Freddie to Treasury: "More, Please"

Highlights include Freddie Mac (FRE) and Fannie Mae (FNM).

Freddie Mac Loses $23.9 Billion in 4Q08, Asks Treasury for $30.8 Billion

Yesterday, after market close, Freddie Mac (FRE) reported its 4Q08 and FY08 financial results. During the quarter, the company had a net loss (available to the common shareholders) of $23.9 billion or $7.37 per diluted share.

The huge increase in loss was driven primarily by net mark-to-market declines on the company's derivative portfolio, guarantee assets and trading securities. Increased credit-related expenses, security impairments and additional valuation allowance against its deferred tax assets were also the major contributors to the increased loss.

For the full year, net loss came in at $50.1 billion or $34.60 per diluted share, compared to a net loss of $3.1 billion or $5.37 per diluted share in 2007.

As a result of the massive loss, the Federal Housing Finance Agency, which oversees Freddie, has asked the Treasury Department for $30.8 billion, and the company said it expects to receive that money this month. Treasury already injected almost $15 billion into Freddie last year, and after the latest investment, the government's preferred equity stake will be $45.6 billion in the company.

Within the "Homeowner Affordability and Stability Plan" announced yesterday, the Government laid out the expanded role for both Fannie Mae (FNM) and Freddie Mac in the housing markets. The Treasury doubled the preferred stock back-stop funding for these two Government Sponsored Enterprises (GSEs) to $200 billion each, with the hope that this should enable them to maintain a positive net worth, as the losses will continue to rise in the coming months.

The Treasury will continue the purchase of mortgage-backed securities issued by them. At the same time, they were also allowed to increase the size of their retained mortgage portfolios by $50 billion to $900 billion along with corresponding increases in the outstanding debt.

We are maintaining our Sell recommendation on FRE.

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