Monday, August 10, 2009

Hide and Seek 101: AOCI - Accumulated Other Comprehensive Income

The mortgage-for-all enabler, Freddie Mac, just reported earnings on Friday, August 7, 2009. They claim to have made $768 million for the second quarter. Cheers!! Even a standing-O from Wall Street! Okay, let's talk truth.

After they repaid the TARP extortionists their dividend, Freddie really lost eleven cents. They say they don't need any money from us at the moment as they are issuing debt that they call 'Reference Notes' to the tune of $45 billion so far this year to bring the total to $259 billion. So let's see. They say the made $768 million but they have debt of $259 billion. We have a winner!!

Check the chart below and see if you would like to buy debt in a company like this. Apparently, a lot of people do. But, apparently as well, a lot of people are idiots. As the price of the stock fell from the sixties to the pennies, volume didn't really spike until single digits were reached. We are not dealing with 'jeniuses' here.

So has the mortgage business suddenly gotten better? Even the company admits that their earnings were "driven primarily by $4.3 billion in net interest income mainly due to lower funding costs, as well as $4.2 billion in gains on the company's derivative portfolio and guarantee asset, which were primarily driven by net mark-to-market gains due to increases in long-term interest rate". In other words, through the sorcery of accounting adjustments and invention, they turned a profit. Two things.

First, they are suddenly expert derivative traders. They made over $4 billion in the quarter trading derivatives. They bankrupted their company trading derivatives in the past few years so why the 'steroidal leap' in derivative skill? As I postulated in my newsletter, it helps to be the Federal Reserve's best friend and shill. The Fed trades derivatives and default swaps and they happen to know interest rate movement better than anybody on the planet given their bond market intervention activities. Okay, so the Chinese call the Fed when they get nervous about increasing yields and disintegrating bond values which prompts our Fed to intervene. They pull our chain and we respond. Anyway, don't you think the Fed passes on a little info as to when they are about to intervene so their buddies can front run with their own swap activity? You bet.

Second, since a lot of companies like Freddie have massive bundles of losing security positions on their books, they need to find a way to hide them lest we idiots learn of their pathetic fiscal condition. So, we have changed the accounting rules to allow for as yet unrealized losses to be hidden under a column called 'Accumulated Other Comprehensive Income' or AOCI for short. Got it? Understand the title? The scammers that run our country are counting on your stupidity to first, not to seek the truth, and second, to gloss over this arcane column title. But, some of us are relentless truth seekers. Come to find out that Freddie put another $34 billion under that column for the second quarter and they had $28 billion there in the first quarter. The beauty is that under our new 'accounting rules', that column does not count in the income statement. Isn't that beautiful? That way, even if you have $34 billion in losses, you can still pretend to earn $768 million and stupid stock investors rejoice. So too does the Obama administration as this helps sell their 'economic recovery' story being the administration of change and and transparency they are. The crap is still there. It is just in a column that we no longer count.

Now, look at the chart. Would you lend these people $250 billion? What kind of an idiot would sign up for that? Oh yeah - our government buys this stuff like hot cakes. Hide and seek. Tag. You're it!

FRE 3-year ending 8/7/09
Chart courtesy StockCharts.com

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