As reported in the NYT (Gretchen Morgenson also has a good piece in the Business section) it looks like the government wants to step in and try to shore up Fannie Mae and Freddie Mac. Something it wasn’t supposed to do, even though the companies always operated under the opposite assumption. Both firms (the term seems ironic at the moment) are teetering, and their stocks have taken a nose-dive.
On the same NYT page with the article is a sponsored link (I’m not sure if this instance really qualifies as an advertisement) to a press release from Freddie Mac. The statement insists, as you might imagine, that FM is adequately capitalized and fully solvent; there is nothing to fear and by the way, pay no heed to the bad press they’re getting.
It’s the second paragraph that got my attention:
Beyond that, there are a number of options to manage our capital position. The average rate of run-off on our retained portfolio is currently about $10 billion per month, and not replacing that run-off would free up approximately $250 million of capital per month. Over the course of a year, this would free up approximately $2.5 to $3 billion of additional capital if this run-off rate remains constant. We also could consider reducing our common stock dividend. Our current annual common stock dividend is approximately $650 million.
I’m a stranger here myself, but I did manage to learn that “portfolio runoff” is a term for a decrease in assets of a mortgage-backed security portfolio, due to the pre-payment of the mortgages. This usually occurs when homeowners refinance when the value of their home goes up, or interest rates go down. This means - if I’m understanding this right - that the original loans are paid off, and the new loans stand to generate less in interest than the previous one, thus devaluing the securities. That’s part of the risk assumed by buying mortgage-backed securities. I suspect, however, that here the FM people are defining runoff more loosely to include asset losses due to defaults.
The FM spokespeople are trying very hard paint the situation in a rosy hue. The use of the word “options” makes sense by itself, but there are some key turns of phrase that are just astounding. They write that not “replacing the runoff” - which we can read as “we are unable to generate fresh revenue” - would “free up” $250 million in capital per month. The term “free up” suggests that the situation presents some kind of new opportunity, when what is really happening is Freddie Mac is hemorrhaging money (to the tune of $10 billion per month), and they need to dip into their capital reserves to stay afloat. This gaudy euphemism is designed to deflect attention from the gravity of the situation.
The other ingredient in this PR spell is the use of repetition. The repetition is not literal, but the invocation of the notions of liquidity are drummed into reader’s minds. Please bear with me as I list instances of this.
- Freddie Mac is adequately capitalized
- highly liquid
- we will have a substantial capital cushion
- much greater surplus above the statutory minimum capital requirement
- we are adequately capitalized
- we hold capital well in excess of regulatory minimums
- we are adequately capitalized
- and have liquidity resources
And all this occurs in the first paragraph, which contains a total of just 132 words. Did you get the message? The other repetition that caught my attention was the use of the “free up” phrase, which is invoked twice.
Once the reader sees past the spin, the whole thing becomes a display of spectacular desperation.
Posted in Economics, Politics, Wonders of Language | No Comments »




