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Was schreiben die erst, wenn sie sich mal die Bücher von JPM anschauen ;-)
-->Fannie Mae's Derivatives Surge Above $1 Trillion (Update1)
March 16 (Bloomberg) -- Fannie Mae's derivatives holdings surged 59 percent to more than $1 trillion by the end of last year as the biggest buyer of U.S. mortgages tried to cushion the effect of swings in interest rates on its earnings.
The company posted a realized loss of $6.9 billion on one type of derivative as of Dec. 31, the Wall Street Journal reported, citing a 10-K filing with the Securities and Exchange Commission. Fannie Mae's net income rose to $7.9 billion in 2003.
Derivatives are financial contracts whose value is derived from debt or equity securities, currencies and commodities. Lawmakers and regulators have scrutinized Fannie Mae's accounting for the contracts since smaller competitor Freddie Mac last year said it underreported profit by $5 billion over three years by using derivatives to reduce earnings volatility.
The risk that Fannie Mae's use of derivatives may backfire or destabilize markets is remote, said analysts such as Dennis Gartman, editor of the Gartman Letter. Fannie Mae said its share of derivatives outstanding rose to 0.5 percent of the $208 trillion market, as measured by the Bank for International Settlements as of June 30.
``That is a big damn footprint -- it's Shaquille O'Neal dancing in a world of ballerinas,'' said Suffolk, Virginia-based Gartman, referring to the 7-foot-1, 330-pound center for the Los Angeles Lakers basketball team.
Washington-based Fannie Mae has more than $900 billion of debt, making it the second-largest borrower in the U.S. after the federal government, and more than either the French or U.K. governments. The company's debt due within one year increased 27 percent to $484.1 billion. Securities maturing in more than one year fell 1.7 percent to $477.1 billion.
Risk Management
Fannie Mae and Freddie Mac pose risks to the U.S. financial system because of their rapid growth, Federal Reserve Chairman Alan Greenspan has said.
Fannie Mae in an annual filing with the Securities and Exchange Commission yesterday said, ``the increased volatility in interest rates combined with our adoption of a tighter tolerance range within which to manage our interest-rate risk caused us to rebalance our portfolio more frequently and by larger amounts.''
There was a lot of ``volatility in the market last year'' and the increase in derivatives was a ``part of our overall risk management,'' Jayne Shontell, senior vice president at Fannie Mae, said in an interview.
The yield on the 10-year Treasury note, a benchmark for mortgage rates and corporate borrowing, rose to 4.66 percent on Aug. 14 from 3.07 percent on June 16. Fannie Mae profits on the difference between the returns on its mortgage assets and the cost of its debt.
Fair Value
The increase in derivatives helped Fannie Mae to mute the effects of the swings in interest rates to keep its so-called duration gap within plus or minus 1 month since September, meaning liabilities would be paid off within 1 month of the maturity of its assets.
``Derivatives trading is reducing the risk that Fannie Mae will get into trouble,'' said Scott Simon, who helps manage the $325 billion in assets as an executive vice president at Pacific Investment Management Co. in Newport Beach, California. ``You could easily take away from this that it puts them in a safer position.''
Fannie Mae has resisted calls by Senator Jon Corzine, a New Jersey Democrat, and other lawmakers to account for derivatives at market value on a quarterly basis rather than annually. The company holds many of the contracts to maturity, never realizing gains or losses on them, Fannie Mae chief executive Franklin Raines has said.
Fannie Mae's derivatives trading helped explain a 43 percent rise in the market value of its assets to $31.6 billion last year from 2002, the company reported yesterday. So-called fair-value balance sheets show the current market value of a company's assets minus its liabilities, and reflect changes in some derivatives contracts that aren't in other income statements.
The fair value of liabilities at the company rose 11 percent to $990.6 billion, Fannie Mae said in a regulatory filing.
Income
The gain in market value compares with a 71 percent jump in net income at the government-chartered company to $7.9 billion last year. Fannie Mae's core earnings -- profit excluding gains or losses in the value of contracts used to protect against swings in interest rates -- rose 14 percent to $7.3 billion.
Fannie Mae uses derivatives to protect only 50 percent to 60 percent of its $900 billion investment portfolio against swings in interest rates.
Fannie Mae also disputes the use of fair value because when home refinancings rise, it shows a decline in the value of the company's contracts guaranteeing mortgage-backed bonds. Fair value also accounts for the drop in value of mortgages held when prices decline, which is a condition the company counts on to increase its portfolio with securities at more attractive prices.
To contact the reporter on this story:
James Tyson in the Washington newsroom at jtyson@bloomberg.net
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