I don't follow the company that closely, but in just reading over the summary of their 10K, it doesn't paint a very pretty picture. First off, they have had to accept money from the Government (clearly an indication of major problems on the books). Second, they are in Conservatorship, which means they aren't even really in control of their own operations.
This part is probably the most telling:
Quote:
returning to long-term profitability; and
protecting the interests of taxpayers.
These objectives create conflicts in strategic and day-to-day decision making that will likely lead to suboptimal outcomes for one or more, or possibly all, of these objectives. Our business is also subject to significant new restrictions that could limit our ability to achieve one or more of these objectives, including the requirements under the Purchase Agreement that we
(i) limit the size of our mortgage-related investments portfolio to $900 billion as of December 31, 2009 and, thereafter, decrease the size of our mortgage-related investments portfolio at the rate of 10% per year until it reaches $250 billion, and (ii) not incur indebtedness that would result in our aggregate indebtedness exceeding a specified amount, without the prior written consent of Treasury. The balance of our mortgage-related investments portfolio and indebtedness at December 31, 2008 did not exceed the Purchase Agreement limits.
On February 18, 2009, the Obama Administration announced the HASP, which includes (a) an initiative that will allow mortgages currently owned or guaranteed by us to be refinanced without obtaining additional credit enhancement beyond that already in place for that loan; and (b) an initiative to encourage modifications of mortgages for both homeowners who are in default and those who are at risk of imminent default, through various government incentives to servicers, mortgage holders and homeowners. At present, it is difficult for us to predict the full extent of our activities under these initiatives and assess their impact on us. However, to the extent that our servicers and borrowers participate in these programs in large numbers, it is likely that the costs we incur associated with modifications of loans, the costs associated with servicer and borrower incentive fees and the potential accounting impacts, will be substantial.
As a result of the draws under the Purchase Agreement, the aggregate liquidation preference of the senior preferred stock will increase from $1.0 billion as of September 8, 2008 to $45.6 billion. Our annual dividend obligation on the senior preferred stock, based on that liquidation preference, will be $4.6 billion, which is in excess of our annual historical earnings in most periods. These dividend obligations make it more likely that we will face increasingly negative cash flows from operations. To date, our need for funding under the Purchase Agreement has not been caused by cash flow shortfalls but rather primarily reflects large credit-related expenses and non-cash fair value adjustments as well as a partial valuation allowance against our net deferred tax assets that resulted in reductions to our GAAP stockholders' equity (deficit). Under the Purchase Agreement, our ability to repay the liquidation preference of the senior preferred stock is limited and we may not be able to do so for the foreseeable future, if at all. The aggregate liquidation preference of the senior preferred stock and our related dividend obligations could increase further as a result of additional draws under the Purchase Agreement or any dividends or quarterly commitment fees payable under the Purchase Agreement that are not paid in cash. The amounts we are obligated to pay in dividends on the senior preferred stock are substantial and will have an adverse impact on our financial position and net worth and could substantially delay our return to long-term profitability or make long-term profitability unlikely. For more information, see "RISK FACTORS - Conservatorship and Related Developments - Factors including credit losses from our mortgage guarantee activities have had an increasingly negative impact on our cash flows from operations during 2007 and 2008. As we anticipate these trends to continue for the foreseeable future, it is likely that the company will increasingly rely upon access to the public debt markets as a source of funding for ongoing operations."
For more information on the risks to our business relating to the conservatorship and uncertainties regarding the future of our business, see "RISK FACTORS."
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I've indicated the key points in bold.
Let me basically translate the situation:
We no longer have control of our company. We've had to dilute shareholders massively to obtain money from the Government. They are making us do things that cost a lot and we don't know if we can afford that. We can't even afford to pay the dividends on all this new stock we've issued and probably never will be able to. Most likely we'll need more cash from them, so expect it to get worse, not better. We can't even repay them what they have loaned us most likely. For the foreseeable future, this is a cluster****, so don't expect us to be making any money anytime soon".
I think that about covers it.
From what I can see, the company is hamstrung. They have loaned their money away to people who aren't repaying it and now the government has stepped in and taken control. The upside appears to be very limited as far as profitability goes. It's more or less an OBama zombie bank from what I can see. If the Government backs away and allows capitalism to take its natural course, FRE would probably be toast.
So upside limited, downside chapter 11 and shareholders totally wiped out. Not what I would really characterize as a great risk/reward ratio as far as stocks go.
Ray
11-02-2009, 06:01 PM
FRE: Freddie Mac Stock
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