Freddie Mac, the mortgage finance giant at the heart of the crisis in the US financial system, is deeper in the red than anyone on Wall Street had been predicting, it was revealed yesterday.
The company is in negotiations with the US government about a rescue refinancing that could top up its coffers by $5.5bn (£2.8bn) or more, but its chief executive, Richard Syron, said the talks would take time. A bill allowing a government bail-out of unspecified size passed Congress last month, after Freddie and its sister company Fannie Mae appeared on the brink of a collapse in confidence that could have sunk the companies. Freddie and Fannie – known as government-sponsored entities, or GSEs – own or guarantee about $5trn of US mortgages, about half the total, but a rising tide of defaults and repossessions has wrecked their careful financial plans.
"Neither we nor anyone else can predict when the housing market will fully recover and it would be folly to try to do so, but I can promise you Freddie Mac will play a pivotal role in ensuring it does so," Mr Syron told investors.
The US Treasury has hired Morgan Stanley to advise it on doing a deal with Freddie and Fannie, which might involve using taxpayer money to buy shares. Freddie said it expects institutional investors will ultimately provide the cash, when markets recover.
Meanwhile, Mr Syron has warned Freddie's existing shareholders that their holdings could be significantly diluted, and he cut their dividend too. Its shares slid 19 per cent to $6.49 on the New York Stock Exchange.
The company wrote down the value of its mortgage holdings by another $1bn and said its liabilities now exceeded the value of its assets by $5.6bn. The loss for the three months to end-June was $821m, four times what Wall Street analysts had been expecting.
Mr Syron mounted a robust defence of Freddie's position in the mortgage market. It buys mortgages and parcels them up into mortgage-backed securities, which it sells on. The practice ensures a steady flow of funds to lenders. "There is an essentiality to the GSEs right now," he said. "It would be an extremely ugly mortgage market that didn't have GSEs in it."
Separately, a Wall Street panel has advised regulators and bank executives to give closer scrutiny to mortgage derivatives, including mortgage-backed securities and collateralised debt obligations. The advisory group was headed by Gerald Corrigan, a former head of the New York Federal Reserve Bank. "It is likely that flaws in the design and workings of the systems of incentives within the financial sector have inadvertently produced patterns of behaviour and allocations of resources that are not always consistent with the basic goal of financial stability," he said.
The group offered 60 recommendations for reducing the risks laid bare by the credit crunch. These inc-luded wider adoption of electronic platforms for derivatives trades, and more frequent revisions of financial firms' exposure to risky assets.Reuse content