Fannie Reports Record Earnings; Plays It Safe On Taxes (Update 1)

Tickers in this article: FMCC FNMA
Fannie Mae earnings story updated with changes throughout.

NEW YORK (TheStreet) -- Fannie Mae reported record earnings Tuesday, even as it chose not to recognize any of its $58.9 billion deferred tax asset (DTA) as net income.

Fannie Mae earned $17.2 billion for 2012 and $7.6 billion for the fourth quarter of 2012, the largest quarterly and annual profits in the company's history. Strong earnings had already been widely expected, since Fannie announced last month it had delayed its earnings release in order to evaluate whether to release any of its DTA.

The deferred tax asset reflects potential tax credits from past losses. However, unless a company determines it has a better than 50% chance of realizing enough earnings to make use of the loss, it is required to take what is known as a valuation allowance, which means the DTA can't be reflected as income for accounting purposes. Since all of Fannie's profits go to the Treasury until the company has repaid its debts to the government, capturing a tax credit effectively means taking money from one part of the Treasury (the Internal Revenue Service) to pay another.

"In evaluating the recoverability of Fannie Mae's deferred tax assets, as of December 31, 2012, the company again determined that the factors in favor of maintaining the allowance outweighed the factors in favor of releasing it," Fannie Mae stated in a press release accompanying the earnings.

"Our financial results improved significantly in 2012 and we expect our earnings to remain strong over the next few years," said Timothy J. Mayopoulos, president and CEO.

Common shares of Fannie Mae were up 20% to nearly $1 in early trading Tuesday, though many hedge funds believe it makes more sense to gamble on preferred shares , such as the Fannie Mae "S" shares , which were up more than 16% to $3.90. Other commentators, however, believe investors speculating on a payoff in the preferred shares are ignoring political reality. Indeed, in a recent interview, former House Financial Services Chairman Barney Frank "said he had little sympathy with vultures, "looking to find value in beaten down shares" of Fannie Mae or Freddie Mac . Freddie Mac securities were showing similar gains to those of Fannie Mae early Tuesday.

-- Written by Dan Freed in New York.