Freddie Mac Takes Steps Toward Selling Billions of Dollars in Stock
Friday, July 18, 2008; 4:35 PM
Freddie Mac, the troubled mortgage-finance giant, today took a major step with the Securities and Exchange Commission toward selling billions of dollars of stock.
The McLean-based company requested, and the SEC accepted, its formal registration with the agency, an application process it has been undergoing for months. A Freddie Mac spokeswoman said completion of the process is a prelude to the company eventually selling $5.5 billion in stock, a beefing up that it had agreed to accomplish at the urging of federal regulators months ago.
The Wall Street Journal today reported that the company might try to raise as much as $10 billion in new shares to investors, a move that analysts said could nearly double its market capitalization.
"The timing, amount and mix of securities to be offered will depend on a variety of factors, including prevailing market conditions, and is subject to approval by our board of directors," said Sharon McHale, a spokeswoman for Freddie Mac, in an e-mail today. "As indicated, we indicated in our Form 10 registration statement (filed with the SEC this morning), Freddie Mac continues to review and consider this and other alternatives for managing our capital."
"[O]ur ability to issue additional preferred or common stock will depend, in part, on market conditions, and we may not be able to raise additional capital when needed," Freddie Mac said in its SEC filing today.
After tumbling by nearly half last week, the shares of Freddie Mac and its D.C.-based cousin company, Fannie Mae, rebounded somewhat this week. Shares of Freddie Mac today closed up 10 percent at $9.18 and and Fannie Mae was up 23 percent at $13.40.
Through a sale of equity to investors, Fannie Mae raised $7.4 billion in May in a similar effort to improve its financial balance sheet. The company has not said that it has plans to sell more equity anytime soon.
Both companies have been hurt by a decline in the housing market but were bolstered by the government's announcement Sunday that it would work to prop them up if they ran into serious financial trouble. The firms assert that they are financially sound and would not need government assistance.
Registering with the SEC was one of the hurdles Freddie Mac had to clear to win additional relief from its regulator, the Office of Federal Housing Enterprise Oversight. The regulator said in May that it would reduce Freddie Mac's capital requirement in September if the company met several conditions. One condition Freddie Mac has yet to meet is separating the roles of chairman and chief executive as it pledged to do in a December 2003 settlement related to an accounting scandal.
Under its federal charter, Freddie Mac was exempt from registering with the SEC, but as its privileged status came under attack, it said in 2002 that it would register voluntarily. The accounting scandal derailed that effort and exposed widespread weaknesses in the company's internal controls. Freddie Mac took years to resume issuing timely financial reports.
Today's announcement means that Freddie Mac's financial disclosure cleared an SEC review that examines the way information is presented. Now, the SEC will have the power to review the company's financial disclosures on an ongoing basis and to take enforcement action for any reporting lapses.
Freddie Mac will be required to file a variety of reports by the same deadlines that apply to other publicly traded companies, including reports on annual and quarterly financial results, purchases and sales of its shares by insiders, and executive pay. Freddie Mac previously posted similar information on its Web site.
The SEC always had the ability to take enforcement action against Freddie Mac for alleged securities fraud, as it did last year when it obtained a $50 million settlement with the company. The SEC now will have the ability to take enforcement action against the company's top officers if they falsely certify Freddie Mac's financial reports, but those certifications were already subject to Justice Department enforcement under criminal law.