Wednesday, 21 November 2007

Freddie Mac drops a big shoe

It's almost been 9 months since I noted that Freddie Mac (FRE) was buying anything in the mortgage arena and then changed their lofty standards to almost anything. That may have sounded extreme at the time but FRE confirmed those statements yesterday with the release of their 3Q07 results.

Below is the graph of Freddie's Loan loss provisions that I posted 3 months ago after Freddie Mac released 2Q07 results. At that time I noted that FRE's provision for credit losses had gone exponential.

The second graph below is after Freddie's latest results in which they set aside $1.2 billion for credit losses in 3Q07. It makes the second quarter provisions look miniscule by comparison.

Increased loan losses are just half the story, Freddie has recruited Goldman Sachs and Lehman Bros. to look at capital-raising options and may consider cutting their dividend. From

Freddie plunges; quarterly loss more than doubles

Freddie Mac's shares sank as much as 35% on Tuesday, plunging as its third-quarter loss more than doubled and the company raised the possibility of cutting its dividend in half....

In the fourth quarter, "market conditions are working against us," concurred Piszel on the same call. For the year to date, Freddie's recognized $4.6 billion in net credit-related items on a pre-tax basis, Piszel said.

Freddie's third-quarter loss grew to $2.03 billion, or $3.29 a share, from a loss of $715 million, or $1.17 a share, in the same period a year ago.

"The increased net loss, year-over-year, was primarily due to higher credit-related expenses and mark-to-market losses on the company's portfolio of derivatives and credit-related items," Freddie said in a news release.

Freddie said the fair-market value of its net assets fell by $8.1 billion in the quarter, adding that it's taken steps to address the challenges continuing to confront the mortgage market.

Specifically, the firm said it has hired Goldman Sachs and Lehman Bros. to study capital-raising options. Freddie has been having problems with its capital levels, like many other firms hit by the mortgage market's problems....

Also during the latest quarter, the company recorded mark-to-market losses totaling $2.7 billion, wider than $1.5 billion in the third quarter of 2006.

Remember that this is the company that was lobbying congress hard to increase the cap on the number of mortgages they could buy. You can forget about that now. However after today they will probably be lobbying to get their mandated capital ratio of 30% lowered.

Estimates of the amount of capital FRE needs to raise to shore up it's capital ratio range from $3 - $10 billion. An absolute disaster, however you can rest assured that FRE won't be the last company to consider capital raising and/or slashing of dividends. Stay tuned for news of more large shoes dropping off.