Fannie Mae’s role in debt reduction is merely creative accounting

July 11, 2013

Here I am, sitting around in the middle of summer, listening to my air-conditioning system labor and wondering which pot of money to tap for the generator I’ve ordered to provide backup power to my house during the next big storm. And it hits me: I need to think the way the federal government does when it deals with Fannie Mae, the giant “government-sponsored enterprise” mortgage-finance outfit.

You gotta love it. Fannie, which has been in federal conservatorship since 2008, created a paper profit of
$50.6 billion during the second quarter of this year. Then it borrowed $50.6 billion in the financial markets and sent that borrowed money to the Treasury on June 28. This ended up reducing the federal budget deficit, as calculated by most people in Washington, despite the fact that the government is on the hook for every penny of the $50.6 billion that Fannie borrowed. What’s more, this money doesn’t show up as part of the national debt. Pretty slick, isn’t it?

The nonpartisan Congressional Budget Office treats Fannie Mae and Freddie Mac, quite properly in my opinion, as if they’re owned by the government. Therefore, the CBO doesn’t count money they pay to the Treasury as revenue. It treats it as just a transfer from one part of the government to another.

However, the rest of official Washington considers Fannie and Freddie’s payments to the Treasury to be the equivalent of tax revenues and uses them to reduce the stated budget deficit.

Heaven knows, the payments are certainly cash the government can use to pay its bills. The big payment from Fannie to the Treasury last month bolstered the Treasury’s cash position and extended the time we have to resolve the debt-ceiling problem. Not, of course, that it will be resolved in any rational or timely fashion.

Now, watch. The $50.6 billion non-cash profit that Fannie took offset $50.6 billion of previous non-cash losses. When Fannie was hemorrhaging cash, it seemed that it would never earn enough money to utilize its tax losses. So Fannie, as required by accounting rules, took a
$50.6 billion paper loss by declaring that its “deferred tax assets” had no value.

Now, though, Fannie is making record profits, primarily because it and Freddie are about the only game in town when it comes to converting mortgages into mortgage-backed securities.

So in March, Fannie decided it would likely make enough money to use its tax losses and reversed the $50.6 billion charge, as required by accounting rules. This created a non-cash profit.

Someday soon, I expect Freddie Mac to produce a non-cash profit of $30 billion or so by reversing the charge it took when it declared its deferred tax assets to be worthless. Then, I’m sure, Freddie will borrow an amount equal to that non-cash profit, send it to the Treasury and do its bit to help reduce the deficit by using borrowed money without adding to the national debt.

Now, back to my house’s generator. I’ve tried and tried, but I can’t figure out how to create a non-cash profit, borrow an offsetting amount, not have it count as debt and use it to pay for my generator. So I’m going to have to use actual money that my wife and I have saved and set aside for capital projects.

Unless, of course, I can move to Washington and pick up some federal budget-accounting skills.

Sloan is Fortune magazine’s senior editor at large.

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