Courtesy of Pam Martens.
On April 21, Wall Street On Parade reported that the U.S. government (also known as the U.S. taxpayer) was on the hook for potentially tens of billions of dollars in derivative losses at Freddie Mac and Fannie Mae – the two companies the government put under conservatorship during the Wall Street financial collapse of 2008. (See related article below.)
This morning, Freddie Mac is adding further angst to this potential derivatives blowup scenario by reporting that it lost $4.56 billion in its derivatives portfolio in just the first three months of this year – a stunning 90 percent increase over what it lost in derivatives in the first quarter of 2015. That brings its derivative losses for all of 2014, 2015 and the first quarter of 2016 to $15.54 billion. (See chart below.) This is certain to bring gasps from some members of Congress.
While positive net income has offset the derivative losses in recent years, making Freddie Mac profitable overall, the company said in its press release this morning that it had an overall $354 million net loss for the first quarter of this year, meaning the derivative losses fully wiped out the earnings it makes from its portfolio of mortgages and other sources of positive income such as the fees it collects for guaranteeing mortgages.
Despite acknowledging that its net worth is a mere $1 billion, Freddie Mac said in its press release that it would not be drawing further from the U.S. Treasury at this time. Under the conservatorship arrangement, the U.S. Treasury has already infused over $187.5 billion into Freddie Mac and Fannie Mae. But according to a government audit released by the Government Accountability Office (GAO) on February 25 of this year, the U.S. Treasury has committed taxpayers to an additional $258.1 billion that Freddie Mac and Fannie Mae can draw down.
The original conservatorship plan called for the government to receive senior preferred stock in both companies that would pay a 10 percent dividend. (Since both were insolvent at the time, the rate was set high as it would be for a junk-rated company.) After years of the 10 percent dividend being paid by additional draw downs of money from the Treasury (sort of like taking out a home mortgage and asking the same bank to advance you the money to pay the mortgage interest instead of being declared in default), in August 2012 the Treasury amended its agreement. Under the new terms, beginning on January 1, 2013, Freddie Mac and Fannie Mae began paying the Treasury all of its net earnings above and beyond a capital cushion. (This has become known as the “net worth sweep”.)
In addition to the Senior Preferred shares, the U.S. Treasury also received a warrant to purchase, for a nominal price, 80 percent of the common stock outstanding at the time the warrant is exercised. The Treasury Department has not yet exercised that warrant and speculators are having a heyday engaging in speculative trading in the over-the-counter stocks of both Freddie Mac and Fannie Mae, guessing on what might happen in the future. (Lawyers are also challenging the 2012 amendment in court as being unfair to other stockholders.) The U.S. Treasury has the right to exercise the warrant, in whole or in part, at any time through September 7, 2028.
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