Freddie Mac Earnings – Time For Treasury, FHFA To Reverse Course?

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Freddie Mac reports earnings for Q1 2016 – here is what investors and activists are saying


Investors Unite

WASHINGTON, D.C. – In response to Freddie Mac’s Q1 earnings announcement, Tim Pagliara, Investors Unite Executive Director, issued the following the statement:

“By stripping Fannie Mae and Freddie Mac of 100% of their profits every quarter since 2012, the Treasury Department put taxpayers on the hook for any future losses by either of the companies, and we’re now seeing this play out in real-time.  It’s time to reverse the sweep and to protect the taxpayers by allowing these companies to begin rebuilding capital.”

Published on May 3, 2016
The Obama Administration has used executive privilege to withhold from the public over 12,000 documents, totaling roughly 180,000 pages, which detail deliberations over its decision to enact the third amendment sweep of Fannie Mae and Freddie Mac capital in 2012.

WASHINGTON – Wade Henderson, president and CEO of The Leadership Conference on Civil and Human Rights, issued the following statement in response to today’s announcement that Freddie Mac reported a loss of $354 million in the latest quarter. The long-term stability of Freddie Mac, along with Fannie Mae, are crucial to preserving access to affordable housing for low-income communities:


“Even after Federal Housing and Finance Agency Director Mel Watt joined housing advocates and economists on both sides of the aisle in sounding the alarm, the Treasury Department has inexplicably refused to allow Fannie Mae and Freddie Mac to maintain a capital buffer against losses like the one Freddie reported today – and like every other financial institution must maintain. We are inevitably headed toward a path of yet another taxpayer-funded bailout, which should be unthinkable eight years after the financial crisis, and which is even worse because it appears to be by design.”

Dick Bove opines:

Freddie Mac reported a first quarter loss of $0.11 per share. This was less than my estimate of $0.16 per share but worse than the fourth quarter profit of $0.13 per share. The new earnings forecasts are as follows: a) the 2016 estimate is being adjusted to a loss of $0.13 per share from a loss of $0.17 per share; b) the 2017 estimate is being maintained at a loss of $0.04 per share; and c) there is no change in the $0.04 per share loss projected for 2018.

In the first quarter, Freddie Mac posted negative operating revenues of $18 million. The primary reason for this was hedging and fair market adjustments of negative $4.6 billion. The true accounting losses were actually in the estimated $6.7 billion range.

The company reported a pretax quarterly loss of $508 million and an after tax loss of $350 million. However, the firm’s retained earnings fell by $2.1 billion and it ended the quarter with negative common equity of $85.4 billion and total stated equity of $1.0 billion.

In reality, there is no equity in this company since the junior preferreds are carried on the books at par when they have no dividends and no value. The true equity is negative $13.1 billion. The company’s losses were so great that it will not be paying any dividend to the United States Treasury in the quarter.

The firm released the following statement: “Freddie Mac currently faces a risk of a draw [from the Treasury] for a variety of reasons, including if it were to experience a large decrease in interest rates coupled with a large widening of spreads.”

In its conference call with the media (it refuses to speak with analysts) it suggested that its real equity is the $140.5 billion that the Treasury is obligated to lend it under stressful situations. Management also implied that under its internal stress test using the conditions set out for banks the company could lose as much as $70 billion.

Apparently, Freddie Mac believes that it will be in business for the long-term, backed by its ability to be funded by taxpayers, against their will to do so, and the purchasers of its debt accept this view.

In its media conference call it refused to answer questions as to why its hedging activities are so volatile. It refused to indicate what is being done to get its losses under control. Apparently, management has made the decision to continue to “roll the dice” expecting an increase in interest rates to avoid any major near-term draw from the Treasury.

Under the theory that it will be here for the long-term the firm continues to guarantee an increasing amount of mortgage loans. In the quarter, its consolidated trusts grew by $12 billion to $1.568 trillion. This trillion plus number is solely backed by the full faith and credit of the United States even though it does not show up as a government obligation.

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