FNM Finer Point
Finally after a lot of emails from Minyans we are getting to the bottom of the problem of the drop in the AOCI component of capital. The problem, in my opinion, is even worse.
A Minyan writes, "Overall shareholder's equity did decline by $1 billion. This decline was attributed to income of $2 billion less comprehensive income declines of $3 billion (comprised of a decline in unrealized gains of $1.5 billion and net hedging activity of $1.5 billion). So the way I see it (and us), FNM did have a decline in capital."
The income that was reported on the income statement did not include the costs of hedging their duration risk nor their derivative activity; it was buried in the balance sheet. Apparently GSE reporting requires only that the income statement reflect changes in the time value of derivatives and not the fair value.
Our interpretation is that FNM made $500 million net of their dynamic hedging activity. But in addition to this dynamic hedging (buying and selling bonds to adjust their duration risk), they also purchase various derivatives as part of their overall hedging activity. These derivatives were written down by $1.5 billion for the quarter to reflect fair value.
So overall there was a decline in shareholder's equity and therefore a loss for the quarter.
It seems that form takes precedence over substance here. If we are wrong, we welcome a rebuttal from the company or anyone else. Again, not advice--just trying to help educate.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter