Just like you never want to hear a doctor say "oops" in the operating room, you never want to see a going-concern statement in a financial report about a company you own. Accountants throw these in when they've been over the books, talked to customers, and checked the horoscopes and have concluded there is "substantial doubt" about a company's ability to remain in business. In short, don't blame the accountants if the company files for bankruptcy protection.

You¿d reckon that a going-concern statement would be enough to send investors running to the exits, but it's not. True, many large institutions automatically bail when an existing company gets slapped with one of these, but many individuals (often wrongly) take a chance they know more than the bean counters.

During the tech boom of the late 1990s, many companies actually went public even though they had been hit with going-concern statements. Many of those companies subsequently disappeared. Enough said.

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Sunday, July 13, 2008

Federal Regulators Outline Rescue Plan for Fannie, Freddie

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Federal regulators announced sweeping moves to shore up the finances of Fannie Mae and Freddie Mac Sunday, with the government offering a range of ways the troubled mortgage companies could tap capital.

The Federal Reserve board said it had authorized borrowing from its special discount window that allows banks and investment banks to borrow from the Fed at 2.25%. Before the Bear Stearns collapse in March, even investment banks weren’t allowed to tap that window. Historically, the discount window was a lender of last resort to traditional banks.

"This authorization is intended to supplement the Treasury's existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets," the Fed said in a statement. The Federal Reserve Bank of New York will manage the facility.

The Treasury Department added that it would try to increase the amount of credit it could extend to Fannie Mae (FNM) and Freddie Mac (FRE). The current credit line is $2.25 billion apiece. Treasury Secretary Hank Paulson will determine how much credit to extend.

Treasury will also be authorized to buy equity in both companies, if needed.

The moves came because Treasury believed shoring up both Fannie and Freddie “is important to maintaining confidence and stability in our financial system and our financial markets,” Paulson said in a statement.

Treasury’s moves need Congressional approval, which the department said is expected this week.

Moves by the regulators come a day before Freddie Mac was scheduled to sell $3 billion in three- and six-month debt to raise capital. After the Treasury announcement, Freddie Mac chief executive Richard Syron said the company “is adequately capitalized, has a large liquidity portfolio and access to the world's debt markets.”

Freddie is in the process of finalizing its quarterly results and the company said “they will show we have a substantial capital cushion above the 20% mandatory target surplus established by our regulator,” Syron said. “We expect the results will also show that we have a much greater surplus above the statutory minimum capital requirement. The company's capital and liquidity resources will enable it to continue to serve its public mission as it has always done.”

For its part, Fannie Mae “appreciates today's announcements and the expressions of support for the GSEs as shareholder-owned companies that play a critical role in the U.S. housing finance system,” Daniel Mudd, Fannie’s chief executive, said in a statement.

“Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market,” Mudd said.