High dividend stocks – AGNC analysis of the income account> extraordinary losses> reserves for inventory losses

Definition for inventory: (accounting) the value of a firm's current assets including raw materials and work in progress and finished goods. Source “define: inventory” on Google.

AGNC’s current assets are mostly comprised of agency securities (over $6 billion in a $7.1 billion investment portfolio). These agency securities are toxic assets in my opinion. They will be viewed as toxic assets by AGNC’s shareholders the moment that Fannie Mae and Freddie Mac stop guaranteeing the pass-through principal and interest payments of the securitized mortgages that these agency securities are comprised of. You know they are toxic because the Federal Reserve bought over 1 trillion dollars of them from Fannie and Freddie over the course of a year ending in March 2010. The Fed buys toxic assets to bailout the largest banks.

I scanned through the most recent 10-K filing and the 2009 annual report to find out if AGNC’s management set up a reserve fund for future losses on their inventory/assets.  It turns out they haven’t set up such a reserve.  They do acknowledge the risks to their asset values under the banner of “spread risk” in the most recent 10-K filing.

Spread Risk

Our available−for−sale securities are reflected at their estimated fair value with unrealized gains and losses excluded from earnings and reported in OCI pursuant to ASC 320. As of June 30, 2010, the fair value of these securities was $7.1 billion. When the spread between the yield on our agency securities and U.S. Treasuries or swap rates widens, this could cause the value of our agency securities to decline, creating what we refer to as spread risk. The spread risk associated with our agency securities and the resulting fluctuations in fair value of these securities can occur independent of interest rates and may relate to other factors impacting the mortgage and fixed income markets such as liquidity or changes in required rates of return on different assets.

The whole ‘fair value’ accounting smells like government authorized fraud.

Be seeing you!