Paint Lipstick on this Pig
Freddie Mac issued its quarterly “report” and gave clues as to how to paint lipstick on pigs and actually get away with it. The trick is to put $157 billion (from $32 billion before) over to Level 3, where absolutely no haircut is then reported. Readers may recall that Level 3 essentially allows the reporter to make up their own prices separate from market prices. In the case of Freddie, management has determined that “market prices don’t make any sense”, hence the move. This writer would argue that the quasi-official institutions like the GSE and foreign central banks themselves are creating massively distorted Soviet Union style prices that if anything makes even the market prices that Freddie dismisses too high. Notice the Orwellian answer, “no it is not” to the analyst’s straight forward question. From the conference call:
Analyst: There is a headline out there that you have level 3 assets of $157 billion. I was just wondering is that true and is that related at all to the markups of the 1.2 billion gain?
Freddie Mac: No, it is not Paul. We made a determination in the first quarter that given how widely the pricing we were getting on the abs portfolio [varied] that it no longer made sense to leave that into level two. So we essentially moved the entire abs portfolio into level three.
Bloomberg: Financial Accounting Standard 157 allows companies to estimate a value on holdings that aren’t traded. Freddie Mac increased its Level 3 assets under FAS 157 to $156.7 billion, or 23 percent of its assets, from $31.9 billion as of December.
What is even more revealing about this is that Freddie itself is using fairly accurate housing prices now (see chart). So wouldn’t it follow that say a 2006 vintage mortgage on a house in California with a 22% price drop might result in much lower prices for that underlying mortgage? Obviously Freddie’s “logic” is contrived and dishonest, but who is asking? Incidentally the population of the five states (California, Florida, Arizona, Michigan and Nevada) with double digit price declines is 73 million or 24% of the US population. How do the GSEs and others price those mortgages? in the Milky Way apparently.
click to enlarge
It also simply does not follow that Freddie Mac’s holdings are not being impacted by foreclosure activity. Once again they are asking that clear eyed observers believe in Wonderland, Big Foot, Tooth Fairies, and Santa Claus rolled into one. I would have to say that the biggest miss so far in my otherwise fine track record of expectations and predictions, is that MoT apparatcheks like GSEs, the Fed, Pig Men chieftains, and credit rating agencies, et al, still have any credibility left at all. I am stunned beyond belief that I am still having to report all this. I would have predicted that my mission would be about done at this stage. Boy was I wrong!
About 2.5 million foreclosed properties will be on the market this year and in 2009, Lehman Brothers Holdings Inc. analysts led by Michelle Meyer said in an April 10 report.
Speaking of Wonderland, would any rationale person consider this chart of Ambac to represent a AAA firm?
“This is how we measure quality in the financial markets these days. Quality is whatever we say it is.”
chart source: Jesse’s Cafe
There is plenty of confirmation that the double digit decline states are being slammed economically. Logically you would expect that fast food outlets like Jack in a Box could be dinosaurs given the twin hit of housing crash and inflation.
“Like many retailers, we’re seeing softer sales at our restaurants in California, Phoenix and Las Vegas, which have been hardest hit by the housing downturn, high fuel prices and unemployment,” Chief Executive Linda Lang said. The restaurateur said same-store sales at its namesake Jack in the Box chain would be unchanged for the year. In February, the company forecast sales gains of 2% to 3%.
Before dismissing “market prices” and another economic trends as outliers Freddie and others might want to pay close attention to how Americans themselves view their economic situation. 37% say shaky. What is a mortgage to a consumer who feels his or her situation is shaky worth under Level 3 pricing?
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