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March 17th, 2009

TIME Spots the Latest Black Hole on the Horizon



The market observers on the bailout watch, scanning the economic waters for the next potential “black hole,” say they’ve spotted one: Freddie Mac. The mortgage giant reported a 4th quarter loss of $24 billion, raising their total of red ink for 2008 up to $50 billion. Just last week Freddie tapped another $31 billion in exchange for preferred stock.

The substantial losses at Freddie can be accredited to a number of shortfalls: mortgage insurance, mortgage-backed securities tied to subprime, adjustable rate, and/or jumbo mortgages, interest rate derivatives, bonds, and the approximately 30,000 homes they currently own (costing the GSE about $3,300 a month to maintain):

When will the red ink at Freddie stop? It’s hard to say. In its most recent annual report, the company said that if it had to mark all of its assets to the price similar bonds are trading for in the market, the company’s net worth would sink by another $65 billion.

But since Freddie continues to lose money, and because it is now part of the government, the likelihood that the company will have to pay taxes anytime soon is probably nil. Add all those items up, and it becomes apparent that the government will likely spend more than $100 billion in additional funds cleaning up the mess at Freddie.

While the government remains dedicated to preserving capital at several large financial institutions, they have pledged the most to AIG, Fannie Mae, and Freddie Mac:

Citigroup and other banks have also lost money, and will need more capital to survive. But in those cases it’s not clear who will take the hit — shareholders, bondholders or the government. In the case of AIG, Freddie Mac and Fannie Mae, however, there is no question where the money will come from. The losses at those companies are now taxpayer losses.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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