Freddie Mac discloses $151 million 1st-quarter loss

From wire reports

May 15, 2008

Freddie Mac, one of the nation's largest buyers of home loans, announced a fresh wave of bad news yesterday, disclosing a $151 million first-quarter loss that was only smaller than expected because of accounting tactics that minimized the effects of bad loans.

Yet investors were cheered by the results and pushed the company's shares up by $2.29, or 9.2 percent, to $27.25. The company's regulator, which only a month ago chastised Freddie Mac for questionable accounting policies, also applauded the results by reducing the size of the company's required financial safety cushion.

It was the third-straight quarterly loss for Freddie Mac, which lost $4.5 billion in the second half of 2007.

Moody's Investors Service downgraded the company's financial strength rating, projecting Freddie Mac will be hit with up to $7.5 billion in total losses from soured mortgages over the next two years.

Much like rival Fannie Mae, whose share price rose last week after the company reported enormous losses, Freddie Mac's performance yesterday reiterated that investors have become convinced that Freddie and Fannie are too important for either to fail.

Put another way, even bad news can be good news, as long as the federal government needs to bolster an ailing housing market.

"Both these companies are clearly going to be insolvent by the end of the year, but everyone knows that Congress will do anything to keep them afloat, because if Fannie and Freddie go under, the entire global financial system will melt down," said Christopher Whalen, a founder of the independent research firm Institutional Risk Analytics. "These companies' earnings don't matter. Their accounting hardly matters. People buy the stock because they believe the federal government will bail them both out if things get really bad."

Freddie Mac argued that optimism is warranted because the company is positioned to snap up the best and safest loans in the marketplace. The company will seek $5.5 billion in fresh capital from investors, largely to pursue these opportunities, executives said.

"We are confident that the capital we are raising will both allow us to achieve our mission to both the public and to shareholders," Freddie Mac's chief executive, Richard Syron, said in a conference call with analysts. The chief financial officer, Buddy Piszel, said he expected the company's credit guarantee business to grow by as much as 20 percent this year and other aspects of Freddie Mac to grow by more than 30 percent.

But executives also said that they expected housing prices to continue to decline and that they were setting aside billions of additional dollars to offset expected credit losses because of borrowers who do not pay their mortgages on time.

"It's clear we have not yet hit bottom in the housing market," Syron said.