Fanny and Freddie in deep trouble

Freddie Mac and Fannie Mae, the US mortgage firms, are in deep deep trouble. They are Federal institutions, they cannot fail but their assets are becoming worth less (if not yet worthless) and their $5,000,000,000,000 (that's $5 trillion) "book" may be at risk.

This is a major financial issue and just one more step on the inevitable path to world economic ruin.


I note that Freddie Mac's website claims that:

"Freddie Mac is adequately capitalized, highly liquid and an essential part of the nation's housing system. We are in the process of finalizing our results and we estimate that at June 30, 2008, we will have a substantial capital cushion above the 20% mandatory target surplus established by our regulator, the Office of Federal Housing Enterprise Oversight ("OFHEO") and a much greater surplus above the statutory minimum capital requirement. We are not under any mandate to raise capital in the near term. OFHEO has stated that we are adequately capitalized and that we hold capital well in excess of regulatory minimums. The Director of OFHEO confirmed yesterday that we are adequately capitalized and have liquidity resources to perform our important public mission, and we are continuing to do so.

Beyond that, there are a number of options to manage our capital position. The average rate of run-off on our retained portfolio is currently about $10 billion per month, and not replacing that run-off would free up approximately $250 million of capital per month. Over the course of a year, this would free up approximately $2.5 to $3 billion of additional capital if this run-off rate remains constant. We also could consider reducing our common stock dividend. Our current annual common stock dividend is approximately $650 million.

Currently, Freddie Mac's liquidity position remains strong. This is a result of the combination of two factors: access to the debt markets at attractive spreads and an unencumbered agency MBS portfolio of approximately $550 billion which could serve as collateral for short-term borrowings.

We believe current speculation in the media around the issue of conservatorship does not accurately reflect the facts. Freddie Mac is not on the threshold of conservatorship because we are adequately capitalized. The preliminary indications of our expected financial performance for the second quarter, while reflecting the challenges that face the industry, do not point to an immediate need to raise additional capital. As the Director of OFHEO stated, we remain committed to our agreement with OFHEO to raise additional capital given appropriate conditions.

We are pleased at the expressions of support for the GSEs in their current form from senior administration officials and members of Congress.

Freddie Mac is a stockholder-owned corporation established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac raises capital on Wall Street and throughout the world's capital markets to finance mortgages for families across America. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters."