November 3, 2015

For the first time in four years Freddie Mac, the US government-owned mortgage conduit, posted a US$475 million loss in the period after marking down its investment in derivatives by US $4.17 billion.

According to CEO Don Layton the loss “was caused mainly by the accounting associated with our use of derivatives, whereby the derivatives are marked-to-market but many of the assets and liabilities being hedged are not. The resulting difference between GAAP reporting and the actual underlying economics, which has created significant GAAP income volatility in our quarterly financial statements, reduced the after tax earnings in the quarter by an estimated $1.5 billion as interest rates declined significantly.”  The loss was not caused by a decrease in credit quality.

Freddie has a thin capital cushion of US$1.8 billion, enough to avoid asking the U.S. Treasury Department - which owns their senior preferred stock - for a cash injection. In 2018, the GSE capital cushion falls to zero, as proscribed by the senior preferred stock purchase agreements..  

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