The Federal Agricultural Mortgage Corporation, otherwise referred to as Farmer Mac, invested corporate funds in HSBC Finance. Farmer Mac President and Chief Executive Officer Michael Gerber had to know the following:
• HSBC Finance lost approximately $40 billion since 2003
• HSBC shut down all HSBC Finance business except credit card operations
• HSBC Finance, formerly Household International, was a subprime lender
Most shocking is that Farmer Mac was able to enter into a credit default swap covering the balance.
How much does this protection cost, who financed it, and who provided the protection?
HSBC Finance customers are more prone to layoffs and financial setbacks, thus providing more risk as unemployment increases. Complaints about HSBC Finance continue to flood our mesage center. Disregarding all evidence, Farmer Mac was able to receive default protection.
Here are the details:
During third quarter 2009, Farmer Mac recorded an other-than-temporary impairment loss of $1.6 million to write down the Corporation’s $49.9 million investment in the unsecured debt of HSBC Finance to its fair value of $48.3 million as of September 30, 2009.
Subsequent to September 30, 2009, Farmer Mac sold $20.0 million of the HSBC Finance debt for $19.5 million. That sale resulted in a loss of $0.5 million on Farmer Mac’s initial investment, but a gain of $0.1 million during fourth quarter 2009 because the sale proceeds exceeded the carrying value that reflected the other-than-temporary impairment loss recorded during third quarter 2009.
To mitigate the credit exposure related to Farmer Mac’s remaining $28.9 million investment in HSBC Finance debt, during fourth quarter 2009 Farmer Mac entered into a credit default swap covering the balance. The credit default swap protects Farmer Mac against any future default by HSBC Finance and provides an offset to further declines in the fair value of the remaining investment.
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