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Dick Bove Discusses Fannie Mae (FNMA) Conspiracy Theory; Says GSEs Were Never Insolvent

July 2, 2015 9:56 AM EDT
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Rafferty Capital's Dick Bove doesn't necessarily believe the conspiracy theory on Fannie Mae (OTC: FNMA), however, he also doesn't believe that the companies were insolvent at the time of the government takeover and said 'accounting gimmickry' was used to show they were.

Bove:

  • Adam Spittler CPA, MS, and Mike Ciklin JD, MBA, MRE have done some forensic accounting analysis on Fannie Mae’s financial statements. Spittler is a Senior Associate at KPMG and Ciklin is an investor in a number of start-up digitally based companies. The result of their work is a conspiracy theory concerning the government takeover of Fannie Mae in which the public has been lied to concerning Fannie Mae’s financial condition in 2008 and in subsequent years.
  • The arguments are presented in three monographs entitled A Forensic Look at the Fannie Mae Bailout: Scrubbing the Tricky Accounting of Conservatorship; A Follow Up To The Forensic Look … ; and Deloitte! Restate Thou Must!!
  • The basic argument is that in 2008 when the financial system was crumbling, the Treasury and the Federal Reserve made the decision to take over the two government sponsored agencies (GSEs). These companies were needed to pump money into the big banks in order to prevent them from failing. The GSEs pumped the money in by purchasing distressed mortgages at par.
  • They got the money to do this from the Treasury. This money, which was supposedly to be used to bailout the GSEs, was not needed for that purpose because the two GSEs were cash flow positive. However, to get the money into and out of the GSEs the Treasury had to prove that the GSEs were insolvent. This was accomplished by accounting manipulation.
  • The two authors use extensive quotes from the books written by Henry Paulson and Timothy Geithner as well as selected hearings to prove their point. Since I am not a conspiratalist thinker, I am unable to argue whether this theory is correct or not. I am not even willing to argue that if this was done the two officials who did it were acting against the public interest. They were doing what they thought was correct to solve a formidable problem – and they solved the problem.
  • I am willing to argue, however, that the forensic argument that was presented concerning the GSE balance sheet and income statements is correct since I have believed this all along. To me it has always been clear that accounting gimmickry was the basis of arguing that these two companies were insolvent. They were not and recent history proves this.


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