Freddie CEO Feels Strain Of Firm's Twin Missions

The New York Times reported yesterday that Syron ignored warnings in 2004 from his chief risk officer that the company was taking on too-risky loans. Syron told The Post that he remembered being warned about the loans but added, "Every credit officer I know of, their job is always to raise the issue of credit [risk]."

Sharp declines in the share prices of Fannie Mae and Freddie Mac last month prompted Congress and the Bush administration to make explicit what the financial markets have long assumed: That the government is prepared to prop up the companies if either falters. Legislation recently signed by President Bush allows the Treasury to extend unlimited amounts of money to the companies through loans or investments.

This week's earnings reports could shed light on the odds that the government will have cause to put taxpayer money on the line.

In some respects, Freddie Mac is in weaker condition and has performed significantly worse under Syron than Fannie Mae has fared under chief executive Daniel H. Mudd.

Investors are closely watching the "fair value" of the companies, which shows how much their holdings would be worth if sold at current values. By that measure, Freddie Mac is in a deeper hole.

If Freddie Mac had liquidated its assets and liabilities on March 31, it would have been left with a deficit of $5.2 billion, which represented a $31.7 billion plunge in value from a year earlier. In comparison, Fannie Mae's fair value at the end of March was $12.2 billion.

But those numbers depend heavily on subjective judgment about the value of the companies' holdings -- something that investors have become less willing to accept.

As of March 31, $144.2 billion of Freddie Mac's mortgage-related investments were valued based on what the company called "unobservable inputs" -- meaning there were no clear price quotes from the financial markets to use as a measure. The company shifted $153.8 billion of mortgage-related investments into that category this year as market demand for certain mortgage-backed securities dried up and "inputs that were significant to their valuation became limited or unavailable," Freddie Mac said in a filing with the Securities and Exchange Commission.

A related measure that Wall Street will be tracking in today's report from Freddie Mac involves so-called unrealized losses -- declines in the value of mortgage-related investments that Freddie Mac has not yet counted as actual losses because it says it will hold on to them until they recover their value. As of March 31, Freddie Mac had $32.4 billion of unrealized losses, and 40.7 percent of those investments had been impaired for at least a year. Fannie Mae's unrealized losses as of March 31 totaled $9.3 billion.

Analyst Paul J. Miller of the Arlington investment firm Friedman, Billings, Ramsey said that other investors have reported losses on similar securities. Freddie Mac and Fannie Mae should, too, he said.

Investors are also eager to hear what Syron says today when Freddie Mac hosts its first quarterly conference call for analysts and shareholders since the government adopted the rescue plan.

Like Fannie Mae's Mudd, Syron was brought in to put his company's house in order in the aftermath of an accounting scandal, but Syron took longer to finish the job. He stepped in at the end of 2003, and Freddie Mac did not complete the overhaul of its internal controls and financial reporting systems until this year. A federal regulator, the Office of Federal Housing Enterprise Oversight, said last year that Freddie Mac's efforts had suffered from "ineffective planning and inconsistent execution."

Freddie Mac has yet to fulfill a commitment it made in 2003 to separate the jobs of chairman and chief executive, both of which Syron holds, and OFHEO has said it will not relax a potentially costly regulatory constraint on the company until it does.

Government officials, analysts and others fault both companies for not raising more capital sooner, which would have strengthened their financial base and positioned them to provide more support to the troubled housing market. But Freddie Mac has been a source of greater frustration. In November, its capital briefly fell below the level required by the government.

Freddie Mac, which last month completed its delayed registration with the Securities and Exchange Commission, would soon fulfill a long-standing promise to the government to raise more capital. But a depressed stock price could make it much more expensive for Freddie Mac to do so.

Compounding Freddie Mac's woes, it has spent $1 billion buying back its own shares since March 2007 at an average cost of $62.04 per share only to see the stock price tumble. The stock closed yesterday at $8.04.