Massive Freddie Dilution Coming Right Up

Financials have been flying for three days on short squeeze (see Short Squeeze In Financials Continues). However, capital raising efforts are going to eat into that.

Please consider Freddie Clears SEC Hurdle Towards Major Stock Sale.

Freddie Mac (FRE) moved ever-closer to a planned stock sale by becoming a registrant with the Securities and Exchange Commission; the company�s filing of a Form 10 registration statement with the SEC is a large milestone for the company, and paves the way for the company to offer shares.

�Becoming an SEC registrant marks an important milestone for the company and demonstrates our commitment to enhanced transparency and financial reporting,� said chairman and CEO Richard F. Syron.

While Syron said that the �registration statement does not relate to an offering of securities,� it certainly moves the GSE closer to a planned $5.5 billion capital raise that has been in the offing since the company reported its first quarter results.

�We conclude what was a difficult chapter in Freddie Mac�s history and join the ranks of other large, public financial institutions as an SEC registrant,� said Buddy Piszel, executive vice president and chief financial officer. �Along the path to SEC registration, we�ve upgraded our internal controls and financial reporting to strengthen our business, resulting in a return to timely quarterly financial reporting.�

Freddie did reiterate in a press statement that it would raise at least $5.5 billion of new core capital via �one or more offerings, which will include both common and preferred securities.� It also said that it expects to exceed capital targets established by the Office of Federal Housing Enterprise Oversight, its regulator, when it reports second quarter results.

Freddie Mac Daily Chart



click on chart for sharper image

As of the close today today Freddie Mac's Market Cap is $5.94 Billion. Those scrambling to get in (forced in via the short squeeze if you prefer to look at it that way) are going to suffer massive dilution when a $6 billion company attempts to raise $5 billion in capital.

Freddie Insults Shareholders

The Wall Street Journal is reporting How Freddie Mac Raises Money: Insult Shareholders. Then Run Back to Them.

Earlier this week, Deal Journal noted that the government was blaming shareholders far more than management for the dismal performance of Fannie and Freddie. The Wall Street Journal�s James B. Stewart, writing in his �Common Sense� column, also complained that shareholders were left behind. Many shareholders, he said, put Fannie and Freddie �in pretty much the same category as U.S. Treasury Bonds, and safer than the local utility.� His kicker: �We�ve all learned that quasi-governmental is only quasi-safe.�

Economist and former Treasury Secretary Lawrence Summers, in a great blog post on the Web site Creative Capitalism, tackles how Fannie and Freddie were able to play both sides of the game: �When there were social failures the companies always blamed their need to perform for the shareholders. When there were business failures it was always the result of their social obligations. Government budget discipline was not appropriate because it was always emphasized that they were �private companies.� But market discipline was nearly nonexistent given the general perception�now validated�that their debt was government backed.�

At this point, Freddie may be wishing it had less meddling from the government. After all, it would be a lot easier to attract new investors if Paulson hadn�t already told the old ones to jump in a lake.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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