The Misery Mounts at Freddie Mac

Freddie has lots of cash, but the value of its paper assets, minus its liabilities, looks like a dreadful black hole

by Ben Levisohn

How much is mortgage-finance giant Freddie Mac (FRE) worth? Judging by the stock market, $4.2 billion, its market capitalization at the close of trading on Aug. 6. But the company's update on its second-quarter earnings and financial condition, released Aug. 6, seems to tell a grimmer story.

Look past the devastating $821 million loss it reported for the quarter—nearly three times what Wall Street analysts had forecast. Ignore the $1 billion writedown the government-sponsored enterprise took on subprime and other risky mortgages, only the latest in a painful series. Disregard the rising rate of foreclosures, which grew 20% in the June quarter from the preceding quarter. Drill down to its fair value—a measure of the total worth of the assets on its balance sheet, minus its total liabilities. What do you see?

It looks an awful lot like a gaping hole. Freddie's fair value as of June 30 was a negative $5.6 billion. Based on this particular measure of its financial condition, if it had to sell its assets today, Freddie Mac would be worth less than nothing.

Mark-to-Market Reckoning

Freddie says that number is wrong. And to give the GSE its due, it most likely is. Fair value is a mark-to-market number, a theoretical figure at best and as much a result of investor sentiment as the actual quality of the assets. Freddie is required to mark some assets down now, and CEO Richard Syron expects to write them back up in the future.

In fact, Freddie looks much stronger on a cash basis, sitting on $37.1 billion in capital at the end of the second quarter, $2.7 billion more than its mandatory capital surplus. Analysts disagree, however, about just how much stronger.

Freddie's capital position is not a panacea. "It doesn't make me feel much better," says Chris Whalen of Institutional Risk Analytics. He calls the negative fair-value figure "a grotesque number."