Fannie's Big Rate Bet Isn't Paying Off

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Fannie Mae's (FNM) net worth actually dropped in 2002 despite the firm's massive leverage, according to a closely watched balance sheet measure that portrays an alarming drop in shareholder wealth.

Fannie's regular balance sheet, released quarterly, had already shown a massive decline throughout 2002 in shareholders' equity -- or assets minus liabilities -- as Fannie failed to financially insure itself against interest rate risk. But the company's supporters had hoped that a special version of its balance sheet, released yearly in its annual financial statement and designed to offer a more accurate portrayal of asset and liability values, would present a healthier picture. That didn't happen.

This so-called fair-value balance sheet, released in a filing Monday, showed that the wealth left over for shareholders actually declined in 2002, falling 2% from the prior year to $22.1 billion. And if Fannie hadn't sneakily included a new asset called mortgage purchase commitments in the fair value balance sheet, shareholders' equity would've fallen far more steeply -- dropping some 12% to $20.5 billion.

Off Balance? Fannie stock stumbles

Clearly, if Fannie were the hedge fund its critics claim it to be, its managers would be looking for a job Monday after shortchanging shareholders so sharply. When asked for comment, a Fannie spokeswoman pointed to a press release trumpeting Monday's first-ever 10-K filing and explaining the fair value balance sheet. It says: "Because the methodology for calculating the fair value balance sheet does not include future business opportunities and only represents existing business, Fannie Mae's management does not believe this measure represents a reliable estimate of Fannie Mae's value as a going concern."

Here, Fannie is probably referring to the belief that losses in equity resulting from heavy mortgage prepayments can be partially or fully recouped over time by new business that Fannie gets. But it's not at all clear if the new business is as profitable as the old, and a recent Detox showed that a good chunk of the losses reflected in the 2002 balance sheet may be locked in and impossible to recoup.