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Minyan Mailbag: Does Bailout Have Other Victims?


Assessing Fannie and Freddie's collateral damage.


Minyan Peter,

When you say, in Fannie, Freddie Bailout Nececssary, But Not Enough, that "GSE asset valuation issues referenced by the regulators aren't unique to the agencies," are you saying that MBS could also be hurt?

Minyan Michael

Dear Minyan Michael,

As per the New York Times, Morgan Stanley (MS) and other advisors found that the reported asset values on the balance sheet were more than the assets were really worth. Loans were being rewritten to keep them current; the value of other assets, like the deferred tax assets, are really questionable. To adjust the value of the assets downward would dramatically reduce the agencies' stated capital.

When the economy is slowing and unemployment is rising, delinquency trends can change quickly. Furthermore, there are many bank managers out there who still see what's happening as a normal credit cycle correction, rather than the secular change in credit availability that it is.

In sum, what's reported as a good loan or a good asset may not be as good as reported. And when corrections are made, the impact on capital for highly leveraged organizations like banks can be significant.

To be clear, I'm not saying that people are deliberately hiding things. It's just when the value of collateral like houses and cars goes down and people lose their jobs, loans are worth less.


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