Freddie Mac is a unique entity, operating as a for-profit company but one that was created by Congress to serve specific housing policy objectives. At its heart, though, Freddie Mac is a mortgage investor and times are not good for mortgage investors as Freddie Mac’s third quarter results show.
Freddie Mac announced a third quarter loss of $2 billion, which caused a drop in its stock (FRE) of more than 30%. It also reported a decrease in fair value of net assets of $8.1 billion. That is not a typo. The results—given what has gone on in credit markets—is not a surprise, though the magnitude of losses may be. In fact what is most surprising, given numerous financial cable news outlets and our 24-hour news cycle is like the numerous large investment banks, it has take so long for the market to react to Freddie Mac’s exposure to the subprime crisis.
Remember it was mid-July when the repricing of certain subprime related securities began cause numerous hedge funds to go belly-up. Freddie Mac’s stock dropped from above $40 at one point on Monday, Nov. 19 to below $25 on Tuesday, Nov. 20. Yes it had dropped considerably from a mid-July high above $60 but the stock had traded above $65 as late as October.
Maybe it is beneficial for the stability of the market that the impact of this crisis is coming in dribs and drabs but it is also testament to the fundamental misinformation being provided by so called public companies. We are four months into this and we are not close to knowing the complete impact of the subprime crisis. According to its Website, “Freddie Mac conducts its business primarily by buying mortgages from lenders, packaging the mortgages into securities and selling the securities – guaranteed by Freddie Mac – to investors.”
Given that statement why did it take so long for this exposure to be known?
