are reflected in their loan reserve accounts.

nmewn's picture

Great catch Bruce.

Those IOU's replacing Social Security funds should be redeemed immediately to prop it up...afterall a ponzi must have cash flow or it fails ;-)

Ned Zeppelin's picture

There's no way the GSE debt ever shows up on the US balance sheet. That much is true. The rest is shuffling of deck chairs on the Titanic. And shutting the GSEs down is out of the question, unless you want to collapse the entire US new and existing homes market - it is the only significant source of liquidity in that market.  Kill it, and it's instant shutdown. So let them play with the numbers.   

Steroid's picture

First it has to go to the Treasury then it can be absorbed legally by the FED.

That is just QE 2.0! They still need a few trillion to have a cool five.

AR15AU's picture

Amazing work, sir...  Someone call the press, lol.

Is this a G20 concession?  Something of that nature?

Moonrajah's picture

Okay, now I see why we need a $5T QE2.0. Why did it take so long for them to come clean?

Lonewar's picture

Oh just got through looking over the latest 10q for Fannie.

Damn spread is down to 0.30%. =( Or about 9 billion a year. Last year was nice as the spread was at 1.3% or ~$36 billion. Current loss rate is ~$5 billion per quarter, so now they are actually losing money =(. Fannie currently has about ~$60 billion in loss reserves and about ~$75 billion in Treaserv Preferred, so they can no longer clear out the treaservs preferreds with loss reservers and operate on a break even basis.

What is really irritating to me is that Fannie has a AAA long term debt rating from everyone, and they can borrow long at ~4%, but they are using the Treaserv Preferreds to borrow long at 10%. What they need to do is buy a bank somewhere, transform to a Bank Holding Co, and then borrow short from the Treaserv at 0.20%ish and lend at 5.1%ish... A roughly 5% spread would net them $150 billion a year from mortgage interest alone...

But as this was just a political institution and not a banking institution that option was never made available to them...

Skeptical_10016's picture

The reason for the large increase can be explained because Fannie / Freddie purchased the bad loans out of the MBS pools, I believe.   While the Holdings of mortgages by Fannie & Freddie increased by $2.6 trillion and $1.8 trillion respectively, the amount of MBS (lines 59 and 62 of the June release) decreased by $1.8 trillion and $2.6 trillion.  The net increase in direct holdings of mortgages by Fannie & Freddie increased by $4,366 billion while the MBS issued by Fannie & Freddie decreased by $4,421 billion for a net decline of $55.1 bn. 

williambanzai7's picture

You can't fathom this without a PHD

Pretty Huge Deficit

Lonewar's picture

Oh, and one more thing, Fannie is making about 1.2% spread on that 2.8 trillion...

GoldBricker's picture

~33 billion a year. Nice work if you can get it.

Does that go to the Fed's coffers (as holders of the interest-paying assets), or what?



Lonewar's picture


This was talked about in Fannie's annual report. Its basically all the SIV's coming onto the balance sheet. I am surprised that the latest quarterly didnt have them incorporated, but this is why Fannie and Freddie have been running such horrendous losses, to build up their loss reserves so that when these loans come on the books, and have to be bought from banks at Par because of HAMP, the agencies have the capital to complete this congressionally mandated action.

If you look at the annual, and the 1q10 report you can see that the "losses" taken by Fannie (at least, didnt read Freddies) are almost exactly equal to the build of the loss reserves. If Fannie took their current (as of 1q10) loss reserves, they could immediately pay off the Treaserv preferreds and be at break even. Then they could use profits for the quarter to pay off losses as they accumulate. Yes it would be break even, but that is better than announcing bullshit losses.

Now granted, I am not a CPA, nor is my background in finance, and if anyone else is gambling with Fannie or Freddy that does have this background would like to tell me that these loss reserves are on the money, please do so (It wont stop me from gambling with Fannie), but I would like to know.

tom's picture

Interesting. But the same Z1 does not consolidate GSEs and their mortgage pools in its tables. They are still two separate lines throughout.

I suppose the Fed's statistics reports have no legal ramifications, and it's Treasury and ultimately the Pres who will decide whether to formally bring the pools onto the GSE's balance sheets. For all the reasons you give I doubt it will happen.

Tyler Durden's picture

From p.35, footnote 1 of the Z.1: "Federal Home Loan Banks, Fannie Mae, Freddie Mac, Federal Agricultural Mortgage Corporation, Farm Credit System, the Financing Corporation, and the Resolution Funding Corporation. The Student Loan Marketing Association (Sallie Mae) was included until it was fully privatized in 2004:Q4. Beginning 2010:Q1,  almost all Fannie Mae and Freddie Mac mortgage pools (table F.125) are consolidated on Fannie Mae’s and Freddie Mac’s balance sheets." The reclass can be seen on table L.210Of course the most hilarious part is that the "Budget Agency" debt of $23.6 billion (L.210, Line 2) is all that the Fed recognizes as being part of the US debt officially. (L.209, Line 32). 

faustian bargain's picture

So, all the US federal government officially owes the Fed is 23.6 billion? Man I want those accountants working for me.

RockyRacoon's picture

All that rolls over on to the Treasury books when the smoke clears.

The Fed is not owed anything in the long run, when the balancing occurs. 

It's just not on the people's tab -- yet.

Bruce Krasting's picture

Tks T.

So its official. Unfortnately Fannie did not get the memo on this. They show an 800b BS as of May 30.


Wilderman's picture

I bet they got the memo and they're busy cleaning drawers while trying to thow out their previous misconceptions.  I predict obsfuscated legallese for a few months until this becomes public knowledge.  June's fannie report should be fun reading, tho.  When's it due?

Mactheknife's picture

>This would put us $3T or so over the debt limit and bankrupt the government on paper. I find it odd that the Fed is pushing this at this time. It works against them.

Benny boy is definitely up to something. Hasn't he "bitched" about this every time he reports to the hill? I don't see how it works against the Fed Reserve.

beastie's picture

Good catch. Why now and what are they hoping to achieve with this move?

Bob Sponge's picture

I think TPTB may want to crash the current world financial system and replace/reset it with a one-world currency with a one-world central bank. This would increase their power immensely. So, increasing the US national debt by 1/3 brings us closer to the collapse. If the US dollar (the reserve currency of the world) collapses, that may necessitate the reset. I can't say for sure that TPTB have this intent, but I also cannot discount it based on what I see going on.

theprofromdover's picture

The Euro is such a continent-wide experiment, and has just proved it cant work without central control of all legislation and taxation.

Presumably they have noticed, and are working on plan B (how to stop inflation affecting them)

Steak's picture

$4,000,000,000,000 balance sheet shuffle and Bruce effin Krasting has the scoop.  Eat your heart out old media :D

arnoldsimage's picture

so what. bruce missed the skinny on where lebron was going.

Bruce Krasting's picture

My bet/hope was the Knicks. Another five years of bad b-ball....

masterinchancery's picture

No chance he was going to NY, would have cost him $12 million in taxes! Fla has no income tax.

Vendetta's picture

good point.  If Bruce had a phd in sports analysis he would've known.

UncleFurker's picture


Yeah. EPIC FAIL Bruce. You'll never get a job at CNN at this rate.



Wilderman's picture

An instant 1/3 increase in the recognized US deficit (4.4T = 32% of +/-13.6T, recognized debt ceiling)?

This won't go unnoticed.

Bruce, You are the Man!