Fannie, Freddie Reality Check: The Big Bailout Is Coming

CNBC's Diana Olick is writing Freddie�s Forecast Seems A Little Too Bright.

Freddie Mac CEO, Richard Syron, warned of the troubled times in housing, even revised his forecast for home price drops, peak to trough, from 15 percent to 18-20 percent. He said we�re only halfway through the correction.

But then one of his underlings went on to assure everyone that Freddie Mac (FRE) would be able to withstand $40 billion worth of credit pain through 2009 (if it finishes raising that $5.5 billion it promised). He also talked about how they may reverse some of the previously estimated losses as the portfolio does better than expected.

Freddie, in the second quarter, wrote down the value of its subprime and Alt-A portfolio by $1 billion. Freddie is claiming that they can hold these securities to maturity and not have to take a loss, because over time, the dire predictions of defaults on these loans just won�t come to pass. Freddie�s subprime and Alt-A portfolio is about $130 billion. Think of that. Just $1 billion in writedowns.

I think Armando Falcon, a former head of OFHEO, said it best when I interviewed him yesterday:

"They've only written them down by let's say five or 6% total over the past few quarters. If those were sold on the market they would get maybe 50 cents on the dollar for these securities. At some point they can't delay the inevitable about having to mark these assets down to their true market value. They are now holding them close to book value, based on the theory that these are temporary impairments. As the market continues to decline into next year, it will be clear that these aren't just temporary impairments. Then the government will not be able to allow this forbearance on recognizing losses much longer."

Freddie CEO Makes Preposterous Claim

Anyone following Alt-A mortgages knows that Freddie's claim is simply preposterous. Thus, the only surprise this quarter is that anyone was surprised when Freddie Mac's loss was bigger than expected.

Freddie Mac (FRE) posted a loss of $821 million for the second quarter, slashed its quarterly dividend and promised investors that it would raise at least $5.5 billion in new capital, the institution said Wednesday.

It's the fourth quarterly loss in a row for the company, a government-sponsored entity designed to buy mortgages on the secondary market from lenders.

The magnitude of the loss, five times worse than what Freddie reported for the first quarter of 2008, stems from the general rise in home foreclosures compounded by the decline in securities made up of subprime mortgages. The collapse of subprime-backed securities has already forced the world's biggest banks to write off more than $200 billion over the past 12 months.

"We are confident the actions we are taking are strengthening Freddie Mac's financial and competitive position as well as its ability to serve the American homebuyer and will generate value well into the future," said CEO Richard Syron in a statement.

But critics contend that Syron's not doing enough. Freddie's share price continues to drop � down 18% at $6.57 in late afternoon trading � eroding its capital base. Syron says he doesn't want to raise more capital now, which would dilute the holdings of current shareholders.

Freddie Mac Alt-A Delinquencies



click on chart for sharper image

The above image from Freddie Mac's Second Quarter 2008 Results.

Freddie has $130 billion in subprime and Alt-A loans. Somehow CEO Richard Syron wants us to believe the problem will go away if left on its own.

The Big Bailout

The ProLibertate Blog is talking about The Big Bailout: America as a Full-Spectrum Kleptocracy.

With the Senate's passage of the Fannie Mae/Freddie Mac bailout Saturday (July 26), the United States of America has now become the world's first full-service kleptocracy, a form of government described earlier in this space as a government of, by, and for the robbers.

We are supposed to pretend to believe that the Senate, so great was its anxiety over the nation's economically distressed homeowners, met in a rare Saturday session for the sole purpose of administering the balm of Gilead on hardworking families who confront the bleak prospect of foreclosure.

When the Senate sacrifices so much as a minute of its down time, it does so not to relieve our burdens, but to add to them in the interest of their fellow parasites.

I encourage you to read the rest of the article. It's a great rant.

Gross Says Treasury Will Rescue Fannie, Freddie

Pimco's Gross Says U.S. Will Rescue Fannie, Freddie

Bill Gross, who manages the world's biggest bond fund, said the U.S. Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie Mae and Freddie Mac to help shore up their capital.

"By the end of the third quarter, the preferred stock in Fannie and Freddie will be issued, the Treasury will have bought it," Gross, co-chief investment officer at Pacific Investment Management Co., said today in an interview on Bloomberg Television. "We'll be on our way toward a joint Treasury-agency combination."

My Translation: When Gross says "Treasury" he really means "U.S. Taxpayers".

Freddie Chief Executive Officer Richard Syron today told investors the company will wait for its stock to improve before starting its planned $5.5 billion capital raising. Freddie agreed in May to raise the capital but failed to complete a sale as its stock slumped as much as 80 percent.

My Comment: The decision to wait for its stock to improve when losses on Alt-A loans are accelerating is enough to question the competence of Syron.

"I have enormous respect for Bill Gross," Syron, 64, said today in an interview with CNBC. "I think he's an extraordinarily talented manager, particularly on the fixed income side. But based on the information I have now, I do not believe that the Treasury will end up having to inject money into Freddie Mac."

My Comment: Syron clearly does not understand the risks of the company he is running. Shareholders should demand his ouster.

"This report significantly shortens the timeline for Treasury intervention," said Ajay Rajadhyaksha, the head of fixed-income research for Barclays Capital in New York. With the value of Freddie's outstanding stock now at $4.3 billion, Rajadhyaksha said, "I don't see how they can raise capital by themselves without a capital infusion from Treasury."

My Comment: Bingo.

Bill Gross: Common Shareholders Will Be Subordinated Significantly

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Bill Gross Comments

"Most of the earnings in futures years will go the preferred holders, bond holders, and the Treasury, not the common stockholder."

"Mortgage rates have to come down or this economy is going nowhere"

"Obama and McCain are both talking fiction when it comes to balancing the budget in their term. The deficit which is now approaching $500 billion in my way of thinking will grow to $600 billion and then $700 billion because that's required in a period where slow growth persists."

"We need people on the Fed that understand interest rate spreads and credit spreads and the dynamics of the market place not just academics."

"I still like the dollar vs. the Euro. The ECB will be cutting rates 6 months down the road. The weakness in the US recession has been factored in. The weakness in Euroland is just beginning to be factored in."

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